Thursday, May 15, 2008

U.S. Industrial Production Dropped More Than Forecast

U.S. Industrial Production Dropped More Than Forecast

By Shobhana Chandra

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Industrial production in the U.S. fell more than forecast in April, as the slowdown in consumer spending prompted car and appliance makers to cut back.

The 0.7 percent decrease in production at factories, mines and utilities was twice as much as anticipated by economists surveyed by Bloomberg News. IND' ))">Capacity utilization, which measures the proportion of plants in use, fell to 79.7 percent, the lowest since September 2005, from 80.4 percent the prior month.

A deepening housing slump, restrictions on credit and soaring food and fuel prices have caused consumers and businesses to rein in purchases of expensive items like cars and machinery. Only growing demand from overseas has prevented American factories from declining even more.

‘‘Manufacturing is now showing clear evidence of weakening,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who accurately projected the drop. ‘‘We will see a continued slowdown in the economy, but no collapse. The industrial sector isn't going to escape the slowdown.''

Industrial production for March was revised down to a 0.2 percent increase from 0.3 percent. April output was forecast to drop 0.3 percent, according to the median estimate of 76 economists surveyed by Bloomberg News. Projections ranged from a drop of 0.8 percent to a gain of 0.7 percent.

Declines in May

Earlier today, the New York Fed reported manufacturing in the region shrank in May for the third time in four months, as a drop in orders caused businesses to pull back. Its IND' ))">Empire State index fell to minus 3.2, lower than forecast, from 0.6 percent in April. Readings less than zero signal contraction.

U.S. Treasury securities were little changed following the reports and stock-index futures held earlier gains. The yield on the benchmark 10-year note was 3.90 percent at 9:33 a.m. in New York, compared with 3.91 percent late yesterday.

The industrial production report showed factory output, which accounts for about four-fifths of industrial production, slumped 0.8 percent, the most since September 2005, after no change the prior month.

Utility production increased 0.3 percent after rising 0.7 percent, the report showed. Mining output, which includes oil drilling, decreased 0.8 percent, after a 1 percent gain, the Fed said.

Industrial capacity utilization was estimated to fall to 80.1 percent from 80.5 percent, according to the survey median.

Auto Slump

Motor vehicle and parts production plummeted 8.2 percent following a 4.3 percent decline the prior month, the report said. Autos were assembled at an 8.3 million annual pace last month, the fewest since a strike-depressed 8.2 million in July 1998.

Excluding autos and parts, factory output fell 0.4 percent last month.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 0.8 percent and output of computers and peripheral equipment increased 0.5 percent.

Sales of cars and light trucks in April slid to a 14.4 million annual rate, the fewest since 1998, according to industry figures. Officials at General Motors Corp., the world's largest automaker, said this week the company may have to borrow cash and reduce spending to fund its operations if the economy worsens.

‘‘There have been a lot of questions about whether the U.S. economy is in recession -- the U.S. auto industry is definitely in a recession,'' GM's Chief Operating Officer Fritz Henderson said in a May 13 conference call.

Less Demand

GM is cutting production by 138,000 trucks and sport- utility vehicles at four plants in the U.S. and Canada this year amid record-high gasoline prices. The reduction is about 10 percent of GM's planned large pickup and SUV production for 2008.

Part of the slump in auto making last month may have also reflected a protracted strike at American Axle & Manufacturing Holdings Inc., GM's biggest axle supplier.

The United Auto Workers walkout at American Axle, which began Feb. 26, idled all or part of as many as 33 GM factories, and cut GM's output by 230,000 vehicles through April, according to the Detroit-based automaker. GM this week said it reopened or added shifts at five North American plants.

Consumers aren't the only ones tightening their belts. Business investment in new equipment and software dropped last quarter for the first time in more than a year, according to figures from the Commerce Department.

Housing Spillover

Deere & Co., the world's largest maker of tractors and combines, yesterday reported second-quarter profit grew less than analysts estimated because of a 7.2 percent drop in demand for construction equipment and rising raw-material costs.

So far, manufacturing has done better than in past economic slowdowns, in part due to gains in exports. The Institute for Supply Management's IND' ))">factory index reached a five-year low of 48.3 in February, and then stabilized just above that level over the last two months. The index fell as low as 42.1 in February 2001, a month before the start of the last recession.

The purchasing managers' group export index has averaged 57.1 so far this year, up from 55.8 in 2007. A reading of 50 is the dividing line between contraction and expansion.

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