Production at U.S. factories dropped in March for the first time in four months as the industry cooled following the strongest surge in three decades.

Manufacturing, which makes up about 75 percent of industrial output, decreased 0.2 percent last month as appliance and furniture makers cut back, data from the Federal Reserve showed today in Washington. The decline followed a revised 3.4 percent gain from December through February that marked the biggest three-month jump since March 1984.

The rebound in manufacturing that helped the world’s largest economy climb out of the recession in June 2009 may now be giving way to gains among service industries, including retailers, as consumer spending grows. Another report showed builders broke ground on fewer houses than forecast last month, a sign residential real estate continues to lag behind.

“We’ve had a very strong run -- manufacturing just sort of plateaued a little bit here in March,” said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut, who is the most-accurate forecaster of industrial production for the two years ended February, according to data compiled by Bloomberg. “The services sector has begun to take off and is more of the leader, but manufacturing is continuing to contribute.”

Stocks advanced as gains in Spain’s bonds eased concern about Europe’s debt crisis. The Standard & Poor’s 500 Index rose 1.3 percent to 1,387.49 at 11:07 a.m. in New York, following a two-day decline.

Europe, Asia

Elsewhere, German investor confidence unexpectedly rose to a two-year high in April, suggesting Europe’s largest economy can weather the region’s debt crisis. In India, the nation’s central bank reduced its benchmark interest rate by a greater-than-projected half a percentage point as concern over the outlook for growth trumped inflation fears.

The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.” The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said today in its World Economic Outlook.

The Fed’s report showed total production, which also included utilities and mines, was unchanged in March for a second month. The median projection of 82 economists surveyed by Bloomberg News called for a 0.3 percent increase. Estimates ranged from a decline of 0.6 percent to a gain of 0.7 percent.

Homebuilding Decrease

A report from the Commerce Department showed housing starts fell 5.8 percent in March to a 654,000 annual rate, less than the lowest estimate of economists surveyed by Bloomberg and the slowest since October. The slump was led by the volatile multifamily category, which at the same time showed a jump in permits, a proxy for future construction.

While warmer weather may have spurred home construction at the beginning of 2012, a competing supply of cheap existing properties may be steering potential buyers away from purchasing a new home. That means home construction may not help boost the economy in 2012.

“Housing continues to bump along the bottom,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York. “The best we can hope from housing over the next couple years is that it won’t subtract from growth. The numbers in the past few months were decidedly impacted by a much milder winter, so a significant portion of construction was pulled forward.”

The report on industrial production showed auto making climbed 0.6 percent in March after a 0.8 percent rise the prior month. Cars last quarter sold at the fastest pace in four years, according to industry data.

Business Equipment

Production of business equipment climbed 0.2 percent after a 1.3 percent jump, indicating capital investment continues to drive manufacturing.

Capacity utilization, which measures the amount of a plant in use, was little changed at 78.6 percent last month after 78.7 percent in February. It has averaged about 81 percent since records began in 1967.

The Fed last week said the economy grew in all 12 of its regions from mid-February through late March as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

Manufacturers mentioned gains in automotive and high- technology industries, the Fed said on April 11 in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. The firms “expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices,” the Fed said in the report.

Demand for Metals

Companies like Reliance Steel & Aluminum Co., North America’s largest metals service center, are benefiting from increased demand and rising commodity prices.

“Demand was somewhat stronger than we had anticipated and a stronger pricing environment allowed us to modestly improve our gross profit margins,” David Hannah, chief executive officer of the Los Angeles-based firm, said yesterday in a statement.

Retail sales rose more than forecast in March as Americans snapped up everything from cars and furniture to clothes and electronics, according to Commerce Department figures issued yesterday. The 0.8 percent gain was almost three times as large as projected and followed a 1 percent advance in February.