The government reported yesterday that the output of the nation's factories declined in October for the first time since April, signaling that the industrial part of the economy had finally joined the construction, service and consumer sectors in the march toward recession.
Analysts said the report from the Federal Reserve could prompt the Fed to lower short-term interest rates one-quarter to three-quarters of a percentage point over the next six weeks. Such a move would likely bring down a broad range of interest rates, including the prime rate and mortgage rates.
The Fed's Open Market Committee, which sets the federal funds rate, met yesterday, and, as is customary, it did not announce its decision. But the first increment of any change should become evident before the end of the week.
"This is another bit of evidence that should tip the Fed toward easing" interest rates, said Richard Peach, an economist for the Mortgage Bankers Association of America.
The drop in industrial output took place across a wide variety of industries, including consumer goods, big-ticket durable items, and even the amount of electricity produced by the nation's electric plants.
Overall, industrial production fell 0.8 percent last month, following an unrevised 0.2 percent gain in September, the Federal Reserve said. U.S. factories, mines and utilities operated at 82.6 percent of capacity last month, down from 83.5 percent in September.
A slowdown in auto assembly lines accounted for 25 percent of the total October decline, the Fed said, as the output of motor vehicles and parts fell 4.5 percent. Manufacturing production fell 0.8 percent, while mining and utilities output dropped 0.4 percent and 1.6 percent, respectively.
With those figures, it became clear that the downturn, which had previously been most keenly felt in the Northeast and in the service and consumer sectors of the economy, had finally spread to manufacturing, where exports had provided some continued vitality.
The decline in industrial output follows the report from the Commerce Department showing that in the three months ended in September the economy grew at a 1.5 percent annual rate -- a statistic that surprised many economists. The sharp decline in production in October, however, suggests that widespread pessimism about the economy was justified.
"What we're saying is that the fourth quarter will be as negative as the third quarter was positive," said Thomas F. Carpenter, vice president and chief economist for ASB Capital Management, a Washington-based firm that manages $7.5 billion in assets for companies, endowments and retirement funds.
"This is one more indication that the economy has slipped into recession," Peach said.
Carpenter said that Federal Reserve Board Chairman Alan Greenspan pays close attention to industrial output numbers and predicted that the Fed would accelerate the gradual easing of interest rates that has taken place over the past two years. Earlier this month, the central bank lowered the federal funds rate by a quarter of a point to 7.75 percent. Carpenter predicted that the Fed would soon lower the discount rate to 6.5 percent from 7 percent.
Wall Street appeared to agree with Carpenter's assessment. Government bond prices rose, with the 30-year Treasury bond climbing 29/32 of a point as the market positioned itself for lower interest rates. When the prices of government bonds rise, the yields fall, a sign that traders expect the government to pay lower rates in the future.