* 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 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
"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
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.