Weak utilities demand restrains U.S. industrial production

U.S. industrial production barely rose in September as a rebound in manufacturing and mining output was offset by surprisingly weak demand for utilities, pointing to a moderate acceleration in economic growth in the third quarter.

Still, the mixed report from the Federal Reserve on Monday suggested that the industrial sector downturn has probably run its course. Gains in output are likely to be muted as the sector remains constrained by the lingering effects of the dollar's past rally, a collapse in oil prices and weak global demand.

"It is hard to have a full-blown, strong economic expansion if the manufacturing sector is hurting and that has been the case this year," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.��

The Fed said industrial output edged up 0.1 percent last month after declining 0.5 percent in August. Last month's gain was in line with economists' expectations. Industrial production rose at an annual rate of 1.8 percent in the third quarter, the first quarterly increase since the third quarter of 2015.

The report came on the heels of data on Friday showing a mild increase in core retail sales in September, which prompted the Atlanta Fed to cut its third-quarter gross domestic product estimate by two-tenths of a percentage point to a 1.9 percent rate. The economy grew at a 1.4 percent pace in the second quarter.

The dollar was little changed against a basket of currencies, while prices for U.S. Treasuries rose. Stocks on Wall Street were trading lower.

MANUFACTURING OUTPUT RISES

Industrial production was last month supported by a 0.2 percent rise in manufacturing output, which followed a 0.5 percent drop in August. Manufacturing output was boosted by the production of goods such as textiles and plastics.

Motor vehicle and parts production edged up 0.1 percent, while the output of machinery and primary metals fell.

Manufacturing production rose at a 0.9 percent rate in the third quarter. Manufacturing has also been hurt by business efforts to reduce an inventory overhang, which has resulted in fewer orders being placed with factories.

There are, however, signs of stability, as the dollar's rally appears to be slowing and oil prices steadily rise. A survey early this month showed an acceleration in factory activity in September, and new orders for manufactured capital goods have increased since June.

But strong gains in the near-term are unlikely. A separate report from the New York Fed on Monday showed factory activity in New York State weakened further in October as new orders continued to contract. Manufacturers were, however, more upbeat about the sector's prospects in the next six months.

"We look for modest growth in the manufacturing sector to continue as the worst of the effects of the strong dollar and inventory overhang pass," said Jesse Edgerton, an economist at JPMorgan in New York.

In September, mining production rose 0.4 percent as gains in oil and gas well drilling offset a drop in crude oil extraction.

That left mining output rising at a 3.7 percent rate in the third quarter following six consecutive quarterly declines. Energy services firm Baker Hughes reported on Friday oil firms increased drilling rigs last week for the 16th straight week.

Utilities production dropped 1.0 percent last month, despite unseasonably warm weather during the month. The drop in utilities output suggests slower consumer spending in the third quarter. With output tepid last month, industrial capacity use edged up 0.1 percentage point to 75.4 percent, and is 4.6 percentage points below its long-run average.

Officials at the Fed tend to look at capacity use as a signal of how much "slack" remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)