Stronger factories, lower prices lift economy

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WASHINGTON (AP) — U.S. manufacturing is recovering from a slump, and inflation may be peaking. The latest government reports suggest businesses and consumers may be seeing some relief after the economy stumbled earlier this year.

Industrial production rose in October at the fastest pace in three months. Factories made more trucks, electronics and business equipment.

At the same time, Americans paid less for gas, cars and computers last month as overall prices fell for the first time since June.

The data follow a strong report on retail sales in October and point to an economy that is growing at a solid pace in the October-December quarter. Still, the resurgence in the price of oil and a possible recession in Europe 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.

Factory output, the largest component of industrial production, increased a solid 0.5 percent. It was the fourth straight monthly gain.

Production of autos and auto parts surged. Business equipment rose for the sixth straight month. Electrical equipment, appliances and transportation equipment all climbed.

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.

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.

Higher output at auto plants has allowed dealers to stock popular models that were in demand this spring. As a result, October sales were 7 percent higher than the same month last year. Light trucks were the biggest contributor.

A steep drop in gas prices was a key reason the Consumer Price Index dropped 0.1 percent in October, the Labor Department said. Food prices did rise, but at the slowest pace this year.

Excluding volatile food and energy costs, so-called “core” prices rose 0.1 percent.

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

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 rise in countries that hold some of the world’s major sources of crude.

If those prices translate 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. The October gain in retail sales suggests similar growth in the final three months of the year.

Instability in Europe might also hurt the U.S. economy. 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.