WASHINGTON � - Prices paid to US producers fell last month by the most since April 2003 as energy costs dropped, a separate report from the labour department showed.

The 1,3% decline in the producer price index followed a 0,1% increase in August. But prices, excluding fuel and food, increased a greater-than-expected 0,6% last month, the most since January last year. This reflected a rebound in the costs of new vehicles after a price drop in August.

Manufacturing output, which accounts for about four-fifths of the industrial production report, fell 0,3% last month, the most since February, after rising by 0,2% in August. If car production is excluded, factory production fell 0,2% after gaining 0,1% the month before. Economists expected industrial production to decline 0,1% after a reported 0,1% drop in August, according to the median view of 62 economists in a Bloomberg News survey. But the estimate range was wide, from a fall of 0,6% to a rise of 0,4%.

Capacity utilisation was forecast to fall to 82,2%, from 82,4% in August, according to the Bloomberg News survey. Projections ranged from 81,4% to 82,6%. Plant operating rates, which economists monitor for indications of pressure on factories� ability to produce goods with existing resources, has averaged 81% over the past three decades.

Higher operating rates increase the risk of bottlenecks developing in the production process and can force prices higher. Manufacturing �generally held up well� across the US in recent weeks, and there were �few signs of increased price pressures,� the Fed said last week in its latest regional survey, which is known as the beige book.

Industrial production in the US fell more than forecast last month as vehicle, furniture and electronic equipment makers scaled back output and cooler weather reduced demand for electricity. The 0,6% drop for September was the largest in a year and followed an unchanged reading a month earlier, the Fed said.

In the event, capacity utilisation fell to 81,9%, the lowest since May, from 82,5% a month earlier. Companies are trying to cut back to avoid excess inventories as the economy slows.

But an easing in manufacturing, combined with a decline in housing, increases the risk that the economy will slow too much. �The less aggressive stance we�ve seen in orders really suggests increased risk to (production in) the fourth quarter,� Tim Rogers, chief economist at Briefing.com in Boston, said.

The report �really suggests weaker business investment, weaker capital spending, and that�s really crucial to the economy in coming months�.

Economists expect the federal open market committee to hold the benchmark overnight interbank lending rate at 5,25% for a third straight month when it meets on October 25.

Cooler temperatures than average in the US weighed on utility production, which fell 4,4%, the biggest decline since January. However, mining output in the US rose 0,7% last month, following a 0,5% decrease in August, according to the Fed report.

The weaker housing market is hurting demand for construction products and may be dampening production of some goods. Car and truck production totalled 10,88-million units on an annual basis, compared with 11,07-million in August.

Vehicle makers, including General Motors (GM), have said they will cut production for the rest of the year. GM reduced its fourth-quarter North American production forecast to 1,11-million cars and light trucks on
October 3. Reuters, Bloomberg