Industrial production in the United States fell for the second straight month in September, while housing starts posted their biggest gain in more than a decade.

Figures released Wednesday by the Federal Reserve show the total output at the nation's factories, mines and utilities dropped 0.1% in September after falling 0.3% in August. The manufacturing sector, which makes up most of the report, dropped 0.3% in September after a 0.2% drop the month before.
Production did increase at a 3.6% annual pace in the July-September quarter because of a strong July and a rising trend in the spring.
"One thing that is very clear is production has stalled," said Newport Communications Senior Economist Jim Haughey. He cites three reasons. First, consumer spending slowed last spring and early summer, but he says that is now behind us. Second, an expensive dollar has brought a flood of imports, mostly from Asia. Recent and prospective currency changes are weakening the dollar, but the impact on trade will take a few months. West Coast port problems may cause more delay. Third, the expensive dollar has driven more manufacturing out of the country, primarily to China, Canada and Mexico. Haughey predicts that currency changes will eventually halt this, but not until well into next year at the earliest.
"So production growth will be slim this quarter and then return to 3.5-4% growth next year."
Haughey notes while September durable goods production was off 0.5%, the trend is still for 4%-plus growth.
"Computer and semiconductors account for most of this growth, but neither generates much added freight volume because the production gains are largely from better performance in the parts and not more parts," he said. "Non-durables output was unchanged in September after an unusual 0.5% fall in August. Ahead, the growth trend is expected to be 2-3%. Apparel and textiles are the weakest markets but will be the biggest gainers from the coming improvement in the trade balance."
Meantime a separate report from the Commerce Department showed housing starts posted their biggest increase since 1986, due mainly to decades-low interest rates.
A 13.3% increase in new home starts was recorded during September to an annual rate of 1.843 million.
"The economic growth payoff from the Fed?s cheap credit policy continues to build," said Haughey.
He notes mortgage applications reached an all-time record in early October, more than 400% above the spring level, and the residential remodeling market -- as large as new construction -- is keeping pace with housing starts. "This will push GDP growth this quarter close to 3% instead of the 2% widely expected during the summer," he said. "This provides a direct boost for construction-related trucks, trailers and freight and a smaller indirect benefit for all truck equipment and freight."
According to Haughey, September may be the peak for starts in this housing cycle. New home starts were 7% above permits, and the recent stock market pickup is already pushing credit costs higher. However, he predicts residential construction spending will keep growing through the winter. Only 20% of the September starts will be completed by the end of the year; 30% more will be completed during the winter. Also, he notes a strong housing market always means slightly larger homes with more features, so construction spending will grow faster than the number of houses built.
"It is very unlikely this recent bubble in housing activity is about to burst," Haughey notes. "Housing construction is far too high related to employment trends. But the ratio of new homes to income is not much above the long-term average because the recent gain in contractor-built houses is almost entirely offset by the 50% drop in new mobile home sales."