After a string of stronger releases, the disappointing data resumed Tuesday with weaker U.S. industrial production numbers.

The U.S. Federal Reserve Board said industrial production fell 0.5% in March and is now estimated to have edged down 0.1% in February. Manufacturing output declined 0.2% in March, but excluding motor vehicles and parts, it was little changed for the second consecutive month.

The decline in industrial production also shaved capacity utilization from 75.3% to 74.8%, the lowest since December 2001.

BMO Nesbitt Burns said that the war and warmer weather led to the drop. “Manufacturing, which accounts for about 85% of total production, fell 0.2% in March, while the warm weather led to the biggest drop in utility output in five years. Motor vehicles and parts production slowed for the second month in a row, down 1.8% last month,” notes BMO. “Excluding autos, the overall decline was a more moderate 0.4%. On the plus side, computers & office equipment saw solid gains during the month.”

RBC Financial says that the Empire State Manufacturing Survey also came in far worse than consensus expectations with a -20.4 reading. “Most major subcomponents deteriorated sharply, marked by sharp drops in new orders, shipments, unfilled orders, delivery times, inventories and employment. This is a discouraging report, but is not a major market mover in isolation of all manufacturing surveys taken together with the next one due out on Thursday in the form of the Philadelphia Fed’s index.”

Despite the weak production report, RBC says that it is conceivable that the performance of U.S. industry will improve over coming months as Iraq’s weight is gradually lifted from business confidence and the markets.

Nesbitt agrees, noting, “U.S. factory activity remains sluggish and the sector continues to shed workers. However, reduced war concerns and a weak U.S. dollar should help revive output.”

http://www.federalreserve.gov/releases/G17/Current/default.htm