Industrial output up more than expected in Sept.

WASHINGTON - Output at the nation's factories, mines and utilities rises for the third straight month, but some economists say the manufacturing growth that has helped lead the nascent economic recovery may slow as federal stimulus programs are phased out.

Higher output of motor vehicles and parts spurred much of the September increase, due in part to the government's Cash for Clunkers program. But steel and other sectors also posted gains, and General Electric reported separately Friday that its industrial businesses grew in the third

quarter.

"Thanks to the Cash for Clunkers program, replenishing inventories and exports, U.S. factories are getting back into business," Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients.

The Federal Reserve said industrial production rose 0.7 percent last month. That beat the 0.2 percent increase that Wall Street economists expected, according to a survey by Thomson Reuters.

August output also was revised higher, to 1.2 percent from 0.8 percent.

Industrial output increased at a 5.2 percent annual rate in the July-September quarter, the Fed said, the largest quarterly gain since the first three months of 2005. It's also the first quarterly increase since the beginning of 2008.

Production is increasing as automakers and other companies are restocking inventories that were cut sharply during the recession to bring them in line with plummeting sales. Many economists expect that once the rebalancing is complete, industrial production and the broader economy will slow, particularly if consumer demand remains weak.

"The sharp rise in third-quarter industrial production is not sustainable," said Nariman Behravesh, chief economist at IHS Global Insight. "Nevertheless, there are clear signs of a broad-based recovery in most ... sectors."

Behravesh expects industrial output to rise at a 4 percent clip in the final three months of the year, but slow to a 2 percent rate in early 2010 as the effect of the clunkers program and inventory restocking wears off.

A key concern for many economists is whether consumer demand will be sufficient to pick up the slack. Households are working to reduce debt and struggling with widespread job losses and stagnant wages.

But retail sales, excluding autos, rose for the second straight month in September, the Commerce Department said earlier this week.

Factory output, the single largest slice of industrial production, rose for the third straight month, increasing 0.9 percent, the Fed said. Much of that improvement was fueled by higher auto manufacturing, which rose 8.1 percent.

Despite September's gain, industrial production is 6.1 percent below year-ago levels, the Fed said.

But autos weren't the whole story. Excluding motor vehicles, factory output rose 0.5 percent.

The production of steel and other metals rose 3.4 percent, while computer and electronic products, and aerospace equipment also saw higher output.

Auto companies benefited from the clunkers program, which provided rebates of up to $4,500 to consumers who traded in older cars for newer, more fuel-efficient models before ending in August.

Automakers have ramped up operations to replace inventories depleted by the clunkers program and factory shutdowns earlier this year. General Motors and Chrysler cut back on production in early summer as they restructured and emerged from bankruptcy protection.

As other companies rebuild inventories that were slashed during the recession, the increased output should contribute to a broad, but slow, economic recovery. For example, GE's third-quarter results were dragged down by its troubled financial unit, but the divisions that make wind turbines and household appliances posted gains.

Profits for GE's industrial businesses edged up 4 percent, but sales declined 13 percent, as demand was lackluster.

Mining production, meanwhile, rose 0.7 percent last month. Utility output dropped 0.7 percent.

The Fed's report shows that industrial companies are using more of their plants and equipment, though operating rates remain below levels associated with a healthy economy.

The operating rate for the nation's factories, mines and utilities was 70.5 percent last month, up from record-low levels in June but still below the long-term average of about 80 percent. That means the industrial sector can further boost output without running up against capacity constraints, which can spur price increases.

But it also means production can rise without investment in new factories and equipment, which would help further boost the economy.

Despite September's gain, industrial production is 6.1 percent below year-ago levels, the Fed said.