December 14, 2012 / 2:05 PM / 5 years ago

WRAPUP 4-US factories flex muscles post storm, inflation subdued

* Factory output up 1.1 pct in Nov. in post-Sandy surge
    * Auto output strong; factories show gains into December
    * Consumer price index falls 0.3 percent on gasoline
    * CPI drop first since May, "core" prices up just 0.1 pct

    By Lucia Mutikani
    WASHINGTON, Dec 14 (Reuters) - U.S. factory output posted
its sharpest increase in nearly a year in November as auto
production staged a rebound, while consumer prices slipped,
offering cautious optimism for the struggling economic recovery.
    Factories have bounced back after being held down by
Superstorm Sandy, which struck the East Coast in late October.
    Despite last month's rise, factory production remained below
highs reached earlier this year. Analysts said this subdued
recovery and tame price pressures provide ample scope for the
Federal Reserve to stay on its ultra-easy monetary policy path.
    "This is an economy that still has a lot of slack and upside
potential," said Robert Dye, chief economist at Comerica in
Dallas. "There is a lot of dry tinder out there, the Fed has
added to that with monetary policy and we have to get past the
fiscal cliff issues to see if the dry tinder catches fire."
    The "fiscal cliff" refers to the $600 billion in deep
government spending cuts and tax hikes that will hit the economy
next year if the Obama administration and Congress fail to agree
on a less drastic plan to reduce budget deficits.
    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, the Federal Reserve said. It
said production was lifted by a surge in motor vehicle output.
    Hurricane Sandy had weighed on overall industrial output in
October, but the rebound in November was stronger than
economists had expected. Output at the nation's factories, mines
and utilities taken together also jumped 1.1 percent after
slumping 0.7 percent in October. It was the biggest gain in
almost two years.
    Separately, financial information firm Markit said its
preliminary gauge of U.S. factory activity in December rose to
54.2, its highest level since April, from 52.8 in November.
    "Going forward, output will largely be determined by what
type of resolution is reached on the fiscal cliff," said Brett
Ryan, a U.S. economist at Deutsche Bank Securities in New York.
    "If policymakers do not come up with a solution, the
recovery in industrial production may prove to be fleeting."
    In a third report, the U.S. Labor Department said its
consumer price index 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 remained tame.
    "The inflationary backdrop remains very benign, providing
the Fed with considerable breathing room to keep monetary policy
accommodative," said Millan Mulraine, a senior economist at TD
Securities in New York.
    The central bank said on Wednesday it expected to hold
interest rates near zero until the unemployment rate falls to at
least 6.5 percent as long as inflation does not threaten to
break above 2.5 percent.
    U.S. stock prices ended lower on Friday as the data failed
to dispel worry on Wall Street over the fiscal cliff. Prices for
U.S. government debt rose as traders saw the inflation data
supporting an easy Fed policy. The dollar fell from a near
nine-month high against the yen and dropped for a fifth straight
day against the euro. 
    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. It has
slowed from nearly 3 percent in January.
    Last month, gasoline prices tumbled 7.4 percent, the largest
drop since December 2008, after falling 0.6 percent in October. 
    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, the cost of apparel fell for the first
time in two months, while new motor vehicle prices saw their
first rise since August. Auto prices could have been lifted by a
spike in demand as people replace vehicles destroyed by Sandy.
    Prices for used cars and trucks fell for a fifth straight
month, while housing costs edged up.
    In the 12 months through November, the core CPI increased
1.9 percent after rising 2.0 percent in October.
    "The current disinflationary trend, and the fact that wage
and upstream price pressures are almost non-existent, suggests
that core inflation will probably remain below the Fed's target
for most of 2013," said Jeremy Lawson, a senior economist at BNP
Paribas in New York.
    The Fed targets an inflation rate of 2.0 percent, but uses a
separate gauge that tends to run a little lower than the CPI.

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