NEW YORK (CNN/Money) - U.S. industrial output fell in December, the Federal Reserve said Friday, surprising economists who expected a modest gain.
Industrial production fell 0.2 percent last month after rising 0.1 percent in November, according to the Fed, which also said factories, mines and utilities ran at 75.4 percent of capacity in the month, compared with 75.6 percent in November.
Economists, on average, expected production to rise 0.2 percent and capacity use of 75.7 percent, according to Briefing.com.
Though the actual number was much worse than they expected, many economists were quick to point out that most of December's decline was due to a 4.3-percent drop in production of motor vehicles and parts.
"A sharp slowdown in vehicle assemblies made a not-that-bad industrial production report look bad," said Joel Naroff, president and chief economist of Naroff Economic Advisors. "The manufacturing sector is not yet out of the woods, but it hasn't gone further into the tank either."
Still, the data, along with a disappointing report on consumer sentiment and an earnings warning from software maker Microsoft (MSFT: Research, Estimates), helped drive U.S. stock prices lower in early trade, while Treasury bond prices rose.
Manufacturing has been the sector hardest hit by a slowdown in the broader U.S. economy, which fell into recession in March 2001.
The manufacturing recession, on the other hand, began in 2000, partially the result of a dramatic falloff in business spending on new technology and equipment after a glut of spending in the 1990s.
After signs of recovery in the summer of 2002, the sector relapsed in the second half of the year, and In the last six months of 2002, industrial production rose just twice, in July and November.
For all of 2002, the Fed said production fell 0.6 percent, following a 3.5-percent drop in 2001 -- the first back-to-back declines since 1974-75.
December's declines were broadbased, with a 0.5 percent drop in consumer goods and a 0.6 percent drop in business equipment.
A 2.2 percent decline in the output of durable goods -- things like cars and computers, meant to last a few years or more -- was due largely to a 4.3 percent drop in the output of motor vehicles and parts.
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