WASHINGTON - U.S. industrial production fell in June after four consecutive monthly increases, the Federal Reserve Board said yesterday in a report that stirred fresh doubts about the durability of the recovery.
Output of factories, mines, and utilities dropped 0.3%, a reversal from revised increases of 0.5% recorded in April and May. The strong pace of industrial expansion earlier in the year had raised hopes among Federal Reserve officials and private economists that the economy was on a steady mend.
Along with the drop in June production, the operating rate for U.S. industrial plants fell to 78.5% of capacity from 78.9% in May, the Fed reported.
Analysts said they continue to expect sluggish growth in the economy in the months ahead, and virtually all have pared their expectations since the Labor Department reported that the June unemployment rate jumped to 7.8%.
"Whether the manufacturing sector deteriorates further depends on what happens to orders, and that depends on what consumers choose to do," said Stephen Slifer, senior vice president for Lehman Brothers. "My own sense is that the economy is slowing down, and that willingness to spend has been deterred by the employment report."
The Commerce Department reported on Tuesday that retail sales in June rose 0.5%, the third monthly increase in a row, but sales excluding autos were up only 0.1%.
The Fed report said "sizable declines" in output came in motor vehicles, construction supplies, and energy materials. The drop in energy production reflected an interruption in coal output as a result of the brief rail strike at the end of June.
Output of consumer goods decreased 0.4%, with the cutbacks in auto and truck assemblies accounting for about half of the loss, the Fed said. Output of appliances and furniture improved, while firms making business equipment and clothing posted declines.
"I think manufacturers got ahead of themselves," said Cynthia Latta, senior financial economist for DRI/McGraw-Hill Inc., a forecasting firm in Lexington, Mass. "They stepped up production in response to strong orders in the first quarter, but sales tailed off in the second quarter, and that forced firms to cut back to prevent too much inventory accumulation."
A separate report yesterday from the Commerce Department said business inventories swelled gain in May, the fourth consecutive monthly rise and the highest level since March 1991. The department earlier reported a continuing drop in order backlogs at manufacturing firms since last fall to the lowest level since May 1989.
For the second quarter, according to the Fed, industrial output was up at an annual rate of 4.5% - a marked turnaround from the 2.9% decline during the first quarter. But compared to a year earlier, output was up only 0.8%.
"June was a tough month," said Chris Varvares, vice president for Laurence H. Meyer & Associates in St. Louis. "The economy was on the road to recovery but hit a major pothole."
The forecasting firm estimates that real gross domestic product grew at a rate of about 2% in the second quarter, down from 2.7% in the first quarter.
Gordon Richards, an economist at the National Association of Manufacturers, said special factors helped to account for the drop in industrial production. He cited the cutbacks in auto assemblies, the rail strike, and mild weather that curbed air conditioning use.
But he called the drop in output of construction materials "quite serious for the future" and a sign of the ongoing oversupply of commercial office buildings, apartments, and condominiums in many cities.