Oct. 16 (Bloomberg) -- Industrial production in the U.S. rose 0.1 percent in September, restrained by a slump at automakers, the Federal Reserve said.

The increase in output at factories, mines and utilities matched expectations and followed no change in August, the Fed said in Washington. Capacity utilization, which measures the proportion of plants in use, held at 82.1 for a second month.

Declining sales and the strike against General Motors Corp. last month caused a slump in production of autos and parts. Growth overseas and a weaker dollar are boosting exports and may ensure the slowdown doesn't worsen.

``Generally the restraint in the numbers reflects the weakness in vehicles,'' said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, who correctly forecast the rise. ``Exports are a huge contributor, and capital goods exports have been quite strong.''

The median forecast in a Bloomberg News survey of 80 economists was for a 0.1 percent gain in industrial production, compared with an initially reported 0.2 percent advance the prior month. Projections ranged from a decline of 0.3 percent to a 0.4 percent increase.

International investors sold a record amount of U.S. financial assets in August as tightening access to credit threatened economic growth and spurred an exodus from American equities, a report from the Treasury Department also showed today. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.

Market Reaction

U.S. Treasury securities held earlier gains following the reports. The yield on the 10-year note was 4.66 percent at 9:35 a.m. in New York, compared with 4.68 percent later yesterday.

Factories account for about four-fifths of industrial production. Utility and mining output together make up the rest.

Utility production fell 0.1 percent after rising 4.6 percent in August, the Fed said.

Mining output, which includes petroleum drilling, increased 0.2 percent last month after decreasing 0.6 percent.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 1.4 percent after falling 1.2 percent the prior month.

Motor vehicle and parts production declined 3.3 percent, the most since January, following a 1.6 percent drop, the report said. Manufacturing excluding vehicles and parts rose 0.3 percent.

Production of computers and peripheral equipment increased 0.9 percent. Manufacturing of home electronics gained 0.1 percent in September.

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 declines in home sales and construction.

Growth Forecasts

The economy will grow 2 percent this year, the least since 2002, according to a Bloomberg survey of economists taken the first week of October. Economists had projected a 2.5 percent rate of expansion at the start of the year.

Reacting to the credit squeeze, the Fed on Sept. 18 lowered its benchmark rate by half a percentage point, the first cut in four years. Trading in Fed funds futures suggests investors are betting on a possible quarter-point rate cut in the benchmark rate at the December Fed meeting, with odds narrowing in recent days for a cut in October.

Fed Chairman Ben S. Bernanke yesterday said the housing industry's contraction will be a ``significant drag'' on U.S. growth into next year, though evidence of a broader impact on spending is limited. He said policy makers will ``act as needed'' to secure growth and contain prices.

GM Strike

A two-day strike at General Motors last month trimmed production at the biggest automaker before the company and the autoworkers union reached an agreement to lower labor costs by shifting retiree health-care liabilities to a union-run fund.

Automakers planned to reduce production even before the strike and more cuts are likely this quarter as demand slows, economists said.

``The industry is weighed down by energy prices and housing and its showing up in vehicle sales,'' GM chief sales analyst Paul Ballew said Oct. 2 in an interview from Detroit.

Housing is affecting makers of other machinery makers. Eaton Corp., the world's second-largest maker of hydraulic equipment, yesterday said weaker home construction and tighter credit would limit sales growth in the current quarter.

``Our overall markets in the fourth quarter will not improve as we had earlier anticipated,'' Eaton's Chief Executive Officer Alexander Cutler, said in a statement. ``The greater weakness in U.S. housing starts is negatively impacting our residential-electrical, hydraulics-construction equipment.''

Slowdown Signals

Other reports have signaled factories are pulling back. Manufacturing expanded in September at the slowest pace in six months as orders slipped and inventories fell, the Tempe, Arizona-based Institute for Supply Management said Oct. 1.

Orders placed with factories fell by the most in seven months in August, the Commerce Department said last week. The decline showed the turmoil in credit markets may have eroded business confidence, economists said.

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 second quarter and contributed 1.3 percentage points to economic growth, the most since 1996, according to Commerce Department figures released Sept. 27.

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

Last Updated: October 16, 2007 09:44 EDT