U.S. Economy: Industrial Production Contracts Most Since 2005

By Shobhana Chandra

Sept. 15 (Bloomberg) -- Industrial production in the U.S. fell in August by the most in almost three years as the slowdown in consumer spending prompted automakers to cut back.

The 1.1 percent decrease in production at factories, mines and utilities was more than forecast, Federal Reserve figures showed today. Car output slumped 12 percent, the most in a decade, and declines ranged from semiconductors to building supplies.

Today's report indicates the domestic slump is pulling down a U.S. manufacturing industry that has been buttressed by record exports. The figures may stoke concern the economic downturn will deepen amid a housing recession, rising unemployment and a credit crunch that today sent Lehman Brothers Holdings Inc. into bankruptcy.

``We're seeing more pervasive weakness in manufacturing, going beyond autos,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The economy is taking a lurch downward. This is another report that points to a recession.''

Stocks slid and Treasuries climbed today in the aftermath of the Lehman bankruptcy and on concerns American International Group Inc., the largest U.S. insurer by assets, lacks sufficient assets to offset losses.

The Standard & Poor's 500 Stock Index fell 1.4 percent to 1,234.82 at 10:56 a.m. in New York. Yields on benchmark 10-year notes fell to 3.57 percent, from 3.72 percent at last week's close.

Economists' Forecasts

Industrial production was forecast to drop 0.3 percent, according to the median estimate of 68 economists surveyed by Bloomberg News. July's reading was revised down to a 0.1 percent gain from the 0.2 percent previously estimated.

Earlier today, a report from the New York Fed showed manufacturing worsened this month in that region. The Empire State general economic index fell to minus 7.4, the lowest reading since June, from 2.8 a month earlier. A reading of zero is the dividing line between growth and contraction.

The Fed's production report also showed that capacity utilization, which measures the proportion of plants in use, decreased to 78.7 percent, the lowest level since October 2004. Capacity was estimated to fall to 79.6 percent, according to the Bloomberg survey median.

Economists track plant operating rates to gauge factories' ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. The utilization rate has averaged 81 percent over the past 30 years.

Factory Output

Factory output, which accounts for about four-fifths of industrial production, dropped 1 percent after a 0.1 percent increase the prior month, the report showed.

Production at utilities fell 3.2 percent, reflecting a cooler August than usual, economists said. Mining output, which includes oil drilling, decreased 0.4 percent. Shutdowns in the Gulf of Mexico as Hurricane Gustav approached may have contributed to the drop. Shutdowns ahead of Hurricane Ike will probably hurt mining output this month.

The slump in motor vehicle and parts production followed a 2.5 percent gain the prior month, the report said. Carmakers assembled just 8.19 million autos at an annual pace last month, the fewest since April 1991.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 6 percent.

Factories may slow further as sales weaken. Purchases at U.S. retailers fell 0.3 percent in August following a 0.5 percent decline in July as Americans retrenched in the face of mounting job losses and record foreclosures, Commerce Department figures showed last week.

GM, Ford

Carmakers are struggling. General Motors Corp. and Ford Motor Co., the biggest U.S. automakers, dragged the domestic industry to its 10th straight monthly sales decline in August as consumers snubbed trucks because of high fuel prices. Ford this month further pared production plans for the rest of 2008.

``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Chief Executive Officer Alan Mulally said during a speech on Sept. 8 in Dearborn, Michigan. ``I've never seen anything quite like it.''

Manufacturers are also cutting payrolls. Factories eliminated 61,000 jobs last month, the biggest decline in five years, Labor figures showed on Sept. 5. The drop included a loss of 39,000 jobs in auto-making and parts industries.

Other recent reports show American manufacturers have become more cautious as consumer spending weakens. The Institute for Supply Management's factory index fell in August for the first time in three months, the group reported on Sept. 2.

Consumer spending, the biggest part of the economy, will stall this quarter, while economic growth will slow to a 1.2 percent annual rate, less than half the prior quarter's pace, according to a Bloomberg survey from Sept. 2 to Sept. 9.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net