U.S. industrial output seen boosted by demand, Y2K

NEW YORK, Jan 12 (Reuters) - U.S. output of manufactured goods likely rose in December for the 12th straight month, in response to strong global demand and increased activity to build inventory ahead of Y2K, analysts said.

"Most is coming out of (strong demand in) the industrial sector. Some of it is restocking of inventory going into Y2K," said Gregory Miller, chief economist at SunTrust Inc. in Atlanta.

Economists surveyed by Reuters, on average, forecast that industrial production rose 0.4 percent in December versus a 0.3 percent pickup in November. The nation's mines, factories and utilities likely ran at 81.1 percent of capacity in December, nearly the same level as November, according to the economists.

"It'll cap a strong quarter for manufacturing," said Jim O'Sullivan, economist at J.P. Morgan Securities Inc. in New York. "It's consistent with a strong economy."

The Federal Reserve Board will report the December output and utilization data on Friday at 9:15 a.m. (1415 GMT).

Overall goods output was underpinned by record U.S. car sales of nearly 17 million vehicles in 1999. Auto plants have been running full out to meet brisk demand, sparked by a barrage of incentives and rebates.

"Auto is firing close to capacity," Miller said.

Apart from the auto boom, manufacturers have been pumping out a wide array of goods from furniture to high-tech toys to keep up with an insatiable consumer appetite at home and abroad, economists said.

Miller noted that the economic rebound overseas has not shown clear signs of straining U.S. manufacturing capacity.

"It's not so clear that the (foreign) expansion is so strong that it'll strain our capacity," he said.

Meanwhile, analysts said an output drop likely came from the utility industry which saw a mild December across the country suppressing power demand for home heating.

"We have had an extremely warm winter so far," Miller said. "Utilities have not been under pressure to fire up peaking units." Peaking units are costly plants which are switched on to meet upward spikes in power demand.

Analysts said a strong set of December production data would reinforce this week's market nervousness that the Federal Reserve would push interest rates sharply higher this year to slow demand and contain inflationary pressure.

There has been growing sentiment that the U.S. central bank may decide to hike fed funds rate to 6.50 by year-end.

In a Jan. 7 Reuters poll, all 30 of the U.S. primary dealers -- firms that deal directly with the Fed -- expect the Fed to tighten short-term rates by a quarter-percentage point at its rate-setting meeting on Feb. 1-2.

Twenty-seven of the 30 dealers polled indicated they expect the Fed would raise rates at least once more before June, raising the key federal funds rate to 6.00 percent or higher.

Investors and analysts said the December output report will probably have modest impact on the bond market, which has been rattled by worries about multiple rate hikes.

On Tuesday, yield of the bellwether 30-year Treasury bond, a benchmark of long-term rates, closed at 6.67 percent in New York, and just missed a 28-month high of 6.68 percent.

The production data, analysts said, would be overshadowed by top-tier spending and inflation data on Thursday and Friday -- December retail sales, December producer price index (PPI) and December consumer price index (CPI).

"PPI, CPI and retail sales are going to dominate," said Brett Wander, bond strategist at Payden & Rygel, a Los Angeles investment firm that manages $28 billion in assets. "If PPI, CPI and retail sales paint a consistent picture, industrial production will highlight it."

-- Edward R. (somewhere@the.morrow), January 13, 2000