Finance Blog number 1

Sales of newly built homes fell unexpectedly in September after rising for five straight months, according to government figures released Wednesday.

The Commerce Department said new home sales fell 3.6% to a seasonally-adjusted annual rate of 402,000 last month, from a downwardly revised rate of 417,000 in August. It was the first time new home sales declined since March.

Economists surveyed by Briefing.com had expected September new home sales to rise to a rate of 440,000 units.

"We’re attributing most of the decline to the potential expiration of the new home-buyer tax credit," said Adam York, an economist at Wells Fargo. "It’s getting harder to buy a house and no one wants to close after the credit expires," he added.

In addition to relatively low prices and attractive mortgage rates, the housing market has been supported in recent months by a temporary government tax credit for first-time homebuyers.

The tax break. The credit can be worth up to $8,000 for eligible buyers,but is set to expire at the end of November. Congress is expected to extend the credit, but the terms are still being debated.

Most economists believe that the drop in September’s new home sales was driven primarily by the tax credit’s timetable — but not all of them agree.

Mark Zandi, chief economist at Moody’s Economy.com, contends that first-time homebuyers are more likely to buy an existing home than a new home, which suggests that the tax credit is less of an issue for new home sales.

Zandi attributed the increase in new home sales over the past five months to low interest rates and more aggressive FHA lending. And he adds that these recent increases haven’t been spectacular. "All we can say is the new home market is stabilized."

Foreclosures still loom best payday advance. Wednesday’s report highlighted concerns about the long-term outlook for the housing market, which remains challenged by rising unemployment and a glut of foreclosed properties on the market.

A separate report showed Wednesday that applications for home loans, considered a leading indicator of sales, fell for the third week in a row last week.

The Commerce Department report showed the median sales price jumped to $204,800 in September from $195,200 the month before. The average sales price rose to $282,600.

The price increase echoed an industry report released Tuesday that showed home prices in 20 major markets rose for the fourth month in a row during August.

Meanwhile, the estimated number of new homes for sale at the end of last month fell to 251,000 units on a seasonally adjusted basis. That’s down from 262,000 unsold homes last month and was the lowest level since November 1982.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the drop in housing inventory means the market is moving towards a better balance of supply and demand. "But the tax credit story is the key element right now," he added.

He said that the credit’s looming expiration will probably mean that home sales will fall again in October and, depending upon where the legislation stands, in November as well.

At the current sales pace, it would take 7.5 months to sell through existing inventory, according to the report. That’s up from the previous month, when the there was about 7.3 months of inventory on the market.

– CNN senior writer Jeanne Sahadi contributed to this report.  

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Italian business confidence rose in October to the highest in more than a year, a further sign that companies are boosting output as the country emerges from its worst recession since World War II.

The Isae Institute’s manufacturing sentiment index climbed to 77.1 from a revised 74.3 in September, the Rome-based research center said today. The October reading, the highest since September 2008, compared with a median forecast of 75.1 in a Bloomberg News survey of 16 economists.

“The combination of new orders and de-stocking are currently supporting the modest increase in production,” said Annalisa Piazza, an economist at Newedge Group in London. “Italy is on a moderate upward trend and further improvement will come in the near future.”

Industrial production posted a record rise in August as Europe’s fourth-biggest economy benefited from growing exports and government incentives to trade in old cars. As manufacturers stepped up production to rebuild stocks, output will rise this month after falling in September, employers’ association Confindustria said yesterday.

Italy’s economy expanded in the three months through September after five quarters of contraction, the country’s central bank said in its October bulletin. Italy will grow 0.6 percent in 2009 after shrinking 4.7 percent this year, Isae said on Oct. 14. The forecast compares with a projection for 0.8 percent growth by Confindustria.

French Confidence

The optimism of Italian manufacturers mirrored a rise in confidence in France, where an index of sentiment among factory executives climbed to the highest in more than a year, buoyed by demand outside Europe and state support for the car industry. German business confidence climbed to a 13-month high in October, improving the outlook for growth in Europe’s largest economy, Ifo institute said on Oct. 23.

Government incentives in Italy and across Europe have helped auto sales recover from a global decline caused by the recession, benefiting Italy’s biggest manufacturer, Fiat SpA.

On Oct. 21, the Turin-based carmaker that acquired a stake in Chrysler Group LLC unexpectedly reported a third-quarter profit payday advance lenders. Its chief executive officer, Sergio Marchionne, said Fiat will lose 370 million euros ($556 million) in operating profit next year without the incentives.

The Italian government will wait until the release of new auto sales numbers next month before deciding whether to extend the incentives to 2010, Industry Minister Claudio Scajola said in an interview on Oct. 22.

Export Uncertainty

As France and Germany, Italy’s two biggest trading partners, emerged from recession in the second quarter, Italian exports to the European Union returned to growth in July before falling in August. Exports “haven’t shown a clear recovery over the summer,” the Bank of Italy said on Oct. 15.

“The Italian economy is largely dependent on exports,” Piazza said. “The current uncertainties on the global recovery might put a lid on business confidence going forward.”

As job losses mount, there are also risks to consumption in the $2.1 trillion economy. The number of employed Italians fell 1.6 percent in the second quarter, the biggest drop since 1994, while the jobless rate rose to 7.4 percent, the highest since 2005. The rate may exceed 10 percent in 2010 should the recovery remain weak, the Organization for Economic Cooperation and Development said last month.

