The Federal Reserve Board reported that U.S. industrial output beat expectations in January, rising 0.7%, more than offsetting December’s downwardly revised 0.4% decline.

Economists, however, are cautious about getting too excited by the numbers.

BMO Nesbitt Burns says the number not only tops market expectations, it confirms signals from purchasing managers’ surveys and price data. The rise was led by a 4.9% jump in motor vehicles and parts, notes Nesbitt. Excluding this, output rose 0.4% last month. There were also solid gains in high tech and in business equipment.

The increase in industrial production improved the capacity utilization rate to 75.7% in January, up from last month’s downwardly revised 75.2%.

Still, Nesbitt is not sounding the all clear on the U.S. economy. “This was not the real thing,” it says. “There needs to be a more widespread and sustained increase for several months before we get excited. However, this should at least open the door to better factory performance in the first half, helped by the weaker U.S. dollar. Upcoming ISM and regional purchasing managers’ surveys will give us direction.”

TD Bank is more optimistic. It says, “The U.S. manufacturing sector may not be burning up the asphalt, but January’s gain is consistent with the most recent readings from the ISM index, which has been flagging an expansion in manufacturing for the past three months. More importantly, the forward-looking components, such as new orders, have also been looking up.”

RBC Financial also notes that U.S. business inventories rose by 0.6% in December, sailing well past the consensus estimate of a 0.2% gain. “The most surprising piece of news in this report was that retail inventories rose by 0.6%, this following a 0.8% gain in November. As such, the inventory-to-sales ratio moved up a tick to 1.37. Although this report will have very little impact on markets, it does raise the prospect that real GDP growth in the last quarter of 2002 was higher than the 0.7% advanced estimate, thanks to a larger contribution by inventories.”

RBC also sees the production improvement as a positive sign for the U.S. economy, but allows that, “it remains unclear to markets how long such strong gains can continue with both domestic and foreign demand remaining vulnerable to geopolitical headwinds”.