Meanwhile, the Labor Department said consumer prices were unchanged in September, giving the Fed more breathing room if it decides another rate cut is needed. The core rate, which excludes food and energy prices, rose 0.2 percent.
Wall Street economists were expecting 0.1 percent increases in both industrial production and in the CPI. On Thursday, the department reported the Producer Price Index rose an unexpected 0.3 percent in September on a statistical quirk in measuring the prices of cars and trucks.
Industrial production figures have been clouded by the impact of the two-month strike against General Motors. Production bounced back 1.6 percent in August, but fell off in September as auto production fell 3.3 percent. Excluding motor vehicles, production fell 0.1 percent in both months.
Capacity utilization dropped 0.5 percentage points to 81.1, 1 percent below the 30-year average.
The weakness in manufacturing is widespread. Production of durables has slowed markedly since a 10.3 percent annual rate in the fourth quarter to 2.5 percent in the second and 1.9 percent in the third. Output of durables sank 0.7 percent in September.
Meanwhile, output of nondurables has turned negative, dropping 3.5 percent in the third quarter. Nondurable production fell 0.2 percent in September.
The Fed didn't cite current weakness in manufacturing as a rationale for easing interest rates on Thursday, but the Fed is clearly concerned that turmoil in the financial markets and tight credit conditions could spill over into the real economy and restrain demand going forward. At the same time, the low inflation readings have given the Federal Reserve room to ease.
The CPI has risen at a 1.5 percent rate in the past three months and has risen 1.5 percent in the past 12 months. The core rate has increased at a 2.3 percent rate in the past three months and has risen 2.5 percent in the past 12 months.
The special index used by the government to adjust Social Security benefits and tax brackets rose 0.1 percent in September for a 1.2 percent rise in the past 12 months.
In September, food prices were unchanged after three months of very modest increases. Energy prices dropped again, falling 1.3 percent for the biggest decline since February.
Lower energy prices have helped keep the CPI at low levels all year. Energy prices have fallen 9.8 percent in the past 12 months. Energy is also a key input into most other goods and services.
It isn't just oil that's cheaper; many raw materials have fallen in price in adjustment to a worldwide glut. In September, prices of goods at the consumer level sank 0.1 percent while prices of services (which represent 57 percent of consumer spending) rose 0.2 percent
Most prices rose only moderately in Septembe. Medical care costs rose 0.3 percent, about in line with recent trends. Housing prices rose 0.2 percent and recreation prices rose 0.1 percent. Education and communication costs were unchanged.
Apparel prices fell 0.7 percent and transportation prices fell 0.4 percent as motor fuel prices dropped 2 percent and airfares fell.
The only sign of higher prices came in the 3.3 percent rise in tobacco and smoking prices.
Written By Rex Nutting, CBS MarketWatch