Factory activity in the U.S. Mid-Atlantic region grew much more than expected in February, rising to its highest level in seven years as more than two-thirds of companies reported higher input prices, a survey showed Thursday.

The Philadelphia Federal Reserve Bank said its business activity index rose to 35.9 in February from 19.3 the month before. It was the highest reading since January 2004 and reflective both of economic growth and inflation pressures.

The prices paid index, which measures business expectations for inflation, jumped 13 points and is now up 55 points over the past five months.

Economists had expected a reading of 20.9, based on the results of a Reuters poll, which ranged from 15.0 to 25.0. Any reading above zero indicates expansion in the region's manufacturing.

The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware. It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management, due at the end of the month.

"This is an optimistic number that is consistent with an economy growing faster than expectations," said David Carter, Chief Investment Officer At Lenox Advisors In New York. "We're seeing similar results across many indicators and we note that the Fed just increased its forecast for GDP. This morning's CPI wasn't big enough to suggest that inflation is a significant problem in the near-term, but it is clearly a concern among investors for longer term."

Leading Indicators

A private research group says its gauge of future economic activity rose a slim 0.1 percent in January, significantly slower than in recent months as a measure of the housing market tumbled.

The rise in the Conference Board's index of leading economic indicators was the seventh consecutive monthly advance.

But It was slower than the 0.8 percent rise in December and a 1.1 percent increase in November. Those had been the biggest increases since March.

The index can swing wildly from month to month. January's slowdown isn't necessarily a sign that economic growth will slacken over the next few months.

The leading indicators began moving sharply higher last fall as the stock market rallied, consumers spent more, the manufacturing sector grew steadily and the jobless rate dropped.