Capacity utilization in factories plunges to record-low 65%, Fed's data show

By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- The nation's industrial output tumbled 1.1% in May, led by big drops in motor vehicles, mining and high-technology products, the Federal Reserve reported Tuesday.

The decrease was a bit worse than forecasts of a 1% drop. April's output was revised lower, to a decrease of 0.7% from 0.5% reported earlier.

Output fell to the lowest level in 11 years in May, and is down 13.4% in the past year, the largest year-over-year decline since 1946. Output has fallen in 16 of the past 17 months since the recession began in December 2007. Since that month, industrial output is down 14.8%.

Capacity utilization in industry fell to a record-low 68.3% last month, down from 69%. Capacity utilization -- a key measurement of slack in the economy -- stands 12.6 percentage points below its long-term average.

In manufacturing alone, capacity utilization fell to a record-low 65%. The government has tracked capacity data since 1948.

"Growing slack implies that deflation remains the predominant near-term risk," wrote Sal Guatieri, an economist with BMO Capital.

Industrial production is one of four key indicators used to judge whether the economy is in a recession.

None of the four has turned higher, although the rate of decline in all four has eased over the past few months. Output, for example, had declined by an average rate of 1.6% in the first three months of the year.

In May, manufacturing output fell 1% and is down 15.3% in the past year, also the largest year-over-year decline since the U.S. demobilized after World War II. Mining output dropped 2.1%, while the output of utilities fell 1.4%.

Motor vehicle output dropped 7.9% last month, with Chrysler and General Motors plants closed temporarily. Excluding autos, total industry output fell 0.9% and manufacturing output dropped 0.6%.

Vehicle assemblies decreased to a seasonally adjusted annual rate of 4.33 million from 4.99 million in April. Assembles had fallen to 3.85 million in January.

Output of high-tech industries declined 1.9% for last month, including a 2.7% drop in semiconductors. High-tech output has fallen 21% in the past year.

"High-tech investment in this recession continues to plummet at a rate that has been far more severe and long lasting than seen during the 2001 tech bust," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley.

In other economic reports released Tuesday, the Labor Department said producer prices rose 0.2% in May, with core prices excluding food and energy falling 0.1%.  

Separately, the Commerce Department estimated that the nation's housing starts surged 17% in May, a reversal after having plunged nearly 13% in April to a postwar low. 

Rex Nutting is Washington bureau chief of MarketWatch.