WASHINGTON - Two economic reports released by the government yesterday show that the economy will probably continue to improve through next year but at a slow rate, analysts said.

The Commerce Department reported that housing starts advanced 1.5% in November to a seasonally adjusted annual rate of 1.242 million units. And the Federal Reserve reported that manufacturing sector output, including mining and utilities, gained 0.4% in November, following a similar gain in October.

"There's some good news and some bad news in these reports," said Alan Gayle, chief economist of Crestar Bank in Virginia. "The economy is on a sustainable upward growth path, but it will have trouble growing above 3% in the foreseeable future."

The November housing starts report, while positive, shows that the economy has only limited upside potential in the coming quarters, economists said.

Since August, housing starts have bounced between a seasonally adjusted annual rate of 1.22 million and 1.25 million units, according to the report. Also, housing permits, an indication of future building activity, declined 1.5% in November, the report says.

All this suggests the housing sector may have leveled off for the time being and won't be a major force behind higher levels of economic growth, analysts said.

"The construction component of the economy is not going to make the kind of contribution it has in the past," Gayle said. "The housing starts report supports the notion that the recovery will continue to be sub-par."

Nonetheless, Gayle and other economists predicted that the housing market will continue to improve modestly. "I'd be very surprised to see a falloff in housing activity at this point," said Peter Toja, an economist with Economic Consulting and Planning Inc. in New York.

On the other hand, economists said, the November industrial production report shows that the current growth path has some upside potential because the manufacturing sector is improving.

In fact, analysts said, the manufacturing sector's prospects now look even brighter in light of the October decline in U.S. business inventories to their lowest level in six months, according to a recent Commerce Department report. Plus, expectations of the strongest holiday retail sales in at least two years also added to their optimism.

"We are certainly getting good news on the manufacturing front, " Toja said. He predicted that the manufacturing sector will sustain a 4% to 5% annual growth rate for at least the next several months.

Douglas Schindewolf, money market economist with Smith Barney, Harris Upham & Co., said he is also encouraged by recent manufacturing data, but cautioned that the manufacturing sector represents only a fraction of the entire economy. "The industrial production report gives a good picture of the manufacturing sector," he said, "but [manufacturing] isn't everything."

Yesterday's Commerce Department report shows that the November gain in housing starts resulted from a 1.3% advance in single-family homes to a seasonally adjusted annual rate of 1.1 million units and a 2.9% increase in multifamily units to an annual rate of 142,000 units.

Building permits declined 1.5% in November to a seasonally adjusted annual rate of 1.122 million units, resulting from a 1.1% drop in single-family permits and a 3.3% decline in multifamily permits, the Commerce Department reported.

And the Fed's report shows that November's 0.4% gain in industrial production resulted primarily from a 0.5% surge in manufacturing output, which followed a revised 0.6% advance the previous month.

Within the manufacturing sector, durable goods production was up 0.4% in November and nondurable goods output was up 0.5%, the Fed said. Also, mining production gained 0.6% in November and utilities production dropped 0.6%.

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