U.S. Economy: U.S. Manufacturing Slumps to Weakest in 2 Decades

The U.S. economic downturn deepened in September and October as the credit crisis intensified, reports showed today.

Industrial output fell 6 percent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month, Federal Reserve figures showed today. The Labor Department reported that for the first time in two years consumer prices didn't increase for two straight months.

Today's numbers give the Fed scope to lower interest rates again this month. Stocks slid and interest-rate futures showed rising expectations of a half-point cut in the Fed's benchmark to 1 percent.

``The credit crunch is intensifying, and enough damage has been done to ensure the next couple of quarters will be much weaker,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The pendulum has swung sharply to the downside risks to growth rather than inflation.''

Shutdowns caused by hurricanes and a Boeing Co. strike caused production at U.S. factories, mines and utilities last month to decline 2.8 percent, the most since 1974, after a 1 percent drop. The median forecast of 73 economists surveyed by Bloomberg News was for a 0.8 percent fall

The Standard & Poor's 500 Stock Index dropped 1.3 percent to 896 at 11:55 a.m. in New York, and is down 23 percent so far this month. Treasuries pared losses and benchmark 10-year note yields were little changed at 3.95 percent.

Philadelphia Plunges

The Fed Bank of Philadelphia's general economic index plunged to minus 37.5 this month, worse than forecast and the lowest reading since October 1990, from 3.8 in September, the bank said today. Negative readings signal contraction. The index averaged 5.1 last year.

Separately, the Labor Department said initial jobless claims fell last week as job losses related to the Gulf Coast hurricanes subsided, while total benefit rolls rose to the highest level in five years. First-time applications declined by 16,000 to 461,000 in the week that ended Oct. 11.

Consumer prices were restrained by declines in fuel costs, automobile prices and airline fares, Labor Department figures showed. The consumer price index was unchanged after a 0.1 percent drop in August. So-called core prices, which exclude food and energy, rose 0.1 percent, also less than forecast.

``It'll give the Fed a little bit of cover to cut rates when they meet next,'' on Oct. 28-29, John Ryding, chief economist at RDQ Economics in New York, said in an interview with Bloomberg Television.

Less Than Forecast

Consumer prices were forecast to rise 0.1 percent, according to the median forecast of 75 economists in a Bloomberg News survey. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.

Prices increased 4.9 percent in the 12 months to September after a year-over-year gain of 5.4 percent in August. The core rate increased 2.5 percent from September 2007, the same as the year-over-year increase in the prior month.

Energy expenses dropped 1.9 percent, led by the biggest decrease in the cost of natural gas on record. Gasoline prices fell 0.6 percent. Food prices, which account for about a fifth of the CPI, rose 0.6 percent for a second month.

New-vehicle prices dropped 0.7 percent, the most since August 2005, and air fares fell 1.7 percent, the biggest decline since November 2006.

Wages, Inflation

Today's figures also showed wages were unchanged last month, after adjusting for inflation, following an increase of 0.6 percent in August. They were down 2.5 percent over the 12 months to September. The decline in purchasing power is contributing to the slowdown in consumer spending.

The Commerce Department said yesterday retail sales dropped in September by the most in three years.

Last month's Gulf Coast hurricanes accounted for 2.25 percentage points of the decline in industrial production, and a strike at Boeing accounted for most of the rest of the drop, the Fed said. Frozen credit markets and higher borrowing costs will force consumers and companies to further trim purchases of expensive items such as cars and machinery.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 0.7 percent.

Auto industry figures earlier this month showed cars and light trucks sold at a 12.5 million annual pace in September, the fewest since 1993. General Motors Corp. this week said it will close a Wisconsin SUV factory on Dec. 23, two years earlier than planned.

Enticing Buyers

Some companies are cutting prices to entice cash-strapped consumers who are limiting purchases to essential items such as food and fuel.

Mattel Inc., the world's largest toymaker, said this month that most of its holiday toys will cost less than $20 to help lure shoppers who are cutting back on spending.

Wal-Mart Stores Inc. said this month it will cut prices ahead of the holiday season, offering 10 items for $10 each.

Hotel companies are struggling as consumers pull back on spending. Marriott International Inc., the biggest U.S. hotel chain, said in a statement that a measure of rates and occupancy will ``at best'' fall 3 percent in North America in 2009.