Factories rebound, Fed cites growth concerns

The data was seen as further confirmation that the Fed would probably hold interest rates unchanged well into the first half of 2007.

The central bank raised its target for the federal funds rate 17 times to 5.25 percent between June 2004 and June 2006. Analysts expect it to start easing monetary policy sometime this year. The next policy-setting meeting for the Fed is scheduled for the end of the month.

A major component of factory output appeared to stabilize in December according to sales figures on Wednesday. Paul Ballew, General Motor's chief sales analyst said the industry's U.S. light vehicle sales in December ran at an annual adjusted rate of 16.9 million, while sales for 2006 are estimated down about 2.3 percent to 16.7 million.

Construction spending also pointed to a resilient economy. Spending fell 0.2 percent in November, led by an eighth straight drop in private residential building that more than offset record highs in nonresidential and public construction.

HOUSING MARKET RESLIENT

More current data showed some resilience in the U.S. housing market. Mortgage applications rose last week, led by demand for home purchase loans even as interest rates climbed for a fourth consecutive week, an industry trade group said.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinance and purchase loans, rose 3.6 percent last week.

But analysts were cautious on the economy and pointed to a report that showed U.S. private sector employment contracted in December for the first time since April 2003.

The monthly ADP National Employment Report showed private sector employers shed 40,000 jobs after adding 158,000 jobs in November. The report is based on payroll data and measures the change in total private sector nonfarm employment each month.

"The ADP number suggests we are only starting to feel the impact of a slower economy," said Boris Schlossberg, senior currency strategist at Forex Capital Markets in New York.

The ADP report hinted the government's closely watched nonfarm payrolls report for December, due on Friday, might prove soft, although economists debate the extent of the correlation between the two reports.

"This is a big surprise. ... There is no evidence of systematic problems in the ADP survey," said Ian Shepherdson, chief U.S. economist at High Frequency economics in New York.

He said his firm would cut its estimate for the Labor Department's report to 75,000 jobs created, from an original estimate of 100,000.

"ADP is not perfect and is sometimes horribly wrong, but it is the best of a bad bunch of payroll indicators and cannot be completely ignored."

According to the latest Reuters poll, Economists expect Friday's report show 110,000 nonfarm payroll jobs were added in December, slowing from a 132,000 gain in November.