Production in U.S. Unexpectedly Falls for First Time in a Year

Production in the U.S. unexpectedly dropped in September for the first time in more than a year, evidence of the slowdown in growth that is concerning some Federal Reserve policy makers.

Output at factories, mines and utilities fell 0.2 percent, the first decline since the recession ended in June 2009, according to figures from the Fed today. Another report showed builders were less pessimistic than projected this month.

Slackening production means it will take longer for the economy to make a dent in the excess capacity that is containing prices and prompting Fed Chairman Ben S. Bernanke to consider additional monetary stimulus. Improving demand from overseas and gains in business investment indicate orders at manufacturers like Alcoa Inc. will not weaken much more.

“It’s just not the kind of pace we need to create jobs and make inroads into reducing unused capacity and reduce unemployment,” said John Ryding, chief economist at RDQ Economics LLC in New York. “It is encouraging to see a little more optimism on the housing side, which might mean the sector is starting to stabilize.”

Confidence among U.S. homebuilders rose in October to the highest level in four months, a sign residential construction is steadying near record lows, a report from the National Association of Home Builders/Wells Fargo also showed today.

The group’s confidence index increased to 16, exceeding the most optimistic forecast in a Bloomberg News survey, from 13 in September. Readings less than 50 mean more respondents said conditions were poor than good.

Shares Rise

Stocks rose, buoyed by earnings at Citigroup Inc. that exceeded analysts’ estimates as reserves for loan losses fell, and Treasuries securities also climbed. The Standard & Poor’s 500 Index increased 0.2 percent to 1,178.69 at 11:52 a.m. in New York. The yield on the benchmark 10-year note, which moves inversely to prices, fell to 2.50 percent from 2.56 percent late on Oct. 15.

Another report today showed global demand for U.S. stocks, bonds and other financial assets rose in August as investors bought Treasuries in anticipation of Fed monetary easing. Net buying of long-term instruments totaled $128.7 billion in August compared with net buying of $61.2 billion in July, according to data from the Treasury Department.

Economists forecast production would increase 0.2 percent, according to the median of 63 projections in a Bloomberg News survey. Estimates ranged from a decrease of 0.3 percent to a gain of 0.4 percent. The drop followed an unrevised 0.2 percent gain in August.

Production Breakdown

Factory production also decreased 0.2 percent, the first drop since June, reflecting a 0.9 percent fall in consumer durables, like appliances and furniture. Output of motor vehicles and technology equipment, including computers and semiconductors, rose. The latter signals business investment in new equipment was still growing.

Capacity utilization, which measures the amount of a plant in use, decreased to 74.7 percent last month from 74.8 percent in August. The gauge averaged 80 percent over the past 20 years, showing there’s enough spare plant equipment and space to prevent bottlenecks that would lead prices higher.

Bernanke and his colleagues at the policy-making Federal Open Market Committee are considering ways they can further stimulate the economy after lowering interest rates almost to zero and purchasing $1.7 trillion of securities. Bernanke last week said the economy may need more stimulus because inflation was too low and unemployment was too high.

Fed Outlook

“There remains lots of unused capacity and, with output slowing in the quarter, we can see these data providing more support among some members of the FOMC for QE2,” Ryding said in a note to clients, referring to a second round of quantitative easing or large-scale asset purchases.

General Electric Co.’s Chief Executive Officer Jeffrey Immelt said there is “slow recovery in a few areas,” during a call with analysts last week after the world’s biggest producer of power-plant turbines reported third-quarter sales that missed analysts estimates. “The environment continues to get better.”

Foreign demand may help sustain growth. Exports rose 0.2 percent in August to the highest level in two years, Commerce Department figures showed last week.

New York-based Alcoa, the largest U.S. aluminum producer, reported profit that beat analysts’ estimates and said sales abroad are climbing.

Demand Overseas

“In countries such as China, Brazil, India and Russia, more and more people are moving into the middle class, driving demand,” Chief Executive Officer Klaus Kleinfeld said in a statement on Oct. 7.

Reports last week suggested manufacturing will continue to support the recovery and that consumer spending in gaining speed.

The New York Fed’s October general economic index rose to the highest level in four months. Retail sales for September beat forecasts, prompting economists at Morgan Stanley in New York to boost their projection for third-quarter consumer spending.

In advance of the pickup in spending, businesses increased inventories in each of the first eight months of 2010, according to figures from the Commerce Department. Additional gains will probably be determined by the pace of household purchases.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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