Industrial output up, but capital flows out

WASHINGTON (Reuters) - U.S. industrial production expanded slightly in September, showing some resilience to a credit crunch that prompted a record flight by foreign investors from U.S. assets in August, according to separate reports released on Tuesday.

But in a sign of the gloom pervading downtrodden housing markets, U.S. home-builder sentiment sank to its lowest reading on record in October as borrowers faced difficulties getting mortgages from more stringent lenders.

Output at factories, mines and utilities rose 0.1 percent in September, in line with analysts' expectations, a Federal Reserve report indicated.

Analysts said the data suggested manufacturing is stable, with auto worker strikes pulling production down slightly, while there was little damage from the prolonged housing slump and financial turmoil that began with a meltdown in mortgage markets.

"It's still holding at a moderate pace," said Lindsey Piegza, a market analyst for FTN Financial in New York. "There is nothing seeping from housing or from the credit crunch as of yet."

Mortgage market and credit turmoil showed in a Treasury Department report that said foreigners dumped a record net $163 billion of U.S. securities in August, when credit fears roiled markets and forced the U.S. Federal Reserve to cut its discount rate charged on loans to banks.

Stocks fell on Tuesday on disappointing earnings and outlooks from big banks hit by the subprime turmoil. Treasury debt prices rose as worries about credit markets and slipping stocks pushed investors to the safety of government bonds.

The dollar fell after the capital flows report, but rose as sluggish corporate earnings and rising oil prices cut the appetite for risk.

The reports come as analysts and policy-makers watch closely for any signs the housing downturn and the credit crunch are crimping consumer or business spending, which have helped buoy economic activity.

Reports released separately on Tuesday showed retail sales were solid in early October.

However, Treasury Secretary Henry Paulson warned in a speech on Tuesday that the housing decline is still unfolding, calling it "the most significant current risk to our economy," in remarks to Georgetown University law school students.

His comments echoed the cautious tone of Federal Reserve Chairman Ben Bernanke, who said in a speech late Monday that housing is likely to exert a "significant" drag on economic growth through early 2008.

Illustrating nervousness about prospects for housing markets, the National Association of Home Builders/Wells Fargo Housing Market index fell to the lowest reading since the gauge started in 1985. A record inventory of unsold homes remains on the market despite price cuts and other incentives aimed at boosting sales.

In its report on industrial production, the Fed said output rose at a 4 percent annual rate in the third quarter, the strongest quarter in a year.

Meanwhile, September capacity utilization was unchanged at a smaller-than-expected 82.1 percent.

CAPITAL FLOWS

"Investors seem to be moving money outside of the U.S., which leads us to believe they are planning for a continual U.S. dollar decline," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

The Treasury's capital flows report showed that net sales of long-term securities such as bonds, notes and equities -- a more closely watched gauge of foreign demand -- hit $69.3 billion, also a record.

Economists had expected net foreign purchases of long-term securities of $60 billion, according to a Reuters poll. U.S. capital markets would have needed to attract nearly $58 billion of inflows in order to cover the August trade deficit.

The net sales of $163 billion, which includes short-term securities such as Treasury bills, surpassed the previous record for net sales of $42.3 billion in March 2001.

At the same time, separate reports show retail sales rose in October as consumers took advantage of promotions, suggesting a housing slump and the credit crisis have yet to dull consumer appetites.

The ICSC-UBS weekly chain stores snapshot showed a 2.5 percent year-over-year rise in the week ending October 13, while the Johnson Redbook Retail Sales Index was up 2.6 percent over the same period.