NEW YORK (CNN/Money) - A closely watched indicator of eastern U.S. manufacturing activity fell in February, the Federal Reserve Bank of Philadelphia said Thursday, though manufacturers in the region were optimistic about the future for the sector.

The Philadelphia Fed's index of current activity fell to 11.4 in February from 16.0 in January, the Philly Fed said, a reading that still indicates growth in manufacturing activity. Economists surveyed by Briefing.com expected the index to rise to 18.0.

Though the reading briefly disappointed stock markets and boosted Treasury bond prices, the Philly Fed pointed out that the businesses it surveyed in compiling the index were optimistic.

"Although more firms reported declines in employment than increases, the overall declines are not as large as in previous months," the report said.

"Declines in inventories were not as large this month, and firms' forecasts suggest an expansion of inventories in the near term," it added. "Firms are becoming more optimistic about the growth of new orders over the next six months, and many anticipate an expansion of production and employment."

The Philly Fed data followed a series of reports earlier Thursday that showed relatively mild consumer price inflation and falling weekly jobless claims, adding to a picture of an economy recovering from its first recession in a decade.

Related links       Philly Fed report

The Institute of Supply Management recently said its own manufacturing index, which measures activity across the nation, showed expansion for the first time in February after a 19-month recession.

Though the recovery could be mild, as hinted by the weaker-than-expected Philly Fed data, most market participants expect the Federal Reserve, which cut its target for short-term rates 11 times in 2001, to start raising rates sometime this year to keep inflation at bay.