WASHINGTON -- U.S. manufacturing expanded in February at the fastest pace since June 2011, buoyed by increases in new orders and production. The third straight month of growth suggests factories may help the economy this year after slumping through most of 2012.

The Institute for Supply Management said Friday that its index of factory activity rose last month to 54.2, up from January's reading of 53.1. A reading above 50 indicates expansion. The ISM is a trade group of purchasing managers.

A measure of new orders rose to the highest level since April 2011. Factories added jobs, the report said, but at a slower pace than the previous month.

The pickup in factory activity in February is encouraging because it suggests demand for goods is stronger even as consumers are paying increased payroll taxes, which has reduced their take-home pay. The cut in payroll taxes, designed to help during the depths of the recession, expired at the start of 2013.

That comes after a separate report Friday showed consumers cut back spending on long-lasting manufactured goods in January, likely because of the tax reinstatement.

Factory output could rise in the coming months. In January, businesses ramped up their orders for industrial machinery, electrical equipment and other capital goods by the most in more than a year. That suggested they are confident about their future growth.

Consumer confidence rebounded in February after a steep fall the previous month. The recovery in confidence suggests a better job market and a sustained housing recovery could offset some of the pain from higher taxes.

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One concern is $85 billion in government spending cuts that are set to take effect Friday. Those cuts will force the U.S. Defense Department and other agencies to buy fewer goods, which could weigh on manufacturers.