UPDATE 2-Mexico Sept industry output down on oil, factories

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By Jason Lange

MEXICO CITY, Nov 19 (Reuters) - Mexican industrial production declined for the fifth straight month in September amid cooling U.S. demand for the country's manufacturing exports and lower oil output, the national statistics agency said on Wednesday.

Industrial output MXIPY=ECI, which accounts for about 40 percent of Mexico's economy, fell 1.8 percent from a year earlier, the agency said in a report.

The reading, which was weaker than expected, is a sign that Mexico's economy is slowing sharply and could follow its top trading partner the United States into a recession, analysts said.

"We're just seeing the beginning of the falls in output that are coming," said Luis Flores, an economist at Ixe in Mexico City.

Analysts polled by Reuters had expected industrial output to contract 1 percent from a year earlier.

Mexican oil production, which has been declining steadily since 2004, dropped sharply in September after several U.S. oil refineries were shut down by Hurricane Ike, reducing demand for Mexico's crude.

But economists are even more concerned about weakness in manufacturing, which represents a much larger sector of Mexico's economy.

The factory sector is shedding jobs across the country, and less money in workers' pockets is putting stress on retailers.

Manufacturing output edged up 0.3 percent in September from a year earlier after falling 2.2 percent in August, the statistics agency said. The September increase was just a fraction of the growth seen throughout most of 2007.

Mexico sends about 80 percent of its exports to the United States, which is reeling from a financial crisis, and weakening consumer demand there bodes poorly for Mexican industry.

U.S. automaker Ford Motor Co (F.N) plans to temporarily shut down its Hermosillo plant in western Mexico for a week at the end of December, a spokeswoman said via e-mail.

The plant, like most car and auto parts factories in Mexico, exports most of its output to the United States, where light vehicle sales fell 23.7 percent in September.

"We still haven't hit bottom," said Agustin Rios, president of Mexico's association of auto parts makers.

Rios said output in Mexico's auto parts sector has fallen about 5 percent this year and could drop 10 percent in 2009. He estimates the sector has lost about 5,000 jobs so far this year.

Weak construction activity is also weighing on the economy as a government program to boost investment in infrastructure faced delays. Construction in Mexico was down 2.1 percent in September.

Mining output, which is dominated by crude oil production, fell 9.6 percent in September from a year earlier. (Additional reporting by Noel Randewich; editing by Gary Crosse)