Factory production dips in October

WASHINGTON -- A decline in factory production in October signals that consumers and businesses remain cautious in their spending, with the economic recovery likely to be sluggish.

At the same time, the weak economy is taming inflation. Wholesale prices rose less than expected last month, giving the Federal Reserve more leeway to keep interest rates low to try to spur a stronger economic rebound.

Industrial production edged up 0.1 percent last month, the Fed reported Tuesday. It was the poorest showing since output fell 0.4 percent in June. Since then, industrial output had posted strong gains, helped by a rebound in auto production.

But auto output slipped 1.7 percent last month. That helped drag down total factory output, the biggest portion of industrial production.

Analysts say industrial production should post modest gains in coming months, consistent with their view that the economy has begun to recover from the worst recession since the 1930s. But they cautioned that the rebound in manufacturing, just as in other sectors of the economy, will be slow and halting.

"We are still dealing with a number of headwinds," said Sal Guatieri, senior economist at BMO Capital Markets. "Consumers are facing high joblessness and the need to pay down debt further. And other sectors including housing and commercial real estate remain under stress."

Overall industrial production would have fallen except for a 1.6 percent surge at utilities. That gain reflected an unusually cold October that boosted electricity production. Output in the mining sector, which covers oil and gas drilling, dipped 0.2 percent.

The government next week will revise its initial estimate that the overall economy, as measured by the gross domestic product, grew at an annual rate of 3.5 percent in the July-September quarter. But weaker-than-expected reports in retail sales, foreign trade and industrial output, suggest that GDP is likely to be revised lower for the third quarter and remain modest next year.

Nariman Behravesh, chief economist at IHS Global Insight, said he expects GDP to be trimmed to around 2.8 percent for the third quarter, then slip to 2.5 percent in the current quarter. Some analysts predict GDP growth will slip to around 1.5 percent in the first half of next year, a pace that will not be fast enough to keep unemployment from rising further.

The Fed report showed that production cutbacks last month affected not only autos, but also appliances, furniture and carpeting, clothing, computer and electronic products, paper products, petroleum and coal products, fabricated metal products and other goods.

The Labor Department report on wholesale prices showed that core inflation, which excludes volatile food and energy, actually declined 0.6 percent. In the past year, core wholesale prices have risen 0.7 percent, the smallest gain in more than five years.

High unemployment helps restrain labor costs, which enables companies to hold prices down. The unemployment rate jumped to 10.2 percent in October, a 26-year high. Some economists say the jobless rate could rise as high as 11 percent by the middle of next year before starting to drift slowly downward.

Fed chairman Ben Bernanke warned Monday that "headwinds" -- including rising unemployment and hard-to-get credit -- will restrain the recovery.

The expectation of low inflation gives the Fed leeway to hold rates low for an "extended period," Bernanke said Monday, repeating a pledge made at the central bank's meeting earlier this month. The Fed isn't expected to start raising rates until after the jobless rate peaks, probably around mid-2010.

The overall rise in wholesale prices reflected a 1.6 percent jump in energy prices as gasoline rose 1.9 percent. Oil prices rose as high as $81 per barrel in October, up from a price around $70 in September.

Elsewhere, food prices last month rose 1.6 percent, driven by a 24.2 percent jump in vegetable prices, the most in two years. Egg, fruit and milk costs also rose.

The government will report consumer prices on Wednesday. Economists surveyed by Thomson Reuters are forecasting a modest increase of 0.2 percent, partially from higher gas prices. Excluding food and energy, consumer prices are expected to grow 0.1 percent.