Fed Report Adds to Signs of Recovery : Economy: Despite September decline in industrial output, improvement from stagnant spring continues.

Industrial production fell in September as cool weather dampened demand for electricity, the Federal Reserve Board said Tuesday, but the report also contains signs that the economy was improving from a weak spring quarter.

Output at the nation’s factories, mines and utilities fell 0.2% last month--the first monthly decline since a 0.6% drop in April--after a 1.1% increase in August.

The drop occurred because utilities generated less electricity as people cut back on use of air conditioners after an August heat wave. By contrast, manufacturers boosted production and mining output rose from August.

“If you look at the overall performance, this really is another sign that the economy is recovering from its second-quarter stall,” said economist Lynn Reaser at First Interstate Bancorp in Los Angeles.

Indeed, for the third quarter as a whole, industrial output expanded at an annual 3.5% rate after contracting at a 2.3% rate in the second quarter, the central bank said. Industrial activity accounts for about a fifth of the nation’s economy.

The Fed’s data bolsters other recent reports indicating an economy slowly picking up steam, with little or no inflation, after nearly grinding to a halt in the second quarter.

It is a scenario that Fed policy-makers have sought by holding interest rates steady since cutting them in July to sustain the economic expansion. The cut in short-term rates was the first in nearly three years.

Output at utilities tumbled 5.4% last month after rising 4.3% in August and 1.5% in July, when air conditioners were running steadily, boosting demand for electricity.

Manufacturers increased production 0.2% in September, as auto makers built more vehicles and companies made more furniture and building materials. The gain followed a 0.9% rise in August.

The Fed’s report contains no signs of inflation pressures from tight production or material shortages, analysts said.

Industry ran at 83.8% of capacity in September, down from 84.2% in August and well below the peak rates of 85.5% touched as 1994 ended and this year began.

“Capacity use coming below 84% is definitely good news for the economy being able to stay at this sustainable rate without producing appreciable inflation,” said economist Waldo Best of Barclays de Zoete Wedd Government Securities Inc. in New York.

“The most encouraging element we’re seeing is the impact of lower interest rates in stimulating housing sales and sales of building materials,” said First Interstate’s Reaser, noting that that was translating into demand for home furnishings.

“We’re beginning to see all the ripple effects of lower interest rates,” she said. Falling mortgage rates have bolstered the nation’s housing industry.

Production of some items, including clothing, textiles and paper, fell in September, a sign that businesses will be cautious while trying to work off excess inventories, said Gordon Richards, economist at the National Assn. of Manufacturers.