Oct. 15 (Bloomberg) -- Manufacturing in New York unexpectedly shot up in October, reaching the highest level in three years, as orders and sales gained.

The New York Federal Reserve Bank's general economic index rose to 28.8, the highest since July 2004, from 14.7 in September, the bank's Buffalo branch said today. Readings greater than zero signal expansion.

Gains in exports and lean inventories will keep factories running even as consumer and business spending cool, economists said. Manufacturing will help sustain the expansion even as the housing recession worsens and growth cools.

``Global demand is pretty sturdy, the weak dollar is supporting export growth, and these factors might be supporting demand and production at U.S. factories,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania, who forecast the index would rise.

Economists forecast the index would drop to 13.1, according to the median projection of 42 economists surveyed by Bloomberg News. Estimates ranged from 8 to 18.5.

Treasury securities fell following the report. The yield on the benchmark 10-year note rose to 4.70 percent at 8:51 a.m. in New York, compared with 4.68 percent late in the day on Oct. 12.

The index measuring the manufacturing outlook for the next six months rose to 50.6, the highest since August 2005, from 48.8 in September, today's report showed.

The measure of new orders climbed to 25 from 13.6 in September.

Sales Jump

A gauge of shipments increased to 28.6 from 5.1, the report showed. The index of inventories rose to 3.5 from 3.2.

Increasing demand for overseas exports is helping to keep factories running. Exports climbed to a record for a sixth straight month in August, the Commerce Department said on Oct. 11.

General Electric Co., the world's second-biggest company by market value, said Oct. 12 that profit rose 7.1 percent in the third quarter on higher global sales of locomotives, airplane engines and turbines for power-generation plants. Total orders rose 20 percent during the period and have climbed every quarter in the past two years.

``We see orders everywhere around the world; that seems to be accelerating, not diminishing,'' GE Chief Executive Officer Geoffrey Immelt said on a conference call with investors.

Prices Rising

Today's New York Fed report showed the index of prices paid for raw materials increased to 36.1 this month from 35.1 in September. A measure of prices received rose to 15.1 from 11.7, which had been the highest since February.

Crude oil futures in electronic trading on the New York Mercantile Exchange reached a record over $85 a barrel today as tensions on the Turkey-Iraq border increased concern that supplies may be threatened. Other commodity costs also have risen in recent months and will pose a challenge to companies.

The producer price index rose 1.1 percent in September, the Labor Department reported on Oct. 12. The gain was more than twice what economists surveyed by Bloomberg News forecast and most of the increase was in food and fuel costs.

General Mills Inc. is not passing on all of its increased costs to consumers, chief executive officer Stephen Sanger said in an interview last week.

``We pass on a lower rate of price increases to consumers than we are feeling in our input costs,'' Sanger said on Oct. 11 at the annual Business Council meeting in Williamsburg, Virginia.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: October 15, 2007 08:54 EDT