Factories flex muscles post storm, inflation subdued

By Lucia Mutikani

WASHINGTON (Reuters) - Factory output posted its sharpest increase in nearly a year in November as auto production staged a rebound, while consumer prices slipped, offering cautious optimism for the struggling economic recovery.

Factories have bounced back after being held down by Superstorm Sandy, which struck the East Coast in late October.

Despite last month's rise, factory production remained below highs reached earlier this year. Analysts said this subdued recovery and tame price pressures provide ample scope for the Federal Reserve to stay on its ultra-easy monetary policy path.

"This is an economy that still has a lot of slack and upside potential," said Robert Dye, chief economist at Comerica in Dallas. "There is a lot of dry tinder out there, the Fed has added to that with monetary policy and we have to get past the fiscal cliff issues to see if the dry tinder catches fire."

The "fiscal cliff" refers to the $600 billion in deep government spending cuts and tax hikes that will hit the economy next year if the Obama administration and Congress fail to agree on a less drastic plan to reduce budget deficits.

Manufacturing output rose 1.1 percent in November, the biggest gain since December 2011 and a rebound from a 1.0 percent drop in the prior month, the Federal Reserve said. It said production was lifted by a surge in motor vehicle output.

Hurricane Sandy had weighed on overall industrial output in October, but the rebound in November was stronger than economists had expected. Output at the nation's factories, mines and utilities taken together also jumped 1.1 percent after slumping 0.7 percent in October. It was the biggest gain in almost two years.

Separately, financial information firm Markit said its preliminary gauge of U.S. factory activity in December rose to 54.2, its highest level since April, from 52.8 in November.