The U.S. economy showed signs it maintained speed into the fourth quarter as retail sales rose in October and a gauge of manufacturing in New York state showed growth this month for the first time since May.
Other data on Tuesday showed muted price pressures at the factory level. That should provide the Federal Reserve with ammunition to give more aid to the economy in the face of increased threat to the recovery from Europe's debt crisis.
The economy seems to be in solid shape, said Alex Hoder, an economist at FTN Financial in New York.
Growth is not strong, but it is not too bad either, and much better than the fourth-quarter recession many were expecting just a few months ago.
Retail sales increased 0.5 percent in October, the Commerce Department said, after rising 1.1 percent the prior month.
The fifth straight month of gains beat economists' expectations for a 0.3 percent increase.
The stronger tone of the economy was further enhanced by a report from the New York Federal Reserve Bank showing factory activity in New York state grew in November for the first since May as shipments improved even though new orders fell.
The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions, but accounts for only a small slice of the overall manufacturing sector, which has been a key pillar of the recovery.
The data supported recent reports suggesting the economy was gaining traction after stumbling in the first half of 2011, hurt by higher gasoline prices and disruptions to production after the March devastating earthquake and tsunami in Japan.
Economists at JPMorgan said growth in the current quarter was tracking close to a 3 percent annual pace after expanding at a 2.5 percent rate in the third quarter.
A third report showed the U.S. Producer Price Index fell 0.3 percent on weak gasoline and motor vehicle prices. That was the first drop in four months and followed a 0.8 percent rise in September.
Excluding volatile food and energy, core wholesale prices were flat last month after climbing 0.2 percent in September.
FED SEEN EASING
Stocks on Wall Street were higher, but investors remained worried about Europe's debt crisis. U.S. Treasury debt prices were slightly lower, while the dollar firmed broadly.
Despite the improving economic picture, most economists expect the Fed to ease monetary policy further early next year through bond purchases to stimulate demand and hiring.
The odds favour the Fed doing a third round of quantitative easing in early 2012. The economy is improving but remains very vulnerable, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.
With the outlook for Europe darkening, analysts believe the U.S. central bank will want to safeguard the economy against any external shocks, which previously frustrated growth.
Many think the Fed will want to err on the side of providing too much stimulus. U.S. central bank officials said on Tuesday the economy still needed more support but continued to differ over the threshold for further action.
October's broad rise in retail sales suggested consumer spending would support growth in the fourth quarter, though economists worry that much of the spending is being funded from savings.
Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- rose at its fastest pace in nearly a year in the third quarter.
Consumer spending is holding up better than many people had anticipated, given a 9 percent unemployment rate and modest wage gains, said Sweet.
Consumers are having to dip into their savings, but I don't think that they're cutting into them as much as the data would suggest. Going forward, this pace of consumer spending is only sustainable if the labour market continues to heal.
Saving in the third quarter was the weakest since 2007 and inflation-adjusted disposable income fell for the first time since the fourth quarter of 2009.
Wal-Mart Stores Inc. Chief Executive Mike Duke said the retail giant's U.S. customers were still worried about jobs and only one in 10 mothers taking part in its surveys view the economy as good.
With food prices rising faster than most wages, some shoppers were concerned about holiday meals, the company said.
Retail sales last month were supported by pent-up demand for motor vehicles. Excluding autos, retail sales rose 0.6 percent, the largest increase in seven months, after advancing 0.5 percent in September.
There were also gains in sales of sporting goods, electronics and appliances, and building materials.
But clothing store sales posted their largest decline since December 2010. Receipts at service stations fell, reflecting weak gasoline prices.
Core retail sales, which exclude autos, gasoline and building materials, rose 0.7 percent in October after advancing 0.5 percent the prior month.
Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. (Additional reporting by Jason Lange in Washington and Chris Reese in New York; Editing by Neil Stempleman)