RPT-UPDATE 2-Storm Sandy knocks U.S. industrial output in October

Fri Nov 16, 2012 12:50pm EST

* Industrial production falls 0.4 percent in October

* Sandy a factor, but underlying output still weak

* Motor vehicle production down for third straight month

* Amount of industry capacity in use lowest in nearly a year

By Lucia Mutikani

WASHINGTON, Nov 16 (Reuters) - U.S. industrial output unexpectedly fell in October as Superstorm Sandy disrupted production, but factory activity appeared at a stand-still even aside from the storm.

Production at the nation's mines, factories and refineries contracted 0.4 percent last month after a 0.2 percent increase in September, the Federal Reserve said on Friday. Economists had expected a 0.2 percent gain.

The Fed said Sandy, which tore through the East Coast at the end of October, cut output by nearly 1 percentage point. The brunt of the impact was felt by utilities and producers of chemicals, food, transportation equipment, and computers and electronic products, it said.

Still, the gain in output last month would have been modest even without the storm, with fears over the possibility of higher taxes and sharp cuts in government spending early next year making businesses hesitant to raise output and invest.

The automatic spending cuts and tax increases, known as the fiscal cliff, would drain about $600 billion from the economy unless the U.S. Congress and Obama administration agree on a plan to soften the blow.

"If you took away the impact of the storm, details of this report suggest that industrial activity has slowed and a lot of this has to do with the uncertainty over the fiscal cliff and slowing global demand," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Industrial output contracted in the third quarter for the first time since the 2007-09 recession ended, but the factory sector does not appear headed for a hard landing.

Economists are divided on whether industrial output will bounce back in November. Some expect the effects of the storm to linger longer.

"Sandy's impact is also likely to be felt in the November industrial production data as power outages and other disruptions in the Northeast persisted into the second week of the month," said Jeremy Lawson, a senior economist at BNP Paribas in New York.

"Eventually, we will see a bounce back as production comes back on line."

MANUFACTURING IN COOLING MODE

Last month, utilities output fell only 0.1 percent, even though parts of the Northeast lost power during the storm. Utilities production was flat in September. Production at mines increased 1.5 percent after rising 0.9 percent the prior month.

Manufacturing production fell 0.9 percent as motor vehicle output declined for a third straight month. Manufacturing had gained 0.1 percent in September. Excluding the effects of the storm, manufacturing output was little changed from its September level, the Fed said.

Production of computer and electronic products fell 0.3 percent last month after being flat in September. Computer and electronic goods are a key part of the capital spending component of U.S. gross domestic product.

"It likely reflects hesitancy on the part of businesses to spend on capex amidst the fiscal uncertainty," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

"This is one reason we have reduced our estimate for fourth-quarter real GDP growth to 1.3 percent from 1.8 percent previously," he added.

The average workweek in the manufacturing sector has been bouncing around 40.5 hours since August after peaking at 40.9 hours in January, while overtime for factory workers has been unchanged at 3.2 hours since June.

That suggests activity is not poised to move lower, even though the manufacturing expansion has stalled.

The report on industrial production showed that the amount of factory capacity in use -- a measure of how fully firms are using their resources -- slipped 0.8 of a point to 75.9 percent in October, the lowest level since November 2011.

The factory operating rate is 2.9 percentage points below its long-run average.

Overall industrial capacity utilization fell to 77.8 percent -- the lowest level since November 2011 -- from 78.2 percent in September. That was 2.5 percentage points below its long run average.

Officials at the Fed tend to look at utilization measures as a signal of how much "slack" remains in the economy, and how far growth has room to run before it becomes inflationary.

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