Manufacturing activity in the United States and Europe showed solid expansion in May, reports showed on Monday, indicating that a global recovery in industry is deepening and reinforcing growth around the world.
But both the US and European indexes showed the global demand behind the expansion also pushed up costs of raw materials. In Europe, the report raised concerns about inflation and potentially higher interest rates in the months ahead.
The US-based Institute for Supply Management said its monthly manufacturing index rose more than expected in May to 55.7 - its highest level since hitting 56.7 in February 2000 - from 53.9 in the prior month. Economists polled by Reuters had forecast the index to rise to 55.0. Any reading above 50 suggests growth, while one below 50 indicates contraction.
And the Reuters Eurozone Purchasing Managers' Index rose to 51.5 in May, the highest since February 2001. The May reading reflected a second straight month of increasing output.
"We're seeing signs of a broadening of global growth momentum," said Bruce Kasman, senior economist and head of global economic research at J.P. Morgan Chase.
Kasman said the global rebound in manufacturing was one reason for the US dollar's recent weakness against other currencies as investors seek to gain on improved returns in other regions and countries of the world, from Asia to Canada.
"The basic message here is a good one for global growth," he said.
Most analysts said that, despite the rise in prices in both reports, the reports indicated a still nascent rebound from a year-long downturn that would likely keep the US Federal Reserve and the European Central Bank from lifting interest rates in coming months as they try to secure a solid recovery.
But some economists said the pickup in inflation could prompt the ECB to begin hiking benchmark rates as soon as July, even if the euro's recent strength would deflect some of the pressure from rising prices.
After an 18-month slump driven by a record runoff of inventories, US factories this year have boosted production to meet rising new orders.
So far the improvement has yet to translate into new hiring or stronger capital investment, which Federal Reserve officials have said they want to see to ensure a sustainable recovery is under way. Until that happens, most analysts expect the central bank to keep short-term US interest rates steady at 40-year lows.
A separate report showed US construction spending rose more than expected in April, bolstered by record spending on home building.
But US auto sales in May fell 5.7 per cent from the same month a year ago, raising worries that US consumers are beginning to lose their ardor for buying big-ticket items.
Still, the outlook for US manufacturing continues to brighten, as a pickup in orders for goods helped drive the ISM index higher. That could signal future strength in the sector later in the year. Factories, however, continued to shed workers, but they did so at a slower pace. Industries such as furniture production and publishing reported hiring workers.
"The second quarter is going to be strong and we can start thinking about this spilling over into the third (quarter)," said Norbert Ore, chairman of the ISM business survey committee.
The closely watched New Orders Index, a measure of pipeline demand for goods, rose in May to 63.1 from 59.0 in April. But factories shed more jobs even as the Employment Index rose slightly to 47.3 from 46.7 in April.
Since mid-2000 the US factory sector has been the hardest hit on the labour front, shedding more than 1.7 million jobs. In recent months, however, the pace of manufacturing job losses has eased.
Prices surged to the highest level since January 2001, driven by higher energy and steel prices. The Prices Index rose to 63.0 from 60.3 a month earlier. While potentially inflationary, the rise in prices could give US companies much needed pricing power and help bolster profits.
Many analysts zeroed in on the rise in prices as a potential problem for the European Central Bank, with euro zone inflation already running at the central bank's two per cent target.
The PMI input prices index, seen as a leading indicator of consumer prices six months to a year down the line, climbed to 56.0 in May, after jumping six points in April to 53.9, reflecting higher oil and commodity prices.
The data was followed by euro zone producer price figures for April, which showed a rise of 0.3 per cent from March and a fall of 0.7 per cent from the same month a year ago.
Analysts said both sets of data showed that past increases in energy prices were beginning to feed through, signaling a turnaround in Europe's downward inflation trend in months ahead. But the region's fragile economic recovery would likely deter the ECB from hiking rates.
"Fundamentally, relatively little has changed... growth will certainly reach potential by the year end, but it will be very gradual," said Volker Nitsch of Bankgesellschaft Berlin. "There is no concrete pressure on the ECB to hike rates this week."