By Lucia Mutikani
WASHINGTON (Reuters) - U.S. factory activity rebounded last month from an eight-month low and consumer spending increased more than expected in January, suggesting the economy was regaining some strength after abruptly slowing in recent months.
The signs of a comeback, also evident in a surprise gain in construction spending, should bolster the Federal Reserve's resolve to keep scaling back its massive monetary stimulus. Reports from automakers also showed sales edged up from January's weather-depressed levels.
"The economy is beginning the slow process of digging its way out of the weather-induced slowdown of recent months," said Millan Mulraine, deputy chief economist at TD Securities in New York. "This upward momentum should be sustained in the coming months."
The Institute for Supply Management said its index of national factory activity rose to 53.2 last month after slumping in January to 51.3, its weakest reading since May. A reading above 50 indicates expansion.
New orders bounced back as did supplier deliveries, inventories and order backlogs. However, production slipped for a third straight month and contracted for the first time since August 2012.
Manufacturers said cold weather was still hindering operations: hampering logistics, causing back-ups at ports and disrupting supplies of raw materials. Frigid temperatures across large parts of the country have been blamed for weighing on growth at the start of the year.
Financial markets were little moved by the data as investors focused on escalating tensions in Ukraine.
In a separate report, the Commerce Department said consumer spending increased 0.4 percent in January after a 0.1 percent gain in December. Economists had expected consumer spending, which accounts for more than two-thirds of U.S. economic activity, to rise only 0.1 percent.
The increase in spending was driven by a 0.9 percent jump in outlays for services, the biggest gain since October 2001. The rise likely reflected a surge in demand for utilities amid the cold weather, as well as higher healthcare spending as President Obama's signature 2010 healthcare law went into effect.
Weak economic data had led to speculation the Fed might pause in its efforts to reduce economic stimulus. But economists said Monday's data and forecasts for some improvement in employment in February made that less likely.
"We have argued before that higher demand for utilities will work as an automatic stabilizer for consumer spending during the unusually cold winter months," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "It should dispel concerns about a too-dramatic economic slowdown."
The consumer data and a surprise 0.1 percent rise in construction spending in January led Barclays to raise its forecast for first-quarter economic growth by four-tenths of a percentage point to a 2.2 percent annual rate. Macroeconomic Advisers lifted its estimate by three-tenths to a 1.7 percent pace.
Data ranging from housing to industrial production and hiring have suggested the economy softened early in the first quarter after expanding at a modest 2.4 percent rate in the final three months of last year.
Apart from the impact of the cold weather, businesses have been placing fewer orders with manufacturers as they work through stocks of unsold goods. The end of long-term jobless benefits and cuts to food stamps have also crimped growth.
While spending on services accelerated in January, spending on goods fell for a second straight month. However, a small rise in auto sales last month offered hope that outlays on goods have picked up.
In January, income rose 0.3 percent, boosted by government transfers for healthcare payments and a cost of living adjustment for Social Security recipients. That offset the drag from the expiration of jobless benefits for more than 1 million long-term unemployed people at the end of December.
Inflation pressures were lacking. A price index for consumer spending rose 0.1 percent after increasing 0.2 percent in December. Over the past 12 months, prices rose 1.2 percent, compared to an advance of 1.1 percent in December.
Excluding food and energy, prices edged up 0.1 for a seventh straight month. These core prices were up just 1.1 percent from a year ago, after rising 1.2 percent in December.
Both measures remain well below the Fed's 2 percent target.
"Muted price pressure will give the Fed confidence to keep interest rates low until there is a pickup in hiring and wages," said Jay Morelock, an economist at FTN Financial in New York.
(Reporting by Lucia Mutikani; Editing by Paul Simao and David Gregorio)