U.S. companies plan to increase hiring and capital spending in 2004 as sales increase in an accelerating economic expansion, the Institute for Supply Management said.

Manufacturers will increase capital spending by 3.2 percent this year after raising investment 2.7 percent in 2003, ISM said in its annual economic outlook, released in New York. Service firms such as banks, Realtors and restaurants will increase capital spending by 7.1 percent after a 2.2 percent rise last year.

"The last time we came out of a cycle in this fashion, the overall economy grew for 120 consecutive months," said Norbert Ore, group director, strategic sourcing and procurement for Georgia-Pacific Corp. (NYSE: GP) and director of the manufacturing business survey for the Institute for Supply Management. "So barring major problems ... the balance of this decade for sure would be very positive overall."

The U.S. economy expanded at the fastest pace since 1984 during the three months ended September, and payrolls have increased four straight months. The economy is improving with support from federal tax cuts, increased military spending and the lowest Federal Reserve short-term interest rate target in 45 years.

Fed policymakers have said that falling inflation, job losses and weak capital spending were the biggest impediments to sustained recovery from the recession of 2001. The ISM report suggests all three are improving.

Manufacturers will expand their payrolls by 0.3 percent in 2004 after cutting jobs in 2003, the report said. Manufacturers haven't added workers since July 2000. Service companies will increase payrolls by 1.4 percent. The gains in employment and capital spending come amid optimism about sales.

Service companies said sales will increase 5.7 percent this year compared with a gain of 4.6 percent in 2003. Manufacturers predicted revenue gains of 5.8 percent, more than double the 2.8 percent gain last year, the survey said.

The group found 61 percent of manufacturers expect business to improve in the first half of next year, while 54 percent of service industry companies see business picking up.

Manufacturers are worried about rising costs while they continue to face pressures to keep prices low, Ore said. The prices companies pay for goods and services will increase 1.3 percent for manufacturers and 2.1 percent for service companies, the report said.

"Until you see capacity utilization come back, pricing isn't going to improve," Ore said. He added that the biggest concerns are energy and health care costs. Labor and benefit costs will increase 2.7 percent for manufacturers and 2.5 percent for non-manufacturers, the report said.

Manufacturers expect the U.S. dollar, which has gained about 20 percent versus the euro in the past year, to continue to strengthen. The biggest gains will be in the Mexican peso, the British pound and Canadian dollar. The dollar will decline against the Japanese yen and Korean won, the companies predicted.

Survey participants are split on the euro. Forty-two percent of purchasers expect the dollar to gain against the euro, and 41 percent expect it to fall. Seventeen percent expect the exchange rate to be unchanged, ISM said.

Manufacturers surveyed said they expect the dollar to continue its decline.

The Tempe, Ariz.-based purchasing managers institute surveyed more than 400 companies in service and manufacturing industries for the annual economic report.