U.S. Industrial Production Fell 2.8%, Most Since 1974

By Shobhana Chandra

Oct. 16 (Bloomberg) -- Industrial production in the U.S. fell in September by the most in almost 34 years as hurricanes and an aircraft strike combined with the credit crunch to weaken manufacturing.

The 2.8 percent decrease in production at factories, mines and utilities exceeded forecasts and followed a revised 1 percent decrease in August, the Federal Reserve said today. For the third quarter, output fell at an annual rate of 6 percent, the biggest decline since 1991.

Last month's Gulf Coast hurricanes accounted for 2.25 percentage points of the decline in industrial production, and a strike at Boeing Co. accounted for most of the rest of the drop, the Fed said. Frozen credit markets and higher borrowing costs will force consumers and companies to further trim purchases of expensive items such as cars and machinery.

``The plunge was mainly due to hurricanes and the strike,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``That said, the trend in manufacturing is weakening. The recession is intensifying, reflecting weakness in both domestic and foreign demand.''

Last month's decline in output was the biggest since December 1974. Industrial production was forecast to fall 0.8 percent after a previously reported 1.1 percent drop, according to the median estimate of 73 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.1 percent to a drop of 2.8 percent.

Factory output, which accounts for about four-fifths of industrial production, fell 2.6 percent after a 0.9 percent decrease the prior month.

Oil Drilling Down

Utility production rose 2.2 percent after dropping 3.1 percent. Mining output, which includes oil drilling, decreased 7.8 percent, after no change in August.

Oil production operations and other facilities were shut down because of Hurricane Ike, which made landfall on the Gulf Coast of Texas on Sept. 13, less than two weeks after Hurricane Gustav struck Louisiana.

Capacity utilization, which measures the proportion of plants in use, fell to 76.4 percent from 78.7 percent the prior month.

Industrial capacity utilization was estimated to fall to 77.9 percent according to the Bloomberg survey median, from an originally reported 78.7 percent in September that was the lowest level in almost four years.

Motor vehicle and parts production increased 1.9 percent following an 11.3 percent drop the prior month, the report said.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 0.7 percent.

Auto Sales

Auto industry figures earlier this month showed cars and light trucks sold at a 12.5 million annual pace in September, the fewest since 1993. General Motors Corp. this week said it will close a Wisconsin SUV factory on Dec. 23, two years earlier than planned.

Industrial production also was damped by a shutdown at Boeing Co., the world's No. 2 commercial planemaker. Chicago- based Boeing on Oct. 13 said its factories will remain idle into a sixth week after the company and its machinists union failed to settle a strike over job security.

Regional reports indicate factories are taking a bigger hit this month. The New York Federal Reserve reported yesterday that its Empire manufacturing index sank in October to the lowest level since the gauge started in 2001.

Sales at U.S. retailers dropped in September by the most in three years, as mounting job losses, plunging home prices and the deepening credit crisis rattled consumers, a Commerce Department report showed yesterday.

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