By Daniel Pimlott in New York and James Politi and Krishna Guha in Washington
Published: October 16 2008 14:01 | Last updated: October 16 2008 14:01
US industrial production suffered its sharpest drop in 34 years in September, data showed on Thursday, adding to evidence of a rapid deterioration in the economy.
With the US consumer pulling back sharply, there are clear signs that business is retrenching as well, in part due to a further tightening of credit conditions and weak global growth.
Most economists expect the economy will contract over the coming months – the debate is over how sharply and for how long.
The Federal Reserve said industrial output fell 2.8 per cent last month, the fastest drop since December 1974, as the impact of the global credit crisis joined forces with hurricanes Gustav and Ike and a strike at Boeing, the aircraft maker.
Meanwhile, the Philadelphia Fed said its index of local manufacturing conditions suffered its worst ever monthly drop in October, falling from 3.8 per cent to minus 37.5 per cent, suggesting the economy worsened further this month. A negative number signals a weakening environment.
Only in the depth of recessions has the index hit lower levels, said Alan Ruskin of RBS Global Banking and Markets. The decline was partly down to a dramatic fall in new orders.
An index of homebuilders confidence hit a record low of 14 in October, according to the National Association of Homebuilders, driven down by falling expectations of future sales.
A recent rise in mortgage rates, yet tighter lending standards and a large supply of homes for sale is likely to continue to depress demand well into 2009.
Inflation pressures eased – with prices flat in September – as commodity prices fell and the credit crisis spread into the real economy, sapping pricing power.
Macroeconomic Advisers, a US forecasting firm, said its tracking estimate for third quarter growth was now minus 0.6 per cent, down from plus 0.3 per cent earlier this week.
“Inflation is not a problem any more,” said Brian Bethune, an economist at Global Insight. “Now we are trying to combat a recession.”
With the announcement on Tuesday of the plan to pump $250bn (€185bn, £145bn) into banks, investor attention has moved from the financial turmoil to its impact on the real economy.
The sharply deteriorating conditions in manufacturing are an indication of how the credit environment is hitting demand for goods.
The slowing economy is combining with falling commodity prices to cut into inflation. The core level of consumer prices, which strips out food and energy costs, rose a modest 0.1 per cent in September, the lowest reading since April.
Lower prices have not stopped consumers from reining in spending. Retail sales plunged by the most in three years last month
Copyright The Financial Times Limited 2008
Source: http://www.ft.com/cms/s/0/c7d095b2-9b81-11dd-ae76-000077b07658,dwp_uuid=b8efc2ae-d98d-11dc-bd4d-0000779fd2ac.html 
