U.S. manufacturing activity slowed in April for a second straight month but input prices reached their highest level in nearly three years, according to an industry report released on Monday.

The Institute for Supply Management said its index of national factory activity eased to 60.4 in April from 61.2 the month before. The figure topped economists' forecasts for a reading of 60. The index for prices paid rose to 85.5 from 85, the highest since July 2008.

New orders, output and hiring all eased in comparison with March but showed enough vigor to offer reassurance the economy had enough resilience to withstand costlier energy. A sharp decline in the value of the U.S. dollar was helping the export-heavy sector.

The economy is not falling apart despite the spike in oil prices, said Joel Naroff of Naroff Economic Advisors in Holland, Pa. Firms are hiring, adding to inventories, seeing demand rise and exporting. Those are not signs of malaise.

While the data reaffirmed that manufacturing continues to help power the recovery, analysts cautioned that progress toward healthier economic conditions is likely to remain painfully slow.

PACE LIKELY TO SLOW

Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., said an increase in factory inventory in April was likely an unwanted development that could lead to a cooling in production.

We are quite pleased by the headline index, but it is likely not sustainable, Shepherdson said. We expect the headline to dip to 57 or so over the next couple of months.

The U.S. Federal Reserve last week said the economy was clawing back from its deep recession at a moderate pace as it vowed to keep its support for the recovery in place.

A separate report on borrowing by small businesses that account for the majority of new hiring showed loan demand rose strongly in March compared to a year ago in a potential sign of optimism.

The Thomson Reuters/PayNet Small Business lending Index increased 12 percent from March 2010. It tracks loans that are taken out for equipment purchases or to update factories.

The combined data added to a picture of modest and unspectacular growth that, taken together with news that al Qaeda leader Osama bin Laden had been killed, seemed to give investor spirits a lift and sent stock prices up.

The Dow Jones industrial average was up about 15 points in early afternoon as market participants weighed the data and pondered the global drama of bin Laden's death.

Legendary investor Warren Buffett, speaking on the weekend to legions of Berkshire Hathaway shareholders who trekked to Omaha, Neb., for the investment company's annual meeting, added to the firmer market undertone by playing down fears of U.S. debt default.

We are not a credit risk, believe me, he said. I don't see how anybody can be other than optimistic about this country.

CHINA LOSES A STEP

Other purchasing manager surveys from around the globe showed that while activity softened in the United States and China -- the two largest economies -- it firmed in Europe and India.

China's official purchasing managers' index dipped to 52.9 in April from 53.4 in March, below market forecasts for a rise to 54.0. The world has been looking for increased Chinese demand to help offset modest growth elsewhere and rebalance global expansion.

Another report on Monday showed the battered U.S. construction industry managed a 1.4 percent increase in spending during March. But February's spending figure was revised down to a 2.4 percent drop instead of a 1.4 percent decline, tempering the report's impact.

The softer tone to U.S. economic data is expected to continue this week, most notably on Friday when the closely watched monthly report on employment is issued.

Economists surveyed by Reuters project that 186,000 jobs were created in April, less than March's 216,000 and not enough to bring the unemployment rate below a lofty 8.8 percent.

Data last week showed overall U.S. growth slowed to a 1.8 percent annual rate in the first quarter, off its 3.1 percent pace over the final three months of 2010.

Economists said consumers were spending less as higher food and gasoline prices dented their incomes.

Input prices in manufacturing also neared a three-year high, the ISM report showed. Last week, U.S. Treasury Secretary Timothy Geithner said the economy faces new headwinds from soaring oil prices, but said a forecast of 3 percent to 4 percent growth for the year as a whole was reasonable.

(additional reporting by Lucia Mutikani and Pedro Nicolaci da Costa in Washington; writing by Glenn Somerville; Editing by Andrew Hay)

Manufacturing