Stronger factories, lower prices lift economy

US industrial production rises at the fastest pace in 3 months, while consumer prices fall

Associated Press
Stronger factories, lower prices lift economy
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This Oct. 28, 2011 photo, shows new seats for a United Airlines, …

WASHINGTON (AP) -- U.S. manufacturing is recovering from a slump, and inflation may be peaking.

Data issued Wednesday point to an economy growing slowly but steadily. Still, surging oil prices and a possible European recession threaten to drain the economy's momentum.

"The continued resilience of manufacturing is encouraging, since this should be the sector most exposed to the global economic slowdown," said Paul Ashworth, chief U.S. economist with Capital Economics.

Output at the nation's factories, utilities and mines rose 0.7 percent last month, the Federal Reserve said Wednesday. It was the fastest growth in three months.

Factory output, the largest component of industrial production, increased a solid 0.5 percent. That marked the fourth straight monthly gain. Factories made more trucks, electronics and business equipment.

Manufacturers "are benefiting from the strong growth in emerging markets, and domestic businesses are confident enough in the future to continue expanding purchases of capital equipment," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a trade group.

A separate report from the Labor Department showed Americans paid less for gas, cars and computers last month as overall prices fell for the first time since June.

Slower inflation could give the Federal Reserve more leeway to lower long-term interest rates to help the economy.

"In the current soft economic environment, inflation is not an issue for policymakers," said Jennifer Lee, an economist at BMO Capital Markets.

Factory production was dragged down this spring after the Japanese earthquake and tsunami disrupted key supply chains for automakers and other manufacturers. Rising food and gas costs and shaky financial markets caused consumers to cut back on big purchases.

The auto industry has rebounded to drive most of the growth in factory output. Many U.S. auto plants, which depend upon parts from Japan to produce various models, are seeing supply chains flow more freely.

Production of motor vehicles and parts rose 3.1 percent in October, the fourth straight monthly gain. Light trucks were the biggest contributor.

Higher output at auto plants has allowed dealers to stock popular models that were in demand this spring. As a result, October sales were 8 percent higher than the same month last year.

A steep drop in gas prices was a key reason the Consumer Price Index dropped 0.1 percent in October. Food prices rose, but at the slowest pace this year. Excluding volatile food and energy costs, so-called "core" prices rose 0.1 percent.

Still, oil prices have been climbing in recent weeks and hit $100 a barrel Wednesday for the first time in four months. They have been rising as the economy improves while tensions increase in countries that hold some of the world's major sources of crude.

If that translates into higher gas prices, consumers could pull back on spending and slow economic growth.

Strong consumer spending helped the economy grow at an annual rate of 2.5 percent in the July-September quarter. And retail sales rose in October, leading many economists to predict similar growth in the final three months of the year.

Instability in Europe might slow the U.S. economy next year. A shaky euro would likely strengthen the dollar, making U.S. goods appear more expensive to overseas buyers. And exports to Europe already account for about one-fourth of U.S. corporate revenue, analysts say.

Europe's economy is barely growing, and sharp government spending cuts might tip it back into recession. If that happens, slowing output by U.S. manufacturers could hinder the broader economic recovery.

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