The mixed data suggest the economy remains fragile but is not on the cusp of another recession.
Overall industrial production, which includes output by utilities, mines and factories, rose 0.9 percent last month, the Federal Reserve said Tuesday. That's the largest gain of the year.
Factory output, the largest component of industrial production, rose 0.6 percent. It was the biggest increase since the March 11 earthquake in Japan disrupted supply chains and slowed production at some U.S. auto plants.
The auto industry accounted for nearly all of the factory production gains. Motor vehicles and parts jumped 5.2 percent. Excluding that category, factory output grew only 0.2 percent.
Also driving industrial production higher was an unseasonably hot summer, which led more people to leave their air conditioners running. Utilities jumped 2.8 percent, the most since December. Mining output also increased.
The Commerce Department said in a separate report that builders began work on a seasonally adjusted 604,000 homes last month, a 1.5 percent decrease from June. That's half the 1.2 million homes per year that economists say must be built to sustain a healthy housing market.
Single-family homes, which represent 70 percent of home construction, fell 5 percent. Apartment building rose more than 6 percent.
Stocks traded lower after three days of gains. The Dow Jones industrial average fell more than 60 points in morning trading. Investors seemed to focus on Germany's economy, which stalled in the second quarter and could slow growth in Europe as it struggles to contain its debt crisis.
The stronger industrial production report confirmed other data that show the U.S. economy strengthened at the start of the July-September quarter after growing at a feeble annual rate of just 0.8 percent in the first half of the year.
Employers added more than twice the number of jobs in July than in each of the previous two months. The number of people applying for unemployment benefits this month fell below 400,000 for the first time since early April. And consumers spent more on retail goods in July than in any month since March.
Manufacturing had been one of the strongest sectors of the U.S. economy in the two years since the recession officially ended. It has weakened in in recent months, rising strongly only once since February.
Economists blamed the decline in part on temporary factors. The crisis in Japan caused a parts shortage for some U.S. automakers and other manufacturers. High fuel prices left consumers with less money to spend on discretionary goods, such as appliances and furniture.
"The increase in manufacturing production suggests the economy is finally emerging from distortions posed by the Japanese production shutdowns, which wreaked havoc on the global manufacturing supply chain," said Joseph LaVorgna, chief U.S. economist with Deutsche Bank Securities.
But housing is likely to keep dragging on the economy.
The number of homes under construction in July was the fewest in 40 years. Just 413,000 homes are under construction, after accounting for seasonal factors. A decade ago, roughly 1.6 million homes were built.
Building permits, a gauge of future construction, declined 3.2 percent in July. Jill Brown, vice president of economics at Credit Suisse, said that decline suggests "very little forward momentum."
After previous recessions, housing accounted for 15 percent to 20 percent of overall economic growth. This time around, between 2009 and 2010, housing contributed just 4 percent to the economy.
Though new homes represent just 20 percent of the overall housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and about $90,000 in taxes, according to the National Association of Home Builders.
New-home sales fell in June to a seasonally adjusted pace of 312,000 homes per year. That's less than half the 700,000 per year that economists consider to be healthy.
One reason for the slow pace is that previously occupied homes are a better deal than new homes. The median price of a new home is more than 30 percent higher than the median price for a re-sale. That's more than twice the markup in healthy housing market.
Despite historically low mortgage rates, few Americans are prepared to buy a home as the economy fizzles and job growth is stagnant.
"The now-extended period of ultra-low interest rates is not squeezing any new demand out of the rock," said Pierre Ellis, an analyst at Decision Economics.