WRAPUP 3-Factory, price data give hopeful signs for U.S. economy

Wed Jan 16, 2013 12:30pm EST

* U.S. consumer prices flat in December
    * Manufacturing output up 0.8 percent
    * Homebuilders sentiment holds near seven-year high

    By Jason Lange
    WASHINGTON, Jan 16 (Reuters) - The U.S. economy ended 2012
on a surprisingly sound note as factory output climbed and low
inflation lifted consumers' purchasing power, signs the economy
may be able to weather the higher tax bills that rang in the new
year.
    Manufacturing output climbed 0.8 percent in December, the
Federal Reserve said on Wednesday, a day after retail sales data
pointed to robust consumer spending last month.
    "There is every indication that the improvement may be a
reflection of a broader pick-up in overall economic activity,"
said Millan Mulraine, an economist at TD Securities in New York.
    The rise in demand appears unlikely to derail the Federal
Reserve's easy monetary policy anytime soon given the lack of
inflation. The Labor Department said consumer prices were flat
in December, restrained by a decline in gasoline prices.
    That's good news for consumers still smarting from the
2007-09 recession. Weekly earnings rose 0.6 percent last month
when adjusted for inflation, the Labor Department said.
    The earnings data means family budgets started this month on
slightly better footing as a rise in payroll taxes hit workers
and the wealthiest Americans faced higher income taxes.
    The tax hikes, aimed at reducing the lofty federal budget
deficit, are expected to hold consumer spending back in the
first half of 2013. Some economists think higher taxes will
subtract a full percentage point from economic growth this year.
    U.S. financial markets were little moved by the data, even
though the increase in factory output and real earnings beat the
forecasts of analysts polled by Reuters.
    Gains in manufacturing appeared broad-based, tempering the
view that some of the growth resulted from a temporary
bounceback after Superstorm Sandy tore into life on the U.S.
East Coast in late October and early November.
    Output of motor vehicles and parts jumped 2.6 percent, while
production of machinery gained 0.6 percent. Factories churned
out 1.5 percent more computers and electronics. Overall
industrial production rose 0.3 percent.
  
 
    Still, the data offered a reminder that the trend in factory
output, like the broader economy, remains lackluster. Output of
consumer goods fell 0.1 percent from November, and overall
manufacturing managed only a 0.2 percent gain in the fourth
quarter when measured at an annual rate.
    "The manufacturing sector is just about keeping its head
above water," said Paul Ashworth, an economist at Capital
Economics in Toronto.
    Economic growth is widely seen as having slowed in the
fourth quarter as businesses restocked shelves at a slower pace.
    
    FLAT PRICES
    The Fed said in December it would keep interest rates near
zero at least until the jobless rate falls to 6.5 percent, as
long as the central bank believes inflation will stay below 2.5
percent. Fed Chairman Ben Bernanke said officials do not expect
the jobless rate -- which stands at 7.8 percent -- to reach 6.5
percent until sometime in late 2015.
    Wednesday's inflation data reinforced the view that
inflation will not hit the Fed's threshold anytime soon.
    "This leaves Ben Bernanke and the Fed with a free hand to
continue with ultra-accommodative monetary policy." said Michael
Woolfolk, a currency strategist at BNY Mellon in New York.
    To boost growth and get Americans back to work in the wake
of the Great Recession, the Fed has kept interest rates near
zero since late 2008 and has bought some $2.5 trillion in
assets.     
    Some economists think steady improvement in the labor market
could at least lead the Fed to curtail its asset-buying program
by the end of this year.
    The Fed targets 2 percent inflation, but uses a separate
index of inflation that tends to run cooler than the Consumer
Price Index. By either measure, annual inflation remains below
the Fed's target.
    In the 12 months to December the CPI increased 1.7 percent,
the smallest increase since August. A measure of core prices,
which strips out volatile food and energy prices to give a
better sense of inflation trends, was up 1.9 percent.
    "This supports the Fed's contention that inflation is mild
and that inflation expectations should be stable," said Terry
Sheehan, an economic analyst at Stone & McCarthy Research
Associates in Princeton, New Jersey.
    The Fed's efforts to lower interest rates are helping many
Americans buy homes, and housing is expected to provide a
substantial boost to the economy this year.
    U.S. homebuilder confidence in the market for single family
homes held steady at near seven-year highs in January,
suggesting the outlook for the housing market remained upbeat.
    The NAHB/Wells Fargo Housing Market index was at 47 this
month, the highest level since April 2006. 
    Separately, the Mortgage Bankers Association said
applications for U.S. home mortgages rose last week, the second
straight week of gains.