U.S. manufacturing sector regaining some momentum

* Industrial production rises 0.4 percent in August

* Manufacturing output up 0.7 percent as autos surge

* New York state manufacturing slows a bit but new orders up

By Lucia Mutikani

WASHINGTON, Sept 16 (Reuters) - U.S. factory output surged

in August as the pace of motor vehicle assemblies jumped to a

six-year high, a hopeful sign for the economy after a slow start

to the third quarter.

Although another report on Monday showed a slight pullback

in factory activity in New York state this month, businesses

were upbeat about the future. In addition, gauges of new orders

and shipments in the state jumped, all pointing to a pick-up in

manufacturing after a speed bump in the spring.

"Growth in the manufacturing sector is picking up and will

run faster over the balance of the year than has been the case

in recent months," said John Ryding, chief economist at RDQ

Economics in New York.

Manufacturing production advanced 0.7 percent, the Federal

Reserve said. The rise, which more than reversed the prior

month's 0.4 percent drop, helped to lift overall industrial

production 0.4 percent.

Factory output had lagged solid gains in the Institute for

Supply Management's index of manufacturing activity.

"The sharp recovery in the ISM since May followed now by

this surge in manufacturing output are encouraging signs that

the spring soft patch in factory activity is over," said Ted

Wieseman, an economist at Morgan Stanley (Xetra: 885836 - news) in New York.

In a separate report, the New York Federal Reserve said its

Empire State general business conditions index slipped to 6.29

in September from 8.24 last month. A reading above zero

indicates expansion.

Economists cautioned against reading too much in the

step-back in activity, saying it was not a reliable indicator of

national manufacturing.

Even as activity in the state slowed, businesses were

confident about the future. The survey's index of six-month

business conditions approached a 1-1/2 year high in September, a

good sign for business spending.

In addition, a gauge of new orders rose sharply after almost

stalling in August and shipments surged to their highest level

in more than a year.

ECONOMY EXPANDING STEADILY

The improvement in industrial output last month pointed to

some underlying momentum in factory activity, which supports

views of only a mild slowdown in economic growth this quarter.

That should keep the Federal Reserve on course to announce

cuts to its monthly bond purchases when policymakers meet on

Tuesday and Wednesday to assess the economy's health.

"The economy continues to expand at enough of a pace where

we are creating jobs and helping to bring down the unemployment

rate," said Gus Faucher, senior economist at PNC Financial (Other OTC: PNCXL - news)

Services Group in Pittsburgh. "I would not be surprised to see

an announcement (on tapering) on Wednesday."

Gains in manufacturing output last month were led by a 5.2

percent rebound in auto assemblies, which had slumped 4.5

percent in July. It was the largest increase since November (Xetra: A0Z24E - news) and

it took assemblies to an 11.25 million-unit rate, the highest

since June 2007.

There were also increases in the production of consumer

goods, high-tech equipment, machinery, aerospace and electrical

equipment and appliances, among others.

Utilities output fell for a fifth consecutive month in

August, a decline economists blame on a relatively cool summer

and difficulties adjusting the series for seasonal fluctuations.

Mining production rose 0.3 percent last month.

The amount of industrial capacity in use edged up to 77.8

percent from 77.6 percent in July. Capacity use, which can

indicate how much factories can ramp up production before

economic growth becomes inflationary, is still 2.4 percentage

points below its long-run average.

"There is no evidence of any inflation pressure at this

point in the production cycle," said Joseph LaVorgna, chief

economist at Deutsche Bank Securities in New York.