The Bank of Italy said that unemployment will hold back gains in consumer spending in the coming months. Consumer confidence unexpectedly fell from a seven-year high in October on concern that rising joblessness may hit spending power, Isae said yesterday.

Manufacturers were more optimistic about the job market than consumers, today’s report showed. A sub-index measuring expectations on employment rose to minus 16 in October from minus 19.

Isae conducted its latest survey of 4,000 companies between Oct. 1 and Oct. 20. The research center revised its September reading from an initial 74.

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China predicted an acceleration in industrial production and reported a 190 percent jump in overseas investment for the third quarter, underscoring the nation’s role in driving a global economic recovery.

Investment by Chinese firms abroad rose to $20.5 billion in July through September, almost triple a year earlier, the Ministry of Commerce said in a statement. Industrial output may rise 16 percent in the fourth quarter, Ministry of Industry and Information Technology official Zhu Hongren said in a briefing, compared with a 13.9 percent pace of gains in September.

Policy makers may be encouraging Chinese companies to invest abroad in part to help counter pressure for the nation’s currency to appreciate, analysts said. Investors are betting on the yuan to appreciate in the coming year as China’s growth accelerates from its weakest pace in a year.

“China’s growth is certain and stable,” said Zhu Jianfang, an economist at Citic Securities Co. in Beijing. “Chinese policy makers see pressure for yuan to appreciate, so they encourage companies to invest abroad to strike the balance.”

Today’s figures came after the government last week reported that China, the world’s third-biggest economy, expanded 8.9 percent in the third quarter, the fastest pace in a year.

Yuan Bets

Yuan forwards, which rose to a 14-month high last week, suggest the currency will gain 2.3 percent against the dollar in the coming year. The 12-month offshore contracts were down 0.2 percent today to 6.6730. The yuan climbed 21 percent over three years after the government scrapped a fixed exchange rate in July 2005.

China’s policy on yuan will remain stable until the nation’s exports recover and improve, Jiang Jianjun, an official in the foreign trade department of the Ministry of Commerce told an online forum today.

The projection for China’s production gains encouraged some investors to sell the dollar on confidence that the global recovery will diminish demand for the U.S. currency as a haven. The dollar rose as much as 0.2 percent and traded at $1.4894 per euro at 7:55 a.m. in London.

Stephen Roach, chairman of Morgan Stanley Asia, today said investors are wrong to bet that China will restrain its unprecedented stimulus after the economy accelerated in the third quarter.

‘Growth Surprise’

“The Chinese really are fixated on one thing and one thing alone which is social stability — they don’t want to take a risk of another negative growth surprise” slowdown, Roach said in an interview on Bloomberg Television in Hong Kong.

By contrast, India, Asia’s third-largest economy after Japan and China, today signaled it’s preparing to raise borrowing costs as inflation pressures build. The Reserve Bank of India ordered banks to keep more cash in government bonds, and central bank Governor Duvvuri Subbarao said “it may be appropriate to sequence the ‘exit’ in a calibrated way.”

Inflation in China isn’t a big risk for the nation in the foreseeable future, China central bank Deputy Governor Yi Gang said, the China Securities Journal reported separately today. The government will keep the yuan exchange rate basically stable, the Beijing-based newspaper reported, citing comments the People’s Bank of China’s Yi made at Peking University yesterday.

The nation’s diversification of its foreign currency reserves shouldn’t cause short-term fluctuations in exchange rates, the newspaper cited Yi as saying.

Investment Abroad

Overseas investment by Chinese companies in the first nine months of the year rose 0.5 percent to $32.9 billion, the Beijing-based Commerce Ministry said on its Web site. The figures don’t include financial transactions.

China Investment Corp., the nation’s sovereign wealth fund that holds almost $300 billion, bought an 11 percent stake in Astana, Kazakhstan-based JSC KazMunaiGas Exploration Production for about $939 million, after spending $2.75 billion to acquire Indonesia’s PT Bumi Resources and Noble Group Ltd. in September.

China’s investment in Africa in the first half of the year rose 78.6 percent to $875 million from a year earlier, the Ministry of Commerce said in a statement on its Web site today. Chinese government will continue to encourage companies to invest abroad, the statement said.

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Wolfgang Schaeuble, who headed talks that led to German reunification and was forced out as Christian Democratic Union party chairman in a bribery scandal a decade later, was named finance minister in Chancellor Angela Merkel’s new government.

Merkel kept control of the coffers away from her Free Democratic allies, who advocated more aggressive tax cuts than the chancellor. Schaeuble, 67, will have to rein in a record post-World War II budget deficit, warding off calls for ever- lower taxes and increased spending as the economy recovers from the deepest slump since the Great Depression.

“He has the strength to drive things through,” Stefan Bielmeier, an economist at Deutsche Bank AG, said in an interview from Frankfurt.

The Finance Ministry was the most disputed post in coalition talks between the CDU, its Christian Social Union Bavarian sister party and the Free Democratic Party. FDP leader Guido Westerwelle, 47, who has never held a government post, will become foreign minister. Karl-Theodor zu Guttenberg, 37, will take over the defense ministry and will be replaced as economy minister by the FDP’s Rainer Bruederle.

Merkel and her allies completed a coalition deal in the early hours today to set up a second-term government that points Germany toward tax cuts and a reprieve for nuclear energy.

Wheelchair-bound Schaeuble, who was paralyzed from the chest down by a deranged gunman at a political rally in 1990, served as interior minister for four years under Merkel. Schaeuble aided Merkel’s ascent in politics. She toppled him from the party chairmