U.S. factory output in December grew at the fastest pace in a year and homebuilder sentiment improved this month, further evidence the economy entered the new year on firmer footing.

Inflationary pressures also remained in check as wholesale prices slipped last month, which could give the Federal Reserve leeway to respond to an anticipated slowdown in growth in the first half of 2012.

Factories boosted output by 0.9 percent last month, pushing total industrial production 0.4 percent higher, the Federal Reserve said.

Manufacturing really outperformed. That shows a good ramp-up in terms of industrial production, which is good news, said Eric Green, an economist at TD Securities in New York.

Manufacturing has been one of the main drivers of growth since the end of the 2007-09 recession, and the latest data add to a picture of an economy expected to have expanded at around a 3 percent annual pace in the fourth quarter.

Last year, the economy added the most manufacturing jobs since 1997.

Higher industrial production came despite a 2.7 percent plunge in utilities. In an unseasonably warm winter, it was the fifth consecutive month of declines for utilities.

The U.S. stock market largely ignored the data but shares rose on optimism the International Monetary Fund would raise more funds to fight Europe's debt crisis and after Goldman Sachs' earnings beat estimates. Prices for U.S. government debt declined.

In a separate report, U.S. homebuilder sentiment unexpectedly rose in January to its highest level in four and a half years, suggesting the nation's downtrodden housing market is starting to heal. The NAHB/Wells Fargo Housing Market index climbed to 25 from 21 in December.

The index has been improving since October, reinforcing optimism the housing market is finding a bottom and might even contribute to economic growth this year.

I would be hardpressed to see a strong recovery, but the worst is behind us, said Josh Feinman, an economist at DB Advisors in New York.


Still, a recession widely seen to have taken hold in the euro zone and gradual fiscal tightening at home are expected to slow economic growth in the United States during the first half of this year. The Fed has left the door open to provide further support for an economy still suffering from an 8.5 percent unemployment rate.

Tame wholesale inflation would give them maneuvering room. The Labor Department said prices received by farms, factories and refineries unexpectedly fell in December, down 0.1 percent from the prior month.

Core producer prices, which exclude food and energy, rose 0.3 percent in December, lifted by higher prices for light trucks. It was the largest gain since July, but labor market weakness will make it harder for firms to pass higher costs on to consumers.

Inflation is not on the Fed's radar screen, said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. The Fed is more concerned about the slowness of the recovery and lack of job creation.

Energy costs for businesses fell 0.8 percent last month, with gasoline down 2.3 percent. Food prices fell 0.8 percent.

That brought the 12-month reading for producer price inflation down to 4.8 percent, a bigger drop than expected.

Nearly a third of the month-on-month gain in core prices was due to an increase in prices for light motor trucks, the Labor Department said.

(Additional reporting by Lucia Mutikani in Washington and Emily Flitter, Julie Haviv and Richard Leong in New York; Editing by Andrea Ricci)