Factories: Drop worst in 34 years

Manufacturing in September falls by a whopping 2.8%, according to the a report released this week by the Federal Reserve.

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By David Goldman, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Production at the nation's factories fell into a virtual tailspin in September, declining by the largest amount in nearly 34 years, according to a report released by the Federal Reserve on Thursday.

Production for all industries fell by a seasonally adjusted 2.8% from the previous month. The decline represented a far greater loss than the economists' consensus estimate of a 0.8% decrease, according to Briefing.com.

"This is consistent with a recession, there's no doubt about it," said John Silvia, chief economist for Wachovia.

The report said the enormous decline was in most part due to hurricanes Gustav and Ike's disastrous effects on the Gulf Coast industry. Mining output took a 7.8% nosedive due to the storms, and oil and gas-related production fell as well.

But the impact was even greater than that of hurricanes Katrina and Rita in 2005, which resulted in a 1.8% decline in industrial production. Even without the impact of the hurricanes and a Boeing (BA, Fortune 500) plant strike, which also curtailed total industrial output, national production still would have slumped.

Recession worries

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.

Though industrial production has been volatile over the past year and a half, registering up-and-down growth since January 2007, it has only recently shown the kind of huge drop off that is typical in a recession. After slight rises in manufacturing in June and July, production tanked a whopping 1.1% in August on a sizeable drop auto manufacturing.

Production fell for 12 straight months during the 2001 recession. The Fed said for the third quarter, production fell 6%, nearly doubling the 3.1% decline of the second quarter.

"Industrial production is a key input into the overall output of the U.S. economy," Silvia said. "For all practical applications, there is a one-to-one correspondence between production and how the economy is growing."

"GDP is gross domestic product, and this is a measure of production," he added.

In other troubling news, The Philadelphia Federal Reserve reported that its regional manufacturing index decreased by 41.3 points, to minus 37.5 from positive 3.8 in October. It was the largest one-month decline in the history of the index. Economists polled by Briefing.com expected a decline of just 5 points.

Sign of weakness to come

The report also showed that industrial capacity utilization - a measure that tracks the percentage of factories in use - posted a seasonally adjusted decrease of 4.6% to 76.4%. Economists had expected a decrease of just 0.7% to 78%.

Manufacturing output decreased 2.6% in September, and the factory operating rate fell to 74.5%, which is more than five percentage points below the average from 35-year average from 1972-2007.

"Over the last six months we have seen utilization declines in manufacturing and mining," Silvia said. "Historically, lower capacity utilization rates have been consistent with weaker corporate profits." To top of page

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