U.S. economic data came in very mixed this morning, with negative readings on production, higher than expected producer inflation, but a stronger consumer confidence reading.

Industrial production dropped more-than-expected in October, down 0.8%. The slid was led by a 5.2% pullback in the auto sector. However, BMO Nesbitt Burns says that the slowdown was fairly widespread, with output ex. autos off 0.4%, and only 46% of industries reported increased activity. It also notes that the fall in production led to a further decline in capacity utilization to 75.2% from 75.8%.

“The weaker-than-expected industrial production numbers weighed on equities at the open,” says Nesbitt. “However, a much stronger-than-expected University of Michigan consumer sentiment survey for November, up to 85.0 from the prior 80.6, provided some support.”

Bank of Montreal says today’s confidence report “combined with the better-than-expected retail sales report on Thursday (flat versus expectations of a decline), suggests the US consumer remains resilient and if confidence remains on an uptrend could continue to support the recovery.”

BMO notes that business inventories also rose a stronger-than-expected 0.5% in September after a 0.1% gain in August as retail inventories surged 1.1%. “This larger-than-anticipated build in inventories may contribute to a modest upward revision to the 3.1% Q3 GDP growth reported in the advance report. However, given the decline in September retail sales (-1.2%) the build may not be desired and could be unwound in subsequent months,” it says.

CIBC World Markets says that a larger-than-expected spike in energy and car prices led to a surprise 1.1% increase in October’s Producer Price Index, leaving the year/year rate in positive territory for the first time since September 2001. “While this report might seem to repudiate deflationary concerns in the US economy, it took some powerful and likely unsustainable prices hikes in cars and skyrocketing energy prices to prevent deflation in the goods sector in October,” it notes.

“Pipeline prices are edging higher and import costs have stopped falling. The economic recovery, evidently, is beginning to restore a modest degree of pricing power, with the exception of the technology sector,” says Nesbitt. “This pattern is typical of a recovery and not consistent with an economy falling toward a deflation trap.”

CIBC says, “Overall, PPI rates are still very tame, and hardly a threat to the Fed. Certainly not enough to prevent the Fed from cutting further in the new year if the manufacturing sector fails to find its footing.”

“These numbers make it clear that we can’t dismiss slowdown fears out of hand,” concludes Nesbitt about the production numbers. “However, manufacturing has been the weakest point for the U.S. economy for a long time and it’s perfectly possible for the rest of the economy to carry the load.”

BMO says that markets were roiled by all the conflicting data today. “Though the strong PPI increase and rise in consumer confidence weighed on the bond market, these factors were offset by the large decline in industrial production and flow of funds out of equity markets,” it says. “The data, on balance are consistent with our view that the Fed will remain on the sidelines through mid-2003. While the industrial production data highlight the recovery’s current “soft spot” that the Fed has referred to, improvements on the consumer-side suggest the recovery is moving forward.”