More manufacturing weakness, Fed report says

NEW YORK (CNNMoney.com) -- Industrial production fell in April, matching the largest decline since the one following Hurricane Katrina, according to a report released by the Federal Reserve on Thursday.

Industrial production decreased 0.7% from the previous month, a much bigger decline than the 0.3% economists surveyed by Briefing.com expected.

The drop matched a 0.7% drop in February as the biggest decline since September 2005, after hurricanes Katrina and Rita blasted the nation's Gulf Coast.

The report also said capacity utilization, at 79.7%, was at its lowest level since the hurricanes.

Excluding the period following those storms, the 1.2% drop in industrial production over the past 3 months is the largest since the recession of 2001.

Industrial production for March was revised lower to an increase of 0.2% from the originally reported 0.3% gain.

"We think the economy is in recession since the end of 2007, and it appears the problems are consistent throughout manufacturing," said Gus Faucher, director of macroeconomics at Moody's Economy.com.

Manufacturing output fell 0.8% in April. Half of this manufacturing loss in April was because of an 8.2% drop in the sale of motor vehicles and parts, according to the Fed. Strikes and strike-related parts shortages resulted in suspended production at many facilities.

Slow vehicle production going forward is expected to continue to dampen manufacturing growth, according to Sam Bullard, economist at the Wachovia Group, in a report.

Excluding motor vehicles and parts, manufacturing production fell 0.4%, after having increased 0.3% in March.

"It is pretty clear that autos were the culprit, but once you pull autos out there is still a lot of weakness," said Robert Brusca, the chief economist at Fact and Opinion Economics.

The output of utilities rose 0.3%, and the output at mines decreased 0.8%. Overall industrial production was up a modest 0.2% above its year-earlier level at 111.2% of its 2002 average.

The index for paper products dropped 1.9%. The output of consumer energy products gained 0.7%. The production of defense and space equipment moved up 1.6% while the output of construction supplies fell 1.5% and has declined in five of the past six months, according to the Fed's report.

Capacity utilization for all industries, a measure of operating rates for the nation's factories, also decreased more than expected to 79.7% - the lowest level since September 2005 - from a revised 80.4% in March. Economists had expected utilization to slip to 80.2%.

If capacity utilization is near 80%, the nation's factories are only operating at full capacity for four days out of every five.

Industrial production is one of the four factors that the National Bureau of Economic Research considers to determine if the nation's economy has fallen into a recession. The other three factors are employment, personal income and retail and wholesale sales of manufactured goods.

"We expect industrial production to remain weak and continue to decline through the first half of the year," said Faucher.

He added that he expects industrial production numbers to "start to improve in the second half of the year as the economy begins to improve as a result of the Fed's monetary policy and stimulus checks" that began being distributed to Americans late last month.