By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing output increased for a second straight month in October amid gains in the production of motor vehicles and a range of other goods, suggesting that the battered factory sector was slowly recovering.
Other data on Wednesday showed a moderation in producer inflation last month. Still, the disinflationary impulse is ebbing as oil prices rise and the dollar's rally fades, which could see an increase in price pressures in the coming months.
The Federal Reserve said factory production rose 0.2 percent last month after a similar gain in September. Output was supported by a 0.9 percent rise in the production of motor vehicles and parts. There were also increases in the production of primary metals and computers and electronic products.
"With the global economic backdrop more stable and growth set to pick up in the United States, we expect to see activity in the manufacturing sector improve a bit in the coming months," said Tim Quinlan, a senior economist at Wells Fargo (NYSE:WFC) in Charlotte, North Carolina.
The report added to a survey early this month showing a second straight month of expansion in factory activity in October. Manufacturing accounts for 12 percent of the U.S. economy.
The sector has suffered a prolonged slump in the aftermath of the dollar's surge between June 2014 and January this year, which has constrained exports. Activity has also been hurt by the collapse in oil drilling after oil prices plunged.
Despite signs of improvement, gains in manufacturing output will likely remain modest against the backdrop of a still-strong dollar and sluggish global demand.
Heavy machinery maker Caterpillar (NYSE:CAT) last month lowered its full-year revenue outlook for the second time this year. It said an "abundance" of used construction equipment, a "substantial" number of idle locomotives and a "significant" number of idle mining trucks had undercut demand.
Longer-dated U.S. government bonds were trading higher, while the dollar was little changed against a basket of currencies. U.S. stocks fell marginally.
MINING SHINES
There was good news on the mining front. Mining production jumped 2.1 percent last month, the largest increase since March 2014, after slipping 0.4 percent in September.
Oil and gas well drilling surged 9.0 percent, building on September's 5.1 percent increase.
Despite the gains in manufacturing and mining output, overall industrial production was unchanged last month as utilities tumbled 2.6 percent. Unseasonably warm temperatures last month reduced demand for heating.
Economists also blamed the decline in utility production on Hurricane Matthew, which lashed the southeast of the country during the month, causing flooding and knocking out power lines.
"The October numbers were likely biased downward by the Hurricane Matthew effect," said Andrew Hollenhorst, an economist at Citigroup (NYSE:C) in New York. "We read today's report as supportive of the idea that the industrial sector is stabilizing."
In a separate report on Wednesday, the Labor Department said its producer price index for final demand was unchanged last month as a rise in the cost of goods was offset by declining services costs. The PPI increased 0.3 percent in September.
In the 12 months through October, the PPI increased 0.8 percent, the biggest gain since December 2014. That followed a 0.7 percent rise in September.
A key gauge of underlying producer price pressures that excludes food, energy and trade services dipped 0.1 percent after rising 0.3 percent in September.
The so-called core PPI increased 1.6 percent in the 12 months through October, the largest rise since September 2014. That followed a 1.5 percent increase in September.
"Despite the moderation this month, we expect PPI gradually to pick up and to feed through to a firming in consumer prices," said Michael Gapen, chief economist at Barclays (LON:BARC) in New York.