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Manufacturing stumbles but seen regaining footing

File photo of Chevrolet Cruze chassis moving along the assembly line at the General Motors Cruze assembly plant in Lordstown, Ohio July 22,
File photo of Chevrolet Cruze chassis moving along the assembly line at the General Motors Cruze assembly plant in Lordstown, Ohio July 22,

By Lucia Mutikani

WASHINGTON (Reuters) - Manufacturing got off to a weak start this year as motor vehicle output tumbled in January, but a rebound in factory activity in New York state this month suggested any setback would be temporary.

In a further sign the sluggish economic recovery remains on track, consumers were a bit more upbeat early this month even as they paid more for gasoline and saw an increase in taxes reduce their paychecks, other data on Friday showed.

"The economy is on a slowly improving course and it's got enough headwinds that we are going to see some volatility in these month-by-month numbers," said Jerry Webman, chief economist at OppenheimerFunds in New York.

Manufacturing output fell 0.4 percent last month, the Federal Reserve said. But production in November and December was much stronger than previously thought and the 3.2 percent drop in auto output - the largest since August - followed two solid months, suggesting it was just a temporary pause.

"Given that most of the weakness was due to the give-back in motor vehicle production after the 11 percent surge in activity during the last two months of last year, we expect this retreat in industrial output to be temporary," said Millan Mulraine, senior economist at TD Securities in New York.

In a separate report, the New York Federal Reserve Bank said its "Empire State" general business conditions index, which gauges factory activity in the state, rose to 10.0 from -7.8 the month before. February's index showed the first growth in the sector since July and the best performance since May 2012.

The rebound was driven by new orders, which hit their highest level since May 2011. Economists said the pick-up in activity likely reflected recovery from Superstorm Sandy, which struck the East Coast in late October.

"What we are seeing in manufacturing is that growth that had been leading the economy is now roughly keeping pace with the overall economy and that's likely to remain the case through 2013," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

CONSUMER SENTIMENT PERKS UP

Separately, the Thomson Reuters/University of Michigan index of consumer sentiment rose to 76.3 in early February from 73.8 in January.

Households drew comfort from steady job gains, which together with rising home and stock prices should help offset a recent increase in payroll taxes and underpin consumer spending.

"Consumers are getting over the fact that their paychecks are a little smaller since the beginning of the year due to the sunset of the payroll tax holiday," said Thomas Simons, an economist at Jefferies & Co. in New York.

"This offers some encouragement that consumption will recover following a weak month in January."

The fairly upbeat sentiment data helped to lift the dollar against the yen, but stocks on Wall Street were little moved, consolidating after a rally that saw the Standard & Poor's 500 index rise nearly 7 percent so far this year.

PAYING TO STAY WARM

Last month's weakness in manufacturing contributed to pushing overall industrial production down 0.1 percent.

Production at the nation's mines fell 1.0 percent, but cold weather boosted utilities production by 3.5 percent. The need for Americans to spend more money on utilities in January should support consumer spending this quarter.

Forecasting firm Macroeconomic Advisers raised their first-quarter growth estimate by a tenth of a percentage point to a 2.5 percent annual rate, which would be a nice step up after a dismally weak fourth quarter.

(Additional reporting by Steven C Johnson in New York; Editing by Andrea Ricci and Tim Ahmann)

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