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U.S. factory expansion broadens even as autos weigh

A tug boat passes in front of a freighter at the Port of Oakland in Oakland, California November 12, 2013. REUTERS/Robert Galbraith
A tug boat passes in front of a freighter at the Port of Oakland in Oakland, California November 12, 2013. REUTERS/Robert Galbraith

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output rose for a third straight month in October even as automobile production fell, suggesting a broadening in activity in a sector regaining momentum after a slump early this year.

Other data on Friday showed factory activity fell in New York state early this month, but economists said that was probably a delayed reaction to last month's 16-day partial shutdown of the federal government.

National manufacturing output increased 0.3 percent after edging up 0.1 percent in September, the Federal Reserve said. In the 12 months through October, factory production was up 3.3 percent, the fastest since December 2012.

The monthly increase, which matched economists' expectations, was despite a 1.3 percent fall in auto production. Auto assembly fell for the first time since July.

"The gains in non-motor vehicle-related production signals a broadening in the production base beyond motor vehicles, which has been the key driver for the U.S. manufacturing sector output in recent months," said Millan Mulraine, senior economist at TD Securities in New York.

Growth in manufacturing was broad-based last month, with hefty increases in the production of primary metals, printing and support, plastics and rubber products, furniture and computer and electronic products, among others.

A separate report from the New York Federal Reserve said its "Empire State" index of business conditions fell to minus 2.21 this month from 1.52 in October, the first negative reading since May.

A reading below zero indicates a contraction in factory activity in the region.

"This (New York state) report does not provide any basis to be concerned about the broader outlook for manufacturing activity," said John Ryding, chief economist at RDQ Economics in New York.

Details of the survey were weak across the board, with steep declines in new orders and unfilled orders.

Most economists do not view the survey as a good predictor of national manufacturing activity as only a small amount of factory production takes place in New York state. Others, however, saw the plunge in orders in November as a sign of slower factory growth ahead.

"There has been a decent, though not especially strong, correlation between the shipments data in the Empire State survey and the manufacturing data over the past few years, so the survey could be signaling some weakening ahead for industrial production," said Daniel Silver, an economist at JPMorgan in New York.

Manufacturing is regaining some steam after hitting a soft patch early in the year. With the Institute for Supply Management survey signaling strength in national factory activity and global trade data improving, most economists expect manufacturing to accelerate in the months ahead.

The Standard & Poor's 500 index touched yet another record high, while the dollar was slightly weaker against a basket of currencies as investors continued to digest remarks on Thursday by Fed chair nominee Janet Yellen that the central bank's accommodative policies would continue.

U.S. Treasury debt prices were little changed.

INDUSTRIAL PRODUCTION DIPS

Despite the rise in manufacturing output last month, overall industrial production slipped 0.1 percent, weighed down by declines at power plants and mines.

Weather-sensitive utilities output fell 1.1 percent last month after surging 4.5 percent in September.

Mining production contracted 1.6 percent in October, the first drop in seven months. The Fed attributed the fall to temporary shutdowns of oil and gas rigs in the Gulf of Mexico as Tropical Storm Karen approached.

With industrial production slipping, the amount of capacity in use fell 0.2 percentage point to 78.1 percent. Officials at the Fed tend to look at capacity utilization measures as a signal of how much "slack" remains in the economy, and how much room growth has to run before it becomes inflationary.

Economists said the fall in capacity utilization could stoke fears of disinflation taking hold and make it difficult for the Fed to scale back its massive monthly bond purchasing program.

The lack of inflation pressures was underscored by a third report from the Labor Department showing import prices fell 0.7 percent in October as petroleum prices dropped by the most in nearly 1-1/2 years. Prices excluding petroleum barely rose last month and were down 1.3 percent from a year ago.

"With price growth slowing in the European Union and the U.S., central banks will find it harder to justify near-term reduction of stimulus," said Jay Morelock, an economist at FTN Financial in New York.

(Reporting by Lucia Mutikani, Additional reporting by Luciana Lopez in New York and Jason Lange in Washington; Editing by Andrea Ricci and Krista Hughes)

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