The U.S. manufacturing sector grew at its fastest rate since May 2004 in February, while prices paid also rose, the Institute for Supply Management said on Tuesday.

BERNANKE TESTIMONY:

The recent surge in oil prices is unlikely to have a big impact on the U.S. economy, but could lead to weaker growth and higher inflation if sustained, Federal Reserve Chairman Ben Bernanke said on Tuesday.

CONSTRUCTION SPENDING:

U.S. construction spending fell more than expected in January to its lowest level in five months, a government report showed on Tuesday, pulled down by weak private construction outlays.

KEY POINTS: * The Institute for Supply Management (ISM) said its index of national factory activity rose to 61.4 in February from 60.8 in January, topping forecasts for 61.0. It was the highest level since May 2004. * A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion. * Offering no hint that he was considering cutting short the Fed's $600 billion stimulus, Bernanke told the Senate Banking Committee he saw increasing evidence that the U.S. economic recovery was becoming self-supporting. At the same time, he warned job growth remains far too anemic. * Until we see a sustained period of job creation, we cannot consider the recovery to be truly established, Bernanke said in remarks prepared for delivery to the panel. * The Commerce Department said construction spending fell 0.7 percent to an annual rate of $791.82 billion, the lowest since August. December's spending was revised to show a smaller 1.6 percent drop than the previously reported 2.5 percent decline.

COMMENTS:

DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON

REUTERS:

Bernanke's testimony shows a reduction of perceived downside risks on growth with deflation risk now seen as negligible, though he still warns that a self-sustaining recovery will not be truly established until sustained stronger job creation is seen, something that he sees grounds for optimism in the next few quarters but is not confirmed yet.

It appears that job growth is going to be needed to push Bernanke into a more hawkish stance, as he sees the recent rise in commodities as likely to lead to only a temporary and modest rise in inflation, though if sustained it would be a threat to both growth and inflation. Bernanke appears to be edging away from the dovish stance, but does not appear to be signaling a policy shift yet.

KURT KARL, CHIEF U.S. ECONOMIST, SWISS RE, NEW YORK:

ISM just keeps going up and up. The employment number is huge for manufacturing, although that is less than 10 percent of employment in the country -- nevertheless it is booming. Also orders for durable goods are very strong compared to previous cycles. In the manufacturing sector, employment-wise as well as production-wise we are in a very strong phase here. No signs of it slowing down. The good news that we have seen some oil price move in February and (manufacturing) still looks good so far despite some concerns overseas with export orders up and new orders up. All systems go so far, although prices (are) at a very high level also.

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW

YORK

It came in close to enough expectations, people are now just going to focus on Bernanke.

It looks pretty decent, one thing we look at is what is happening with new orders, new orders continued to march higher that obviously bodes well for future activity. Prices paid also went higher. One of my biggest worries about the overall economic backdrop is that you start to see more and more pass-through. At some point these producers are going to hit a breaking point, their margins can only absorb these price increases for so long and now we are starting to see some pass through.

We will likely remain in a fairly strong growth environment from manufacturing activity at least through the near-term, but I don't think we can dismiss the fact that these higher energy prices could crimp spending to some extent. But at least in the near-term manufacturing is likely to hold up just given the fact that aggregate demand is starting to return.

VIMOMBI NSHOM, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON

REUTERS:

Construction spending, depressed by private nonresidential projects' largest contraction in 17 years, fell by 0.7% in January, registering its second month of decline.

MARKET REACTION: STOCKS: U.S. stock indexes were little changed BONDS: U.S. bond prices retained losses FOREX: The dollar fell, then recovered, against the euro

Ben Bernanke