Manufacturing contracts, but less sharply

Manufacturing activity shrank in February for the fifth straight month as global economic troubles, a strong dollar and low oil prices continued to cast a shadow over the industry, but the contraction was less severe than anticipated.

An index of factory activity rose to 49.5 from 48.2 in January, the Institute for Supply Management said Tuesday. A reading above 50 means the sector is expanding while under 50 indicates contraction. Economists expected a more modest rise to 48.5.

The better-than-expected news helped U.S. stocks extend early gains. The Dow Jones industrial average was up about 240 points, or 1.4%, to 16,755 just before noon ET.

A weak global economy, particularly China’s slowdown, is pummeling manufacturers’ exports, while a strong dollar is intensifying the pain by making U.S. goods more expensive for foreign buyers. Meanwhile, low oil prices are discouraging drilling activity and related production of steel pipes and other materials.

Last month, production grew more rapidly, as its index rose to 52.8 from 50.2. An index of new orders, a key barometer of future output, was unchanged at 51.5.

And a measure of employment remained in contraction territory but rose to 48.5 from 45.9.

But the exports index fell to 46.5 from 47, indicating that the global weakness and rising greenback are still hampering U.S. shipments overseas.

Half of the industry's 18 sectors grew, including furniture, wood products, appliances, food, chemicals, paper and primary metals. Among those contracting were fabricated metals, plastics and rubber, apparel, and computer and electronics.

Many economists expect the industrial sector to at least settle down in coming months as the greenback and crude prices stabilize.

"We continue to believe that activity and output will slow further, driven by the stronger dollar and weak foreign demand, but the modest improvement in the ISM supports our expectation of a slow grind lower, instead of a sharp stall in activity," Barclays economist Jesse Hurwitz wrote in a note to clients.

Follow economics reporter Paul Davidson on Twitter @PDavidsonusat.