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WRAPUP 2-U.S. factory activity gains steam as production broadens

Lucia Mutikani
Monday, 16 Dec 2013 | 1:04 PM ET

* Manufacturing output rises 0.6 percent in November

* All-industry production increases 1.1 percent

* Empire State manufacturing index creeps up in December

WASHINGTON, Dec 16 (Reuters) - U.S. manufacturing output rose for a fourth straight month in November as production increased almost across the board, the latest suggestion the economy is gaining steam. Production at the nation's factories advanced 0.6 percent last month, building on October's 0.5 percent gain, the Federal Reserve said on Monday. That added to solid reports on retail sales and employment that have painted an upbeat picture of the economy and strengthened the case for the Federal Reserve to start reducing the pace of its monthly bond purchases. "The outlook for 2014 is going to be bright. The economy has reached escape velocity and, with numbers like these, the Fed better start recalibrating," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. Fed officials meet on Tuesday and Wednesday to assess the economy and deliberate on monetary policy. Some economists expect it to announce a reduction in its $85 billion monthly bond buying program, although more believe it will wait until January or March before dialing back its purchases. Manufacturing is pushing ahead after a lull early in the year, and two other reports on Monday suggested it continued to make strides in December. The sector is benefiting from a firming domestic housing market and an improving global economy. The amount of factory capacity in use jumped to a near six-year high of 76.8 percent last month. While a 3.4 percent rebound in auto production accounted for a large portion of the increase, there also were gains in the output of fabricated metals, textiles, furniture and electrical equipment and appliances. There were, however, modest declines in the output of computer and electronic products, machinery, primary metals and transportation equipment. The gains in manufacturing combined with a jump in mining and utilities output to lift industrial production by 1.1 percent. The increase was the largest since last November, and it pushed industrial output above its pre-recession peak. "The broad-based gains in output across the various sectors provide a very encouraging narrative on the overall tone of domestic economic activity," said Millan Mulraine, senior economist at TD Securities in New York.

INVENTORY LIQUIDATION Manufacturing continued to expand in December, though at a slightly slower pace. Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers Index dipped to 54.4 from a 10-month high of 54.7 in November. A reading above 50 signals expansion in economic activity. In a separate report, the New York Fed said its "Empire State" general business conditions index edged back into positive territory at 0.98 from minus 2.21 in November. A reading above zero indicates expansion. The gauge of New York state factory activity, which fell short of economists' expectations for a reading of 4.75, reflected a sharp decline in inventories, a good sign for future production. Other details, including new orders and unfilled orders were weak. Economists, however, cautioned against reading too much into the two reports saying they were poor predictors of national factory activity. "The (Empire State) index suggests a modest improvement in manufacturing conditions but one that resulted in a massive liquidation of inventory," said John Ryding, chief economist at RDQ Economics in New York. "It is difficult to take this series seriously given its volatility but if inventories were drawn down sharply, this is a constructive signal for manufacturing conditions going forward." A cold snap last month boosted the nation's utilities output, which increased 3.9 percent after falling 0.3 percent in October. Mining production rose 1.7 percent as oil and gas rigs in the Gulf of Mexico, which were temporarily shut in October because of Tropical Storm Karen, reopened. Mining output had dropped 1.5 percent in October. Last month, the amount of industrial capacity in use increased 0.8 percentage point to 79 percent, the highest since June 2008. Still, it remained 1.2 percentage points below its long-run average.