Bad News For U.S. Economy

"Slumdog Millionaire" child star Azharuddin Mohammed Ismail, 10, left greets director Danny Boyle as he leaves after a press conference in Mumbai, India, Wednesday, May 27, 2009.
AP Photo/Rajanish Kakade
Industrial production fell by 0.3 percent in August, the first decline in nine months, a fresh sign of the faltering economic recovery.

In a report, the Federal Reserve said that manufacturing output, the largest portion of the total production, dipped 0.1 percent.

Businesses also operated at a slower pace in the month. Capacity utilization decreased to 76.0 percent from July's revised 76.2 percent.

"Automotive products, which posted sizable gains in June and July, decreased 0.5 percent. Output also declined in the other major market groups within consumer durables - home electronics and appliances, furniture and carpeting," the Fed said.

Analysts polled by Reuters had expected production to rise by 0.2 percent and capacity in use to come in at 76.1 percent.

The nation's manufacturing sector was hardest hit by the economic 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.

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 Fed, 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.

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.