U.S. manufacturing expanded for the 18^th consecutive month in January at a surprising pace. The stock market reacted positively to the best reading on manufacturing activity since May 2004. 

According to a report released by the Institute for Supply Management Tuesday, the activity in the manufacturing sector rose to an index of 60.8 percent from a revised 58.5 percent in December, exceeding the most optimistic forecast of economists surveyed by Bloomberg News. A reading above 50 percent indicates growth in the sector. 

Paul Ashworth, chief U.S. economist at Capital Economics, said the January reading is consistent with gross domestic product growth of about 5 percent at an annualized pace. 

“Manufacturing is a fairly small part of the economy, it probably accounts for 15 percent or less,” said Ashworth. “But this index is closely watched by financial markets both because it has a very long history and that it has a pretty good track record in spotting terms in the wider economy, as well as just in manufacturing.” 

U.S. gross domestic product rose at a 3.2 percent annual rate in the fourth quarter. That’s a sign, Ashworth said, that after “a bit of flagging in the middle of last year, things seem to be storming back, especially with the fiscal stimulus coming into play as well.” 

A notable acceleration in the pace of new orders helped push the manufacturing sector higher. New orders registered at 67.8 percent, up from 62.0 percent in December, the 19th consecutive month of increase. 

The report also showed that a manufacturing employment index jumped to 61.7 percent, which is 2.8 percentage points higher than the seasonally adjusted 58.9 percent reported in December. 

An index measuring prices of manufactured goods registered 81.5 percent, 9 percentage points higher than the 72.5 percent in December and the highest reading since July 2008. 

Locally, the Chicago Purchasing Managers Index, compiled by the Institute for Supply Management in Chicago, came out Monday. It also showed an increase in manufacturing activity in January compared with December. 

“Today’s report is another indication of sustained, moderate growth in the manufacturing sector, particularly in the Midwest,” said Jim Nelson, vice president of communications and marketing at the Illinois Manufacturers’ Association. “This is also another great indicator that manufacturing is producing products and restocking shelves after the long recession.” 

Nelson said, “When manufacturing is doing well, that’s an indication that consumers are renewing their confidence in the overall economy.” 

The Dow Jones industrial average closed Tuesday up 144.14 points, or 1.21 percent, at 12,036.07. The NASDAQ closed up 54.75 points, or 2.03 percent at 2,754.83 while the S&P 500 Index rose 21.12 points, or 1.64 percent, to 1,307.24.