Nov. 16 (Bloomberg) -- Industrial production in the U.S. unexpectedly dropped in October as slowing sales prompted factories to make fewer automobiles and appliances.

Factories, mines and utilities reported a 0.5 percent decline in output, the biggest since January, after a 0.2 percent gain in September, the Federal Reserve said in Washington. Capacity utilization, which measures actual production as a share of the maximum potential, fell to 81.7 percent from 82.2 percent.

The figures suggest the biggest housing slump in 16 years is starting to spill over to other industries. The decline also reinforces forecasts for slower growth this quarter.

``The decline was pretty broad-based,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc, a New York forecasting firm that predicted a slump in output. ``The combination of the housing meltdown, consumers pulling back and a desire to keep inventories as lean as possible is overwhelming exports.''

The median forecast in a Bloomberg News survey of 76 economists was for a 0.1 percent gain in industrial production, compared with an initially reported 0.1 percent advance the prior month. Projections ranged from a decline of 0.5 percent to a 0.3 percent increase.

Treasury Yields

U.S. Treasury securities slipped today after Federal Reserve officials signaled that weaker fourth-quarter growth won't prompt the central bank to lower interest rates next month. The yield on the benchmark 10-year note was 4.15 percent at 10:22 a.m. in New York, from 4.14 percent late yesterday.

Fed Governor Randall Kroszner said in a New York speech that policy makers probably won't need to cut interest rates to help the economy weather a ``rough patch'' in the coming year.

``The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate,'' Kroszner said in a speech in New York. Data consistent with such growth ``would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate.''

Economists anticipate the pace of growth this quarter will be less than half the 3.9 percent annualized rate reached in the three months through September.

Goldman Sachs Group Inc. economists wrote in a report that the slump in global credit markets is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a ``substantial recession'' in the U.S.

Separate figures from the Treasury Department today showed foreign buying of U.S. financial assets rebounded less than forecast in September after record selling in the previous month.

Factory Output

Factories, which account for about four-fifths of industrial production, made 0.4 percent fewer goods last month. Utility and mining output make up the rest.

Utility production dropped 1.6 percent after falling 0.1 percent in September, the Fed said.

Mining output, which includes petroleum drilling, decreased 0.6 percent last month after increasing 0.6 percent.

Production of consumer durable goods, including automobiles, furniture and electronics, dropped 0.8 percent after falling 1.6 percent the prior month.

Motor vehicle and parts production fell 1 percent following a 3 percent drop, the report said. Manufacturing excluding autos declined 0.3 percent.

Retail Sales

Retail sales increased 0.2 percent in October following a 0.7 percent increase the prior month as Americans skimped on furniture and sporting goods, a report this week from the Commerce Department showed.

Whirlpool Corp., the world's largest appliance maker, said last month that third-quarter sales in North American fell 8 percent as the housing slump hurt demand for refrigerators and dishwashers.

The growth outlook for the rest of 2007 has deteriorated since mid-August, when concern over defaults on subprime mortgages squeezed access to credit, prompting further drops in home sales and construction.

Economists surveyed by Bloomberg in early November forecast the economy will grow at an annual rate of 1.5 percent in the fourth quarter after expanding at a 3.9 percent pace in the previous three months.

Rate Cuts

The Fed has lowered its benchmark interest rate twice in as many months, taking it to 4.5 percent, to prevent the turmoil in financial markets and the recession in real estate from bringing the expansion to an end.

Trading in Fed funds futures suggests investors are betting on another quarter-point rate cut in the benchmark rate at the next meeting on December 11.

Automakers are among companies struggling. General Motors Corp., Ford Motor Co. and Chrysler LLC have all announced they will trim production.

Chrysler, the automaker owned by private-equity firm Cerberus Capital Management LP, will almost double its planned job cuts to as many as 25,100 and scrap four models, the third- largest U.S.-based automaker said on Nov. 1.

``Growing concerns about the housing slump are showing up in consumers' expectations about future economic conditions,'' said Darryl Jackson, Chrysler's vice president for sales.

Other reports have also signaled factories are pulling back. Manufacturing expanded in October at the slowest pace in seven months, and a measure of production contracted, the Tempe, Arizona-based Institute for Supply Management said Nov. 1.

Still, growing overseas demand for U.S.-made products including civilian aircraft and industrial supplies is sustaining output at American factories.

Record exports helped the trade gap narrow in the third quarter, contributing 0.9 percentage point to economic growth after a 1.3 point contribution in the prior quarter, according to Commerce Department figures released Oct. 31.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 16, 2007 10:34 EST