US industrial output falls on mining, utilities

Tim Boyle | Bloomberg | Getty Images

U.S. industrial output posted its biggest drop in more than 2-1/2 years in March in part as oil and gas well drilling plummeted, highlighting the negative impact of lower crude prices and a strong dollar on the economy.

The dour report from the Federal Reserve on Wednesday was the latest sign that growth slowed sharply in the first quarter.

An unusually snowy winter weighed on activity early in 2015. Labor disruptions at normally busy West Coast ports, as well as the dollar and softer global demand have been a constraint.

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"This provides some confirmation on the disappointing growth performance in the first quarter. The absence of a lift in the other forward-looking indicators suggests that the U.S. economic recovery is struggling to regain any traction," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Industrial production fell 0.6 percent after edging up 0.1 percent in February, the Fed said. March's decline was the largest since August 2012 and was worse than economists' expectations for only a 0.3 percent drop.

A 17.7 percent plunge in oil and gas well drilling pulled mining production down 0.7 percent in March, marking the third straight month of declines in output.

Crude oil has lost more than half of its value since last June, resulting in a sharp drop in well drilling activity. Companies in the oil field are also either postponing or cutting back on capital expenditure projects.

Caterpillar early this year cut its 2015 profit outlook and warned lower oil prices would hurt its energy equipment business.

Data including for retail sales, housing starts, inventories, trade and manufacturing suggest the economy grew at a sub-1.5 percent annual rate in the first quarter after a 2.2 percent pace in the October-December quarter.

U.S. financial markets were little moved by the dismal industrial output report as investors digested a decision by theEuropean Central Bank to keep interest rates unchanged.

Weak manufacturing

For the first quarter, industrial production declined at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009.

Oil and gas well drilling and servicing, which tumbled at a 69.8 percent rate, accounted for the bulk of the drop in industrial output in the first quarter.

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While manufacturing output ticked up 0.1 percent in March after two straight months of declines, it fell at a 1.2 percent rate in the first quarter, the first decline since the second quarter of 2009.

The soft trend could persist for a while. In a separate report, the New York Fed said its Empire State general business conditions index fell to -1.19 in April from March's 6.90. This was the first negative read for the index since December.

The weakness in manufacturing, which accounts for about 12 percent of the economy, has been attributed to the buoyant dollar, bad weather, supply chain disruptions from the ports dispute and softer growth in Europe and Asia.

The dollar has gained 13 percent against the United States' main trading partners since last June, which economists say is equivalent to a 0.5 percentage point interest rate hike.

"The dollar's strength may be taking some of the oomph out of factory production which had been on a tear until December last year," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

"Time will tell whether this is real weakness or simply a bump on the road to prosperity. Our guess remains the economy comes back strong later on this spring."

Companies like Microsoft and Procter & Gamble, the world's largest household products maker, and health care conglomerate Johnson & Johnson have warned the dollar will hit sales and profits this year.

Last month, utilities production tumbled 5.9 percent, reversing February's 5.7 percent increase.