NEW YORK (CNN/Money) - Industrial output showed surprising strength in the United States in February, the Federal Reserve said Monday, a sign the long-suffering manufacturing sector continued its recent recovery.

Though it's also a sign that the broader economy continues its recent robust growth, it's unclear that the factory sector's strength will be enough to generate the kind of job growth necessary to sustain the economy in the long run, economists said.

Industrial production rose 0.7 percent after increasing 0.8 percent in January, according to the Fed, which also said factories, mines and utilities ran at 76.6 percent of capacity last month versus a revised 76.1 percent in January.

Economists, on average, had expected production to gain 0.4 percent with capacity use of 76.4 percent, according to Briefing.com.

"This was a pretty positive number, with solid increases in output of business equipment and consumer goods," said Lara Rhame, senior economist at Brown Brothers Harriman.

Separately, the New York Fed said its Empire State index of New York manufacturing activity fell sharply in March after hitting a record high in early February.

The Empire State report fell short of Wall Street forecasts, but economists typically pay more attention to the Fed report, which uses firm production data, rather than Empire State and similar indexes, which use survey data.

"The industrial production number is the benchmark -- other surveys, while they're good, pale in comparison to the strength this indicator has," said Richard Yamarone, director of economic research at Argus Research.

On Wall Street, stocks fell after the reports, while Treasury bond prices rose, as terrorism fears outweighed the positive economic news.

Before, during and after the 2001 recession, the manufacturing sector was by many measures the worst-performing mule pulling the U.S. economy's wagon. And despite recent gains, the Fed's industrial production index is still 1.5 percent lower than it was at its peak in June 2000.

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What's more, the manufacturing sector is a relatively small part of the total economy, making up less than 20 percent of total gross domestic product (GDP) and employing only about 15 percent of all U.S. workers.

But the manufacturing sector is particularly sensitive to changes in the economy, and the recent strength in factory output is a sign that businesses are investing in new equipment and that consumer spending continues at a healthy pace.

"It's still meaningful -- it's a sector that accounts for a lot of swings in activity," said Joshua Feinman, chief economist at Deutsche Bank Asset Management.

Unfortunately, as has been the case throughout the economy's recovery from the latest recession, manufacturing output increased in February without a commensurate increase in factory employment. Technological innovation has allowed factories to squeeze more work out of fewer workers.

Such gains in productivity, or output per worker hour, are good news for corporate profits and for the wages of people who have a job, but they could keep employment gains subdued this year.

The Labor Department recently said U.S. factory payrolls edged down by 3,000 workers in February, and payrolls are 3.3 million jobs leaner than they were at their peak in March 1998.

"In response to the [industrial production] release...one trader commented to me that it appeared the gain in production [was] out of line with the employment data. Welcome to the new economy," John Silvia, chief economist at Wachovia Securities, wrote in a note to clients.

"Once again we have seen output gains achieved primarily through productivity gains and not employment," he wrote.

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Many economists believe that strong demand will force companies to start hiring in greater numbers this year. Otherwise, without stronger gains in employment and wage growth, output and consumer spending could slow down.

The Fed's industrial production index rose despite a 0.7 percent drop in the output of utilities. Utility output jumped a revised 5.3 percent in January, due mainly to unusually cold weather that month.

Factory output rose 1.0 percent, compared with a downwardly revised 0.2 percent gain in January. Mining output rose 0.1 percent after rising 0.4 percent in January.

At 76.6 percent, the rate of capacity use is the highest since August 2001, but is still 4.5 percentage points below its 1972-2003 average.

"That just speaks to what a big hit manufacturing took and how long a way we have to claw back to reasonable rates of utilization," said Feinman of Deutsche Bank.

In January, the Fed left its key overnight lending rate at its lowest level in 40 years, indicating that inflation was still a distant threat in the United States, despite strong economic growth, higher commodity prices and other signs of potential pricing pressures.

Some economists believe the Fed will raise rates only when the "slack" of idle factory equipment and, more importantly, unemployed Americans, is taken up significantly

Fed policy-makers meet to discuss the economy and their target for short-term rates on Tuesday, and they are widely expected to hold rates steady and keep their policy unchanged.