(Adds manufacturing data, analyst comments, updates markets)
* Housing starts increase 16.9% in December
* Single-family starts rise 11.2%, multi-family up 29.8%
* Building permits drop 3.9%, single-family permits dip 0.5%
* Manufacturing output up 0.2% in December, down 1.0% in Q4
By Lucia Mutikani
WASHINGTON, Jan 17 (Reuters) - U.S. homebuilding surged to a 13-year high in December as activity increased across the board, suggesting the housing market recovery was back on track amid low mortgage rates, and could help support the longest economic expansion on record.
There was also some encouraging news on manufacturing, with other data on Friday showing production at factories increasing for a second straight month in December, indicating some stabilization in one of the industries hardest hit by the Trump administration's 18-month trade war with China.
Though U.S. President Donald Trump and Chinese Vice Premier Liu He signed a "Phase 1" trade deal on Wednesday, a first step toward defusing the trade war, manufacturing is not out of the woods yet. Boeing this month suspended production of its fast-selling 737 MAX jetliner and ripple effects of that decision are already being felt, with a major supplier announcing layoffs last week.
"The shockingly large rise in home construction is likely to provide an unexpected boost to growth," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "However, the first quarter of 2020 it might be a lot softer."
Housing starts jumped 16.9% to a seasonally adjusted annual rate of 1.608 million units last month, the highest level since December 2006. The percentage gain was the largest since October 2016. Groundbreaking activity last month was likely flattered by unseasonably mild weather and probably overstates the health of the housing market.
Data for November was revised higher to show homebuilding rising to a pace of 1.375 million units, instead of advancing to a rate of 1.365 million units as previously reported.
Economists polled by Reuters had forecast housing starts would increase to a pace of 1.375 million units in December.
The dollar firmed against a basket of currencies, while U.S. Treasury debt prices fell. Stocks on Wall Street were trading higher, with the main indexes hitting record highs.
Housing starts soared 40.8% on a year-on-year basis in December. An estimated 1.290 million housing units were started in 2019, up 3.2% compared to 2018.
The rise in construction, together with an increase in completions and the inventory of homes under construction, could ease a housing shortage that has constrained sales over the last couple of years. Housing completions increased 5.1% to a rate of 1.277 million units in December.
Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap. The stock of housing under construction rose 2.0% to 1.192 million units, the highest level since March 2007.
"It's going to take more than increased construction to completely emerge from the ongoing and historic inventory shortage, but more home building certainly won't hurt," said Matthew Speakman, economist at online real estate firm Zillow. "For now, it appears that builders are game for the challenge."
The housing market is regaining momentum after the Federal Reserve cut interest rates three times last year, pushing down mortgage rates from last year's multi-year highs. The 30-year fixed mortgage rate has dropped to an average of 3.65% from its peak of 4.94% in November 2018, according to data from mortgage finance agency Freddie Mac.
Though a survey on Monday showed confidence among homebuilders dipped in January, it remained near levels last seen in mid-1999. Builders said they "continue to grapple with a shortage of lots and labor while buyers are frustrated by a lack of inventory, particularly among starter homes."
While the housing market accounts for about 3.1% of gross domestic product, it has a bigger footprint on the economy, which is now in its 11th year of expansion, through industries such as utilities, retail and manufacturing.
In a separate report on Friday, the Fed said manufacturing production rose 0.2% last month, adding to November's 1.0% increase. Manufacturing output, however, fell 1.0% in the fourth quarter. It dropped 0.2% in 2019, the first decline since 2016.
The U.S.-China trade war has eroded business confidence, leading to a decline in capital expenditures. The housing market improvement is offsetting some of the drag on the economy from weak manufacturing.
Residential investment rebounded in the third quarter after contracting for six straight quarters, the longest such stretch since the 2007-2009 recession. It is expected to contribute to gross domestic product again in the fourth quarter.
Groundbreaking activity could, however, slow in the coming months as building fell 3.9% to a rate of 1.416 million units in December after hitting the highest level in more than 12-1/2 years in November. An estimated 1.369 million building permits were authorized in 2019.
Single-family homebuilding, which accounts for the largest share of the housing market, jumped 11.2% to a rate of 1.055 units in December, the highest level since June 2007. Single-family housing starts rose in the Midwest and the populous South. They fell, however, in the Northeast and West.
Single-family housing building permits slipped 0.5% to a rate of 916,000 units in December after rising for seven straight months.
Starts for the volatile multi-family housing segment vaulted 29.8% to a rate of 553,000 units last month. Starts for buildings with five units or more were the highest since July 1986. Permits for the construction of multi-family homes fell 9.6% to a rate of 500,000 units. (Reporting by Lucia Mutikani; additional reporting by Howard Schneider Editing by Paul Simao and Chris Reese)