May 15 (Bloomberg) -- The slump in U.S. manufacturing deepened while the economy skirted recession, reports today showed.

Industrial production declined 0.7 percent in April, the Federal Reserve said in Washington today, more than twice the drop forecast by economists. Separate figures from the New York and Philadelphia branches of the central bank indicated the slide may continue this month.

Only exports and consumer spending, the largest part of the economy, are keeping the six-year expansion alive as housing shows no sign of a rebound and factories retrench.

``There is no question about whether or not there is a recession in manufacturing -- there is,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, who correctly anticipated the drop in industrial production. ``Housing is in deep recession and manufacturing is in a shallow one.''

The 0.7 percent decrease in production at factories, mines and utilities followed a revised 0.2 percent gain in March, the Federal Reserve said today. Capacity utilization, which measures the proportion of plants in use, fell to 79.7 percent, the lowest level since September 2005.

Industrial production was forecast to drop 0.3 percent after a previously reported 0.3 percent gain, according to the median estimate of 76 economists surveyed by Bloomberg News.

No Turnaround

``There's certainly no sign of a turnaround in the economy,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Even if the worst is over in the financial markets, the economic effects are still playing out. Manufacturing is contracting, but modestly.''

A separate report showed the National Association of Home Builders/Wells Fargo index of homebuilder sentiment unexpectedly dropped this month to 19, signaling the housing slump will continue. The measure reached a record low of 18 in December. Readings under 50 mean most respondents view conditions as poor.

Additionally, the New York Fed reported manufacturing in the region shrank in May for the third time in four months, as a drop in orders caused businesses to pull back. Its Empire State index fell to minus 3.2, lower than forecast, from 0.6 percent in April. Readings less than zero signal contraction.

Factory Slump

The Philadelphia Fed's general economic index improved to minus 15.6, better than forecast, from minus 24.9 in April, the bank said today. The index averaged 5.1 in 2007.

Treasury notes advanced after the reports. The yield on the benchmark 10-year note fell to 3.82 percent at 4:15 p.m. in New York, from 3.91 percent late yesterday.

Manufacturing is ``still struggling, is the best way to put it,'' Christopher Low, chief economist at FTN Financial in New York, said in a Bloomberg Radio interview.

The industrial production report showed factory output, which accounts for about four-fifths of industrial production, slumped 0.8 percent, the most since September 2005, after no change the prior month.

Utility production increased 0.3 percent after rising 0.7 percent, and mining output, which includes oil drilling, decreased 0.8 percent, after a 1 percent gain, the Fed said.

Industrial capacity utilization was estimated to fall to 80.1 percent from 80.5 percent, according to the survey median.

Motor vehicle and parts production plummeted 8.2 percent following a 4.3 percent decline the prior month, the report said. Autos were assembled at an 8.3 million annual pace last month, the fewest since a strike-depressed 8.2 million in July 1998.

Sales Promotion

Chrysler LLC, the third-largest U.S. automaker, said today a new incentive that offers to subsidize customers' gasoline purchases for three years is helping to revive sales this month. The Auburn Hills, Michigan-based company pledged to cap fuel costs at $2.99 a gallon.

May sales are ``right on schedule'' as traffic to dealerships increases, Chrysler's Co-President Jim Press said today in an interview. Purchases this month are running ahead of the pace for April, when they dropped to the lowest for the month since at least 1994, according to Bloomberg data.

``I think we're looking at the economy on kind of a slow slide,'' Chrysler Chief Executive Officer Robert Nardelli said in an interview.

Excluding autos and parts, factory output fell 0.4 percent last month, the Fed reported.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 0.8 percent and output of computers and peripheral equipment increased 0.5 percent.

Car Sales

Sales of cars and light trucks in April slid to a 14.4 million annual rate, the fewest since 1998, according to industry figures. Officials at General Motors Corp., the world's largest automaker, said this week the company may have to borrow cash and reduce spending to fund its operations if the economy worsens.

``There have been a lot of questions about whether the U.S. economy is in recession -- the U.S. auto industry is definitely in a recession,'' GM's Chief Operating Officer Fritz Henderson said in a May 13 conference call.

GM is cutting production by 138,000 trucks and sport-utility vehicles at four plants in the U.S. and Canada this year amid record-high gasoline prices. The reduction is about 10 percent of GM's planned large pickup and SUV production for 2008.

Part of the slump in auto making last month may have also reflected a protracted strike at American Axle & Manufacturing Holdings Inc., GM's biggest axle supplier.

Supplier Strike

The United Auto Workers walkout at American Axle, which began Feb. 26, idled all or part of as many as 33 GM factories, and cut GM's output by 230,000 vehicles through April, according to the Detroit-based automaker. GM this week said it reopened or added shifts at five North American plants.

Consumers aren't the only ones tightening their belts. Business investment in new equipment and software dropped last quarter for the first time in more than a year, according to figures from the Commerce Department.

Deere & Co., the world's largest maker of tractors and combines, yesterday reported second-quarter profit grew less than analysts estimated because of a 7.2 percent drop in demand for construction equipment and rising raw-material costs.

So far, manufacturing has done better than in past economic slowdowns, in part due to gains in exports. The Institute for Supply Management's factory index reached a five-year low of 48.3 in February, and then stabilized just above that level over the last two months. The index fell as low as 42.1 in February 2001, a month before the start of the last recession.

The purchasing managers' group export index has averaged 57.1 so far this year, up from 55.8 in 2007. A reading of 50 is the dividing line between contraction and expansion.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: May 15, 2008 16:20 EDT