Factory output rose less than forecast in September and contract signings for U.S. home purchases fell the most in three years, showing the economy was having trouble gaining traction before the government shutdown.

The 0.1 percent advance in manufacturing followed a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today inWashington. Pending sales of previously owned homes slumped 5.6 percent in September, the fourth straight month of declines, the National Association of Realtors reported.

"The economy is in a shutdown-related soft patch in the fourth quarter," said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who correctly predicted a 0.6 percent gain in total industrial production, which also includes mines and utilities. "Everyone started to be a little more cautious in September."

Advances in housing and manufacturing would help generate the employment gains sought by Fed policy makers, who begin a two-day meeting tomorrow. A pickup in consumer and business sentiment depends in part on how companies and households respond to an agreement by lawmakers that funds the government into early next year.

David Fuller's view It looks to me as if evidence for a recovering US economy over the last few months has been mixed at best. A soft global economy remains a contributing factor, and near-term forecasts of clearly stronger growth by many US commentators reflect both cheerleading and wishful thinking. The US Government remains an obvious headwind and this is unlikely to change anytime soon.

There is no doubt that the US economy has some important advantages, led by a faster rate of technological innovation, and competitive energy costs thanks to fracking. Additionally, most US corporations remain stronger than their domestic economy, not least the sector leading, multinational Autonomies. However, this is increasingly reflected by equity valuations which have continued to rise thanks to the powerful tailwind from quantitative easing (QE).

That punchbowl is unlikely to be taken away anytime soon, as every investor now knows. However, they also know that QE is the main support for today's relatively high valuations, with lagging resources sectors being the main exceptions. Consequently, many investors will be hoping to take some profits as QE tapering nears, probably at some point in 2014.

Meanwhile, the US and other performing stock markets are technically overbought in the short-term so a reaction and consolidation is likely before long. However, if this does not occur soon, and if markets move significantly higher on QE euphoria, that will look climactic and be followed by a sharp correction as share prices fall back even faster than the have been rallying recently.

Tactically, investors can opt to ride out a small reaction and even a larger correction, if they wish, because the risk of a bear market at present appears small while monetary conditions are so accommodative. However, if you are inclined to lighten positions somewhat, I would do it on strength when people are still talking the market higher, rather than selling following a predictable reaction, let alone a correction.

(See also Friday's lead item.)