Rising factory output gives economy a lift

CHRISTOPHER S. RUGABER DANIEL WAGNER AP Economics Writers Published:

WASHINGTON (AP) -- U.S. factories are roaring back from the depths of the recession, cranking out more machinery, vehicles and energy.

Factory production has surged 15 percent above its lows of 2½ years ago and is helping drive the economy's recovery.

A jump in manufacturing output last month coincided with other data suggesting that the economy began 2012 with renewed vigor. Wholesale prices are tame. Demand for U.S. Treasury debt should help keep borrowing costs low. Even homebuilders are more optimistic.

Signs "that manufacturing in the U.S. is gaining global market share appears to be growing, and this could be an important dynamic supporting growth in 2012," said John Ryding of RDQ Economics.

Manufacturing rose 0.9 percent from November to December, the Federal Reserve said Wednesday. It was the biggest monthly gain since December 2010.

Overall output at the nation's factories, mines and utilities grew 0.4 percent. Warm weather dampened demand for energy produced by utilities.

Over the past year, factory output has risen 3.7 percent. Factories benefited in particular in the second half of 2011 from several trends: People bought more cars. Businesses spent more on industrial machinery and computers before a tax incentive expired. And companies restocked their supplies after cutting them last summer.

The growth has also fueled more hiring. Factories added 23,000 jobs in December, the most since July. That helped reduce the unemployment rate to 8.5 percent, the lowest level in nearly three years.

Among the manufacturers faring better is Steris Corp., which makes sterilization equipment and other medical supplies. Hospitals and drug companies are buying more of the company's products.

Steris, based near Cleveland, says it has added 250 employees in the past 18 months and is still hiring. It has more than 5,000 employees globally, about half of them in the United States.

Steve Norton, a spokesman, said Steris has benefited from being part of a regional cluster of biomedical firms and research facilities. Some manufacturers in the region that once focused on auto parts are now also making components for medical devices, he noted.

"The Midwest continues to be a manufacturing leader," Norton said.

Still, Europe's debt crisis has begun to dampen demand for American exports. That trend, should it continue, could slow manufacturing and threaten growth this year.

That hasn't happened yet.

December's gains suggest the industry "is still resistant to the apparent slowdown in growth elsewhere, particularly in Europe," said Paul Ashworth, chief U.S. economist with Capital Economics.

Businesses are starting to see some relief from high energy and food prices, which should benefit consumers later this year.

The producer price index declined 0.1 percent in December, the Labor Department said. The index measures price changes before they reach consumers.

"Core" wholesale prices, which exclude food and energy costs, rose more sharply in December -- 0.3 percent. But economists downplayed the increase. They cited temporary factors that had pushed auto prices down in October and November.

Overall, wholesale prices are trending lower. They increased 4.8 percent in December compared with the same month a year ago, reflecting in part the effect of higher oil and other commodity prices. Even so, it's the slowest annual increase since January and down from 7.1 percent in July.

Falling prices for oil and agricultural commodities have lowered the cost of food and gas. Gas prices have turned upward in recent months, but economists don't expect that to worsen inflation this year. That's because prices will likely be lower than last winter and spring, when political turmoil in North Africa and the Middle East sent prices up.

Lower wholesale costs mean manufacturers and retailers face less pressure to raise prices for consumers to maintain profits. That could keep consumer price inflation in check. Lower inflation also gives the Federal Reserve leeway to keep short-term interest rates low and take other steps, if necessary, to boost the economy.

Borrowing costs are likely to stay low next year, especially if U.S. Treasury debt remains in strong demand around the globe. That's because high demand for Treasurys drives their yields down. Those lower yields, in turn, help keep interest rates down on other loans throughout the economy.

Foreign holdings of U.S. Treasurys rose in November to a record $4.75 trillion, the Treasury Department said. U.S. government debt is still considered among the safest investments. And it has been in high demand as worries about Europe's debt crisis have intensified.

The dollar has strengthened in recent weeks, particularly against the euro. A stronger dollar makes imports cheaper and helps keep inflation in check.

Lower rates on long-term Treasury debt tend to drive down mortgage rates. So far, super-low home-loan rates haven't given much life to the depressed housing market. But they have made U.S. homebuilders slightly less pessimistic.

The National Association of Home Builders/Wells Fargo builder sentiment index rose in January for the fourth straight month, to its highest level since June 2007.

The reading remained far below levels that suggest they are optimistic about a turnaround. Homebuilders appear to be drawing optimism from rising interest among would-be buyers -- interest that builders hope will increase sales this year.

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AP Economics Writers Martin Crutsinger and Derek Kravitz contributed to this report.

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