Output posts biggest gain in year in November; analysts expect more strength in manufacturing.

WASHINGTON -- U.S. industrial output surged 0.9% in November, registering its strongest gain in a year, the Federal Reserve reported yesterday.

The increase came from broad-based strength in the manufacturing sector, including a sharp rise in auto production.

It was the sixth straight monthly gain and the 13th in the last 14 months, according to Fed statistics. The gain was somewhat higher than market expectations and followed a 0.7% advance in October that was down slightly from the 0.8% increase previously reported, the Fed said.

Analysts said the report provides convincing evidence that growth will be robust in the fourth quarter, with real gross domestic product probably growing by more than a 4% annualized rate. Some said it may be close to 5%.

"There's no question that industrial output has been improving all year and finally it's spilling over into the labor market," said Stuart Hoffman, chief economist of PNC Bank Corp. in Pittsburgh. "I think we'll see further gains in output going into next year."

Economists in general predicted that industrial production will continue to improve in the coming months, but probably at a slower pace than that seen in October and November. Notably, they expect auto producers to expand production further in the first quarter of next year in response to strong demand for cars and pickup trucks.

Stan Shipley, senior economist of Shearson Lehman Bros. predicted that on average industrial output will gain 0.4% to 0.5% per month over the next year. "At this point I think the current expansion is self-sustaining," he said.

The Fed also reported that capacity utilization posted its third straight increase in November, gaining 0.6 points to reach 83%, its highest level in over four years.

Joseph Wahed, chief economist of Wells Fargo Bank in San Francisco, also said he is inclined to expect continued gains in output.

But Wahed said the first quarter of next year represents a period of great uncertainty because planned tax increases and a possible reemergence of inflation fears could cause the economy to slow down more than most analysts expect.

"There will be tremendous pressure on the bond market," Wahed said. "The truth is I'm very uncertain about the next quarter." He said capacity utilization is approaching levels that will make the more excitable inflation hawks nervous.

However, Wahed and the other economists interviewed for this article said such inflation fears would be unfounded, given the lack of upward pressure on U.S. wages and the large amount of excess capacity in the global economy. Falling oil prices also help, they said.

Analysts had expected a sharp increase in vehicle and parts production in November. Capacity utilization for vehicles and parts surged a whopping 5.1 points to 83.2% in November, and production since August has gained 20%, the Fed said.

But overall expectations fell a little short because of unexpected strength in other sectors, one economist said.

"Excluding motor vehicles and parts, industrial production grew 0.5% in November, with solid gains in the output of construction supplies and information-processing equipment," the Fed's report says.

Output of durable goods, including autos, advanced 1.3% in November, after a 1.1% gain in the previous month. Nondurable goods production grew 0.6%, following a 0.2% increase, according to Fed data. Meanwhile, mining output fell 0.3% and utilities production grew 0.3%.

Correspondingly, capacity utilization grew in all sectors, except mining. The operating rate of factories increased to 82.2% in November from 81.5% in October, the Fed said.

Total capacity utilization is up 1.6% from a year ago, and industrial production is 4.4% higher than 12 months ago, the Fed said.

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