March 1 (Bloomberg) -- Manufacturing in the U.S. unexpectedly expanded by the most in five months in February, suggesting production is starting to stabilize.

The Institute for Supply Management's manufacturing index rose to 52.3 from a January reading of 49.3 that was the lowest since April 2003, the private industry group said today in Tempe, Arizona. Readings less than 50 signal contraction.

The figures suggest corporate efforts to trim excess inventory may be starting to pay off at the same time strengthening economies abroad lift demand for U.S.-made goods, economists said. The rise bears out the view of Federal Reserve Chairman Ben S. Bernanke, who said yesterday the economy will strengthen by the second half.

``This report would appear to indicate that the inventory adjustment has either run its course or is very close to doing so,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. Manufacturing ``is set to begin to firm up.''

The Commerce Department said earlier today that personal spending increased 0.5 percent in January, more than economists had forecast, after a 0.7 percent gain.

The manufacturing index was projected to rise to 50, according to the median estimate of 81 economists surveyed by Bloomberg News. Forecasts ranged from 48 to 52. The index averaged 53.9 in 2006.

European Manufacturing

Manufacturing in Europe accelerated last month. Royal Bank of Scotland Group Plc said its factory index rose to 55.6 from January's 55.5.

The supply managers' group's measure of prices paid for raw materials rose to 59 from 53 from the month before. The prices- paid measure was forecast to rise to 54, according to the median of economists' estimates.

The Tempe, Arizona-based institute's new orders index, which makes up about a third of the total, increased to 54.9 from 50.3. The production index, a measure of work being performed, rose to 54.1 from 49.6.

The institute's supplier deliveries gauge, which covers how long it takes companies to receive goods, fell to 50.8 last month from 52.7. The measure of orders waiting to be filled rose to 51.5 from 43.5 in January.

The inventory index increased to 44.6 from 39 and marked the seventh straight month that factories were paring the number of unsold goods.

Economic Growth

The economy grew at a 2.2 percent pace in the fourth quarter, the government said yesterday, following a 2 percent rate of expansion in the third quarter. Slower inventory growth subtracted 1.35 percentage points from gross domestic product last quarter. There are signs companies continue to whittle down stockpiles.

The ISM figures come two days after a government report showed orders in January for non-military capital goods excluding aircraft, a proxy for future business investment, fell by the most in three years.

Manufacturing in the Philadelphia region stalled last month as orders declined and shipments weakened, according to a Feb. 15 report from the Fed Bank of Philadelphia. The National Association of Purchasing Management-Chicago said yesterday its business barometer pointed to contraction in that region during February for the second straight month.

Fed Chairman Bernanke said yesterday that central bankers still expect the U.S. economy to strengthen in coming months.

Bernanke Forecast

``My view is that taking all the new data into account, that there is really no material change in our expectations for the U.S. economy'' since his monetary-policy testimony to Congress Feb. 14-15, Bernanke said at the House Budget Committee. ``There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.''

Some manufacturers say demand is improving, helped by robust exports.

``When we look at developing parts of the world, specifically China, South Africa and the Middle East, we see double-digit demand for these products and services as far as we can forecast,'' Christopher Kearney, chief executive officer of SPX Corp., said in an interview yesterday.

Charlotte, North Carolina-based SPX, a maker of power transformers and industrial pumps, expects sales growth this year of 9 percent to 11 percent, Kearney said.

``We are starting to see a pickup of our customers willing to spend,'' Deere & Co. Chief Executive Officer Robert Lane said in an interview Feb. 23. Moline, Illinois-based Deere is the world's largest maker of farm equipment.

To contact the reporter on this story: Joe Richter in Washington at jrichter1@bloomberg.net

Last Updated: March 1, 2007 10:33 EST