By Sarah Chaney 

WASHINGTON -- U.S. manufacturers increased their capacity for the 16th straight month in September, fresh evidence that a strengthening economy is helping to propel a U.S. industrial rebound.

The Trump Administration has prioritized increasing manufacturing investment in the U.S. with tax cuts and tariffs on a range of imported goods. Manufacturing capacity, tracked by the Federal Reserve, is a measure of how much production plants could achieve if running at full steam, a proxy for how much they are expanding their plants and productivity.

Manufacturing capacity began recovering from a steep decline in 2011, faded in 2014 and resumed a modest march higher in mid-2015. In September it was up 1.4% from a year earlier. The report suggests investment in U.S. manufacturing has been increasing at a steady pace over the past three years. In June it passed its 2008 peak.

The latest Fed manufacturing report showed factory output also rose in September, helping drive overall industrial production up 0.3% for the month.

The Fed noted that output was "held down slightly" by Hurricane Florence but that the estimated effect was less than 0.1 percentage point.

The pickup in manufacturing production and capacity in recent years reflects a strong global economy and could also be tied to a resurgence in U.S. oil and gas output, said Kathy Bostjancic, head U.S. financial-market economist at Oxford Economics.

"The shale operators obviously are very sensitive to prices. So as we saw price declines, they were going to pull back on operations and production," she said, adding that recovering oil prices are helping spur production activity. "Any of the ancillary...manufacturers related to shale operations will also get a boost," Ms. Bostjancic said.

The manufacturing sector was hit hard by the 2007-09 recession and later by a big drop in oil prices, which hurt energy production. It also has been buffeted by years of competition from low-cost countries such as China.

The Trump administration has imposed tariffs on imported steel and aluminum and also on a wide range of imports from China, moves meant to encourage more production in the U.S. at the expense of foreign competitors by driving up the price of imported goods. Cuts in U.S. corporate tax rates also were meant to spur domestic investment.

"We are in the midst of a manufacturing renaissance -- something which nobody thought you'd hear---which means more jobs for our great electrical contractors," President Trump said this month at an electrical-contractors convention in Philadelphia.

While some steelmakers have expanded U.S. production in the wake of the tariffs, other U.S. manufacturers remain heavily dependent on imported metals and have been constrained by the higher costs associated with tariffs.

Evidence of slack in the industrial sector persists. Manufacturers operated at 75.9% of their capacity in September, below a long-run average of 78.3%.

"That suggests there's still excess capacity in manufacturing," Ms. Bostjancic said, adding, "that's a reason why goods prices are still deflationary. The global economy is still producing too much goods relative to demand."

Write to Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

October 16, 2018 15:25 ET (19:25 GMT)