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Robust manufacturing output buoys U.S. economic outlook

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output rose broadly in July and automobile production recorded its largest increase in five years, boosting the economy at the start of the third quarter.

While other data on Friday showed some cooling in factory activity in New York state this month, economists said it did not change the view of an economy with strong momentum, noting that the pullback followed a robust increase in July.

"The broad-based nature of the (manufacturing) gains indicates that the strong second-quarter rebound in economic growth momentum is being sustained," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Federal Reserve said factory production jumped 1.0 percent last month after rising 0.3 percent in June. That was the largest gain since February and reflected increases across all major categories.

Auto production surged 10.1 percent, the biggest rise since July 2009. There were also sturdy gains in the production of machinery and computers and electronic goods, which economists said hinted at a pick-up in business investment this quarter.

A stronger pace of business investment is needed to ensure sustained economic growth.

The economy grew at a 4.0 percent annual pace in the second quarter and current forecasts peg the growth rate for the third quarter within a range of 2.5 percent to 3.0 percent.

Industrial capacity utilization, a measure of how fully firms are using their resources, last month hit its highest level since February 2008.

The solid rise in manufacturing and a 0.3 percent advance in mining output helped to offset a 3.4 percent weather-driven decline in utilities production. That left overall industrial production up 0.4 percent in July.

The data had little impact on U.S. financial markets, with traders focusing instead on events in Ukraine. The Ukrainian government said its forces had attacked and partly destroyed a Russian armored column that entered Ukrainian territory overnight.

BENIGN PRODUCER INFLATION

In a separate report, the New York Fed said its "Empire State" general business conditions index fell to 14.69 this month from 25.60 in July.

A reading above zero indicates expansion. Growth in new orders slowed, but a further decline in inventories pointed to an acceleration in activity in the months ahead.

While manufacturing is gaining steam, there is little sign of a broad pick-up in inflation pressures at the factory gate.

In another report, the Labor Department said its producer price index for final demand edged up 0.1 percent in July as the cost of energy products fell, offsetting an increase in food prices.

Prices received by the nation's farms, factories and refineries rose 0.4 percent in June. In the 12 months through July, producer prices increased 1.7 percent.

Excluding food and energy, wholesale prices gained 0.2 percent, matching June's increase. They were up 1.6 percent in the 12 months through July.

"Aside from recent energy weakness, the PPI results continued to point to a steady firming in underlying inflation trends that we expect to continue to be seen in a continued inflection higher in the core consumer price index as well," said Ted Wieseman, an economist at Morgan Stanley in New York. 

Overall, inflation has been rising in recent months, a fact acknowledged by the Fed at its July policy meeting. The U.S. central bank, which had repeatedly warned that price pressures were too low, said the likelihood of inflation running persistently below its 2 percent target had diminished somewhat.

Firming inflation and a tightening labor market have led some economists to anticipate an early interest rate increase from the Fed. The central bank, however, has shown no sign of being in a hurry to lift its benchmark lending rate from near zero, where it has been since December 2008.

Another report on Friday showed consumer sentiment hit a nine-month low in early August. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 79.2 from 81.8 in July.

(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione and Rodrigo Campos in New York; Editing by Paul Simao)

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