Factories flex muscle, inflation subdued


Factory output posted its sharpest increase in nearly a year in November as auto production staged a rebound, while consumer prices slipped, welcome signs for the struggling economic recovery.

A separate report on Friday suggested the manufacturing strength continued into December with activity hitting an eight-month high.

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The data offered hope that a factory slowdown that had weighed on the economy was abating, while the drop in consumer prices provided ample scope for the Federal Reserve to continue to support the recovery.

"The inflationary backdrop remains very benign, providing the Fed with considerable breathing room to keep monetary policy accommodative," said Millan Mulraine, senior economist at TD Securities in New York.

The Fed said manufacturing output rose 1.1 percent in November, the biggest gain since December 2011 and a rebound from a 1.0 percent drop in the prior month. It said production was lifted by a sharp rise in motor vehicle output.

Separately, financial information firm Markit said its preliminary gauge of factory activity in December rose to 54.2, its highest level since April, from 52.8 in November.

Superstorm Sandy, which lashed the East Coast in late October, had weighed on overall industrial output during that month, but the snapback in November was stronger than economists had expected.

The Fed said output at the nation's factories, mines and utilities taken together jumped 1.1 percent last month after slumping 0.7 percent in October. It was the biggest gain in almost two years.

At third report from the Labor Department showed that consumer prices dropped 0.3 percent in November, the first decline in six months, as gasoline prices fell sharply.

The so-called core CPI, which excludes food and energy prices, edged up 0.1 percent after rising 0.2 percent in October. Although food prices rose 0.2 percent in a lagged response to the summer drought, price pressures remain tame.

The Fed said on Wednesday it expected to hold interest rates near zero until unemployment falls to at least 6.5 percent and as long as inflation does not threaten to break above 2.5 percent and inflation expectations are contained.

"We believe that inflation is unlikely to become a valid constraint on Fed policy at least for the next year," Mulraine said.

U.S. stocks opened lower as the data failed to dispel worry on Wall Street that policymakers in Washington might fail to avoid a $600 billion "fiscal cliff" of spending cuts and tax hikes. Prices for U.S. government debt rose as traders saw the inflation data supporting an easy Fed policy.


In the 12 months through November, consumer prices increased 1.8 percent, the smallest gain since August and a slowdown from the 2.2 percent rise in the period through October.

Last month, gasoline prices tumbled 7.4 percent, the largest drop since December 2008, after falling 0.6 percent In October. That offset a 0.2 percent gain in food prices.

The drop in gasoline prices eased some of the strain on household budgets. The Labor Department said inflation-adjusted average weekly earnings rose 0.5 percent last month, reversing October's 0.5 percent fall.

Away from gasoline and food, the cost of apparel fell 0.6 percent after increasing 0.7 percent in October. New motor vehicle prices rose 0.2 percent after slipping 0.1 percent the prior month.

Auto prices could have been lifted by a spike in demand as people replace vehicles destroyed by Sandy in late October. Prices for used cars and trucks fell 0.5 percent, declining for a fifth straight month.

Housing costs edged up, with owners' equivalent rent rising 0.2 percent after climbing by a similar margin in October. Rents have been advancing in recent months, largely driven by a decline in homeownership.

Steady job market gains are also helping to boost demand for accommodation as some people who had moved in with family and friends during the recession seek places of their own.

In the 12 months to November, core CPI increased 1.9 percent after rising 2.0 percent in October.

(Additional reporting by Anna Yukhananov in Washington and Steven C. Johnson in New York; Editing by Andrea Ricci)