Originally created 09/18/02

Industrial activity drops 0.3 percent in August



WASHINGTON -- Industrial production fell by 0.3 percent in August, the first decline in eight months, a fresh sign of the faltering economic recovery.

The latest snapshot of industrial action at the nation's factories, mines and utilities reported by the Federal Reserve Tuesday was much weaker than the performance many analysts were expecting. They were forecasting a rise in industrial production of around 0.1 percent or 0.2 percent.

The 0.3 percent drop was the first decline since December, when the nation's economy was still trying to claw its way out of a recession that began in March 2001.

"It is a setback, but hopefully only a brief one," said Carl Tannenbaum, chief economist for LaSalle Bank.

On Wall Street, stocks were mixed. The Dow Jones industrial average lost 29 points, while the Nasdaq index gained around 2 points in the first hour of trading.

The weak performance in August came after industrial activity rose by a modest 0.4 percent in July, according to revised figures. That increase was twice as big as the 0.2 percent advance the Fed previously reported.

The nation's manufacturing sector was hardest hit by the slump. To cope, the industry throttled back production and cut hundreds of thousands of workers. Manufacturing started off the year with a bang, but its comeback trail has been spotty and slow.

In August, production at factories dipped by 0.1 percent, also the first drop since December. The decline followed a 0.3 percent rise in July.

Production of consumer goods was especially weak, dropping by 0.5 percent. Production of cars and parts, which posted sizable gains in June and July, decreased by 0.5 percent. Production of home electronics, appliances, furniture and carpeting also declined.

Much of the weakness in the overall industrial sector in August came from a sharp 2.5 percent drop in output at gas and electric utilities, despite relatively high temperatures in August. That more than reversed a 2.4 percent advance in July.

However, production at mines rose by a strong 0.8 percent in August, taking back a 0.5 percent drop in July.

The Federal Reserve, worried about the slowing pace of the recovery since the first quarter, has opted to hold short-term interest rates at 40-year lows at each of its meetings this year. But policy-makers also opened the door to future reductions if economic conditions worsen.

Many analysts believe the Fed will decide again to hold rates steady at its next meeting on Sept. 24, but a few haven't ruled out a rate cut. Tannenbaum didn't think Tuesday's report would persuade the Fed to order a rate reduction.

The economy grew at a below-par annual rate of 1.1 percent in the second quarter, a sharp slowdown from the brisk 5 percent growth rate turned in the first three months of this year. Many analysts, however, believe the economy picked up a bit in the current quarter, growing at a rate of around 2.7 percent.

The Fed's report is consistent with other data showing that the manufacturing sector hit some turbulence in August.

Earlier this month, a report from the Institute for Supply Management showed that manufacturing barely grew in August. The group's index of business activity clocked in a 50.5 in August. An index reading above 50 signifies growth in manufacturing, while a reading below that signifies a contraction.