Output at factories in the U.S. Mid-Atlantic region rose this month as new orders surged, but companies continue to be squeezed by higher production costs, the Philadelphia Federal Reserve Bank (search) said Thursday.

The Philadelphia Fed said its business activity index jumped to 17.5 in August from 9.6 in July, well above Wall Street analysts' median forecast for a rise to 12.3 and the highest since April.

A reading above zero denotes growth in the region's manufacturing sector.

"It certainly beat the consensus forecast and shows that so far the manufacturing sector seems to be managing the high oil price environment," said Alex Beuzelin, a foreign exchange market analyst at Ruesch International.

The new orders index, a key indicator of future growth, surged to 19.8 in August from 5.0 and the employment index rose to 6.3 from 3.4 in July.

The regional survey is one of the first indicators of U.S. manufacturing every month and is often used to gauge the overall state of factories nationwide.

The survey's inflation readings showed that although production costs remained high, the prices of manufacturers' own goods slipped.

U.S. Treasury debt (search) prices clung to early gains after the report as investors shrugged off the jump in regional manufacturing and found solace in the subdued inflation readings.

Asked if factory managers were getting squeezed by higher costs, Michael Trebing, senior economic analyst at the Philly Fed, told reporters: "We get that comment frequently from respondents, especially with regard to energy prices."

Firms expect that will continue as input costs rise further, the survey found.

The Philadelphia Fed found 76 percent of manufacturers expect further increases in energy costs this year, 65 percent expect price increases for raw materials and 52 percent expect increases for intermediate goods.

Despite that prospect, producers became more upbeat about the future. The six-month outlook for business conditions rebounded to 33.4 after dropping sharply in July to 15.3.

The national manufacturing sector appears to be recovering from a difficult few months plagued by inventory adjustments.

Other factory indexes, notably the Institute for Supply Management's (search) July national report, showed more strength in manufacturing, leading economists to predict further improvement in the Philadelphia report.

A factory survey from the neighboring New York Fed region released this week was stronger than expected, also led by a surge in new orders.