Nov. 17 (Bloomberg) -- Industrial production and wholesale prices in the U.S. rose less than forecast in October, giving the Federal Reserve more reason to keep interest rates near a record low for an “extended period.”

Total output rose 0.1 percent, restrained by the first decrease in manufacturing in four months, a report from the Fed showed today in Washington. Prices paid to factories, farmers and other producers rose 0.3 percent after dropping 0.6 percent in September, the Labor Department reported.

The reports show why Chairman Ben S. Bernanke and his colleagues at the Fed are focusing on unemployment and capacity use to determine when to remove the trillions of dollars pumped into the financial system. A jobless rate at a 26-year high and industries using 70.7 percent of potential, near June’s record low, will probably limit inflation and keep monetary policy unchanged well into 2010.

“The recovery is still in the early stages and the data are going to be pretty choppy,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “The Fed will most likely see this path as one of subdued inflation and will want to keep an emphasis on sustaining the recovery.”

Stocks advanced for a third day as higher crude oil prices boosted shares of energy companies, overshadowing the smaller- than-expected rise in industrial production. The Standard & Poor’s 500 Index rose 0.1 percent to close at 1,110.32.

Less Than Forecast

Production at factories, mines and utilities was forecast to increase 0.4 percent, according to the median estimate of 75 economists surveyed by Bloomberg News. Projections ranged from a gain of 1.2 percent to a drop of 0.3 percent. The Fed revised September’s gain down to 0.6 percent from a previously reported 0.7 percent increase.

The gain in capacity use left operating rates near June’s 68.3 percent, which was the lowest since records began in 1967, and below the 81.1 percent average over the past four decades.

Economists track capacity utilization to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

The Labor Department’s report on producer prices was forecast to show a 0.5 percent increase, according to the median estimate of economists surveyed. Wholesale prices were down 1.9 percent from a year earlier.

Excluding Food, Fuel

Costs excluding food and fuel, known as the core index, unexpectedly fell 0.6 percent, the biggest drop since July 2006. Over the past 12 months core costs were up 0.7 percent, the smallest gain since 2004.

Another report today showed homebuilder confidence in November was lower than anticipated as companies fretted over the possible expiration of a government tax credit. The National Association of Home Builders/Wells Fargo sentiment index held at 17 for a second month. A reading below 50 means most respondents view conditions as poor.

The Fed’s report showed production at manufacturers declined 0.1 percent in October after a 0.8 percent increase. The decrease reflected a reduction in auto making as the effects of the government’s trade-in incentive dissipated and a decline in demand for business equipment, such as computers.

Motor vehicle and parts production fell 1.7 percent following an 8.1 percent increase the prior month. Automobile production is moderating after surging in the three months through September as “cash-for-clunkers” incentives to buy cars expired in late August.

Broad-Based Decline

Excluding automobiles, manufacturing output decreased 0.1 percent.

Manufacturing has stabilized since June as exports rose from a three-year low in April. Factories have been selling more equipment and consumer goods as demand improves in overseas economies from Asia to Europe.

“Based on improving macroeconomic indicators and stabilization in our own demand trends, it appears we have reached the bottom of the cycle,” Keith Nosbusch, chief executive officer at Rockwell Automation Inc., the Milwaukee- based maker of factory-automation software, said Nov. 9. “In this uncertain economic environment, I cannot predict the shape of the recovery, but I do not expect a sharp upturn.”

Model Changeover

A 1.6 percent gain in the cost of wholesale food and fuel was mostly offset by a 5.7 percent plunge in prices for light trucks, the biggest drop in three years, and a 0.5 percent decrease in autos. The declines reflected the switch to the 2010 model year, the Labor Department said.

“Inflation seems likely to remain subdued for some time,” Bernanke said yesterday in a speech to the Economic Club of New York. He also said “significant economic challenges remain,” and he repeated the Fed’s Nov. 4 pledge to keep interest rates low for an “extended period.”

Nonetheless, the dollar’s 15 percent drop since March 5 according to the index that IntercontinentalExchange Inc. uses to track the currency’s value against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, and expanding global economies are forcing up commodity costs.

The U.S. last week raised its forecast for crude-oil prices this year and next on speculation that demand will rise as the global economy improves.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Courtney Schlisserman at cschlisserma@bloomberg.net

Last Updated: November 17, 2009 16:16 EST