Industrial production takes its biggest dive in nine months

WASHINGTON -- Industrial production plunged in October by the largest amount in nine months, reflecting a big drop in utility output and continued troubles in autos and housing-related industries.

The Federal Reserve said output at the nation's factories, mines and utilities fell by 0.5 percent last month, a much worse outcome than had been expected.

The October decline, the biggest since a similar drop in January, was led by a sharp plunge in output of electricity and natural gas due to warmer-than-normal weather during the month.

Also contributing to the weakness was the third straight drop at auto factories and further weakness at industries producing lumber and other products tied to housing.

Auto makers are struggling with slumping demand in the face of soaring gasoline prices while housing is enduring its worst slump in more than two decades.

Economists said the new report was evidence that the troubles in housing have started to spread to other parts of the economy. The hope had been that a rebound in U.S. export sales would cushion manufacturing from the slowdown in housing and consumer demand. But some analysts worried this may prove to be too optimistic.

"The deepening housing and credit crises along with the recent surge in the price of oil has created the risk of an actual downturn in manufacturing," said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI.

Analysts believe the economy will slow significantly in the current quarter and the first three months of next year, with many raising the odds for a recession.

The Federal Reserve has cut interest rates twice since September, but Federal Reserve Chairman Ben Bernanke sought to lower expectations for further rate cuts to boost economic growth. He said Fed policymakers see the risks of weaker economic growth as roughly balanced with the risks of higher inflation that could be triggered by the latest surge in oil prices. That surge pushed the price of a barrel of crude oil briefly above $98 per barrel last week.

Bernanke's views were echoed in comments Friday by Fed board member Randall Kroszner, who told a New York audience that he saw the economic threats from inflation and weaker growth as roughly balanced even though housing is likely to slump further.

"In the near term, the economy will probably go through a rough patch during which a number of economic data releases may be downbeat," Kroszner said. "With the inventory of unsold homes already quite high relative to sales, a further weakening of demand is likely to prompt additional cutbacks in production."

Many analysts said they still believe if the economic slowdown worsens significantly, the Fed will cut interest rates again, either at the Dec. 11 meeting or at the first session of the new year in January.

Manufacturing output fell by 0.4 percent in October, the biggest drop since a 0.4 percent decline in August.

Output at the nation's utilities was down 1.6 percent. Mining output, a category that includes oil production, fell 0.6 percent.

The declines left factories, mines and utilities operating at 81.7 percent of capacity last month, down from an operating rate of 82.2 percent in September.