Jan. 17 (Bloomberg) -- Industrial production in the U.S. rose more than forecast in December, driven by demand for computers, home electronics and automobiles.

Production at factories, mines and utilities rose 0.4 percent last month, following a 0.1 percent November drop, the Federal Reserve said today. Capacity utilization, which measures the proportion of plants in use, rose to 81.8 percent, from 81.6 percent a month earlier.

The report may signal a manufacturing rebound as improving demand in the U.S. and abroad helps trim bloated inventory, leaving housing as the only major concern for the economy. The warmest December in five decades caused utility use to drop 2.6 percent, preventing production from rising even more.

``The broad-based increase in manufacturing suggests that inventory problems are largely behind us,'' said Dean Maki, chief U.S. economist at Barclays Capital in New York. ``Production growth will be picking up in the first quarter in response to demand.''

Manufacturing, which accounts for about four-fifths of the industrial production report, rose 0.7 percent last month, the most since June, after no change the prior month. Excluding autos, factory production rose 0.6 percent and followed a 0.3 percent drop in November.

Economists expected industrial production to rise 0.1 percent after an originally reported 0.2 percent increase the prior month, according to the median of 72 economists in a Bloomberg News survey. Estimates ranged from a decrease of 0.5 percent to an increase of 0.4 percent.

Capacity utilization was forecast to drop to 81.7 percent, from a previously reported 81.8 percent, according to the Bloomberg News survey. Projections ranged from 81 percent to 82 percent.

Plant Use

Plant operating rates, which economists monitor for indications of pressure on factories' ability to produce goods with existing resources, have averaged 81 percent over the last three decades. Higher operating rates raise the risk of bottlenecks in production that can force prices higher.

Prices paid to U.S. producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline that have since reversed, the Labor Department reported today. The 0.9 percent gain in the producer price index followed a 2 percent increase in November. So-called core wholesale prices that exclude energy and food rose 0.2 percent after rising 1.3 percent.

Several Fed policy makers have said this month that inflation remains their biggest concern as the housing slowdown shows little sign of affecting other parts of the economy.

Inflation `A Challenge'

``Inflation has been and remains a challenge, though recent data provide a bit of assurance that price pressures may be beginning to ebb,'' Fed Bank of Boston President Cathy Minehan said Jan. 12 at a conference in Burlington, Vermont.

The average U.S. temperature in December was 37.1 degrees Fahrenheit, 3.7 degrees warmer than average. It was the warmest December since 1957 and the fourth-warmest on record, according to the National Climatic Data Center in Asheville, North Carolina. The resulting decline in utility production was the biggest since September and followed a 0.2 percent November increase.

Mining output in the U.S. rose 0.8 percent last month, following a 0.4 percent decrease.

Computer production last month rose 3.1 percent, home electronics was up 1.9 percent and auto output rose 4 percent.

Toyota

U.S. producers, such as General Motors Corp. and Ford Motor Co., have been slowing production as sales drop, while their foreign rivals are still expanding. Toyota Motor Corp. may build as many as five North American assembly plants in the next 10 years, according to people familiar with the plans.

Irv Miller, vice president of corporate communications for Toyota's U.S. sales unit based in Torrance, California, said earlier this month that the company was studying ways to boost capacity. He declined to give any details on the company's internal planning.

Other manufacturers are struggling. Corning Inc., the biggest maker of liquid-crystal display glass, last month reported that it got fewer orders, though that didn't hurt its fourth-quarter earnings. The Corning, New York-based company said on Jan. 8 that it is sticking to its forecast.

Output of consumer durable goods, including automobiles, furniture and electronics, rose 1.5 percent in December, after increasing 1.6 percent in November.

Housing Slowdown

The slowdown in housing in hurting some manufacturers in related businesses. Black & Decker Corp., the biggest U.S. maker of power tools, last month cut its annual profit forecast for the third time, citing the housing slump.

The company, whose biggest buyers are home improvement chains Home Depot Inc. and Lowe's Cos., said retailers reduced inventories and bought fewer tools, creating ``significant challenges'' in the first half of 2007.

Manufacturers are getting a boost from growing overseas demand, thanks to a weaker dollar and stronger growth in Europe and Asia. Exports rose 1 percent to a record $124.8 billion in November, the government reported last week.

U.S. consumer demand may also be picking up. Retail sales in December rose 0.9 percent, the most in five months, after a 0.6 percent gain the prior month, the Commerce Department said last week.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: January 17, 2007 09:42 EST