Production at U.S. factories continues to increase -- an improvement that further confirms that the U.S. economy is recovering.

Output at U.S. factories rose 0.7 percent in September -- led by impressive increases in auto, mines, and metals output -- the U.S. Federal Reserve announced Friday. What's more, industrial production rose at a 5.2 percent annual rate in Q3 -- the metric's first quarterly increase since the recession started in December 2007. Excluding autos, industrial production rose 0.5 percent in September and 3.8 percent in Q3.


Industrial production rose a revised 1.2 percent in August and 0.9 percent in July. However, it is still down 12.4 percent since the recession's start, and 6.1 percent in the past 12 months.

In addition, the factory utilization rate, also known as capacity utilization, rose to 70.5 percent in September from a revised 69.9 percent in August. It's the highest capacity utilization rate in seven months.

Economists surveyed by Bloomberg News had expected industrial production to increase 0.2 percent and the capacity utilization to rise to 69.6 in September.

Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising, the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.

In September, auto and manufacturing production increased 0.5 percent, metals rose 3.4 percent, mines increased 0.7 percent, high-tech production was flat, industrial supplies declined 0.4 percent, and utilities fell 0.7 percent.

Further, the September factory data mirrors data and comments released earlier this month by the Institute for Supply Management (ISM), which indicated managers of the nation's factories are seeing an increase in demand. This month the ISM asked a special question on the $786 billion fiscal stimulus package, formally the American Recovery and Renivestment Act.

"Twelve of the 18 manufacturing industries expect to derive some benefit from the program," Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee said, in a statement.

Economic Analysis: Investors should be encouraged by the September factory data, which was stronger than expected. The data suggests: 1) that those who say the industrial rebound is "cash-for-clunkers auto subsidy-based are incorrect -- industrial production outside of autos is rising at a good pace; and 2) the economy could grow at a faster pace than expected, possibly pulling U.S. GDP up to trend-growth levels in 2010, or about 3.0-3.3 percent for the year. To be sure, the September increase in industrial production does not put the manufacturing sector at the heart of the U.S. economic expansion, but one has to be pleased by the trend.

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