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U.S. factory output surges in second quarter, housing improving

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output rose at its fastest pace in more than two years in the second quarter, suggesting the economy was regaining enough momentum to lift growth throughout the year.

Other data on Wednesday showed inflation stirring at the factory gate and the housing market getting back on track after its recovery stalled late last year.

Factory production increased at a 6.7 percent annual rate, the quickest pace since the first quarter of 2012, the Federal Reserve said. That was an acceleration from the January-March period's tepid 1.4 percent pace.

Manufacturing output, however, increased only 0.1 percent in June after a 0.4 percent gain the prior month.

But the strong performance in the second quarter coupled with a report on Tuesday that showed a surge in factory activity in New York state left economists confident the sector was on solid ground and would continue to support the overall economy.

"The backdrop for the manufacturing sector is favorable at the start of the third quarter," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, who added that the manufacturing sector would continue to drive economic growth in the second half of the year.

The sturdy manufacturing growth helped to lift overall industrial production to a 5.5 percent pace in the second quarter, the fastest since the third quarter of 2010.

The economy contracted sharply in the first quarter. It has since rebounded, with growth estimates for the April-June quarter topping a 3.0 percent annual rate.

Separately, the Federal Reserve's Beige Book found economic activity continued to expand in recent weeks, with manufacturing and consumer spending gaining traction.

A second report on Wednesday showed the NAHB/Wells Fargo Housing Market index rose to 53 this month, the highest level in six months, from 49 in June. A reading above 50 means more builders view market conditions as favorable.

Builders were upbeat about sales over the next six months and optimistic about prospective buyer traffic. That is welcome news for a sector that has been stymied by higher mortgage rates, expensive homes and a dearth of properties for sale.

The upbeat data helped to lift U.S. stocks, with the Dow Jones industrial average surging to a fresh intraday high. The dollar firmed against a basket of currencies, while prices for shorter-dated U.S. Treasuries slipped.

INFLATION TRENDING UP

Another report from the Labor Department hinted at some pick-up of inflation at the factory gate. The department said its producer price index for final demand increased 0.4 percent last month, reversing May's 0.2 percent decline.

The series has been too volatile to offer a clear read on producer inflation since being revamped at the start of the year to include services and construction.

Still, inflation is edging higher. Key consumer price measures rose in both May and April, even though the main gauge watched by the Federal Reserve continues to run below its 2 percent target.

"We think the odds are growing that this inflation target could be exceeded by the end of this year and we still look to March 2015 as the date of the first rate hike," said John Ryding, chief economist at RDQ Economics in New York.The U.S. central bank is widely expected to start raising interest rates in the second half of 2015, but labor market strength poses the risk of an earlier policy tightening.

Fed Chair Janet Yellen cautioned on Tuesday that the central bank could raise interest rates sooner and more rapidly than currently envisioned if the labor market continued to improve faster than anticipated by policymakers.

The Fed, which is moving toward wrapping up its monthly bond buying program, has kept overnight lending rates near zero since December 2008. In the 12 months through June, producer prices increased 1.9 percent after rising 2.0 percent in May.

Producer prices excluding food and energy gained 0.2 percent in June after slipping 0.1 percent in May. In the 12 months through June, the core PPI for final demand rose 1.8 percent after increasing 2.0 percent in the period through May.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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