By Lucia Mutikani
WASHINGTON (Reuters) - U.S. industrial production rose at a faster-than-expected clip in March, the latest sign the economy was gaining momentum.
Groundbreaking for new homes also increased but remained well below the post-recession peak hit in November, signalling the drag the housing market is placing on the economy.
Output at the nation's factories, mines and utilities rose 0.7 percent last month after an upwardly revised gain of 1.2 percent in February, the Federal Reserve said on Wednesday.
Economists had expected industrial production to rise 0.5 percent. Manufacturing output gained 0.5 percent, while production at mines rose 1.5 percent and utilities' output increased 1.0 percent.
"The overall tone of this report was very encouraging, with the buoyancy in the manufacturing sector reaffirming our very constructive view on the economic growth performance during the last few months of the quarter," said Millan Mulraine, deputy chief economist at TD Securities in New York.
A separate report from the Commerce Department showed housing starts failed to bounce back as strongly as expected after being weighed down by unusually harsh winter weather.
Groundbreaking activity increased 2.8 percent in March to a seasonally adjusted annual rate of 946,000. Economists, however, expected a rise to a 973,000-unit rate.
Compared to March last year, starts were down 5.9 percent, the biggest decline since April 2011.
"Given the weather, housing is still disappointing," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
While the cold winter weighed on homebuilding in December and January, activity has also been hampered by shortages of building lots and skilled labour, as well as rising prices for materials.
Major U.S. stock indexes traded higher as investors were heartened by data that showed stronger than expected economic growth in China. An index tracking shares of homebuilders also rose. 1:DJUSHB. Prices for U.S. Treasuries fell.
SINGLE-FAMILY STARTS RISE
A report on Tuesday showed homebuilders in April were still downbeat about the sector's near-term prospects. The housing market is under strain from higher mortgage rates and elevated house prices that are sidelining potential buyers.
"Mortgage rates are higher than where they were a year ago and you have sluggish wage growth so a lot of the low-end buyers are being priced out," Brown said.
But there is a ray of hope for a pick-up. In another report on Wednesday, the Mortgage Bankers Association said applications for loans to buy houses rose last week.
The MBA's builder application survey data also showed mortgage applications for new home purchases increased 15 percent in March compared to February. The data has not been adjusted for seasonal fluctuations.
Groundbreaking for single-family homes, the largest segment of the market, surged 6.0 percent to a 635,000-unit pace last month. Starts for the volatile multi-family homes segment fell 3.1 percent to a 311,000-unit rate.
That was the lowest level since last October.
Starts jumped 30.7 percent in the Northeast and 65.5 percent in the Midwest, but fell in both the South and West.
Permits to build homes fell 2.4 percent in March to a 990,000-unit pace. Permits for single-family homes rose 0.5 percent but fell 6.4 percent for the multi-family sector.
(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York and Elvina Nawaguna in Washington; Editing by Paul Simao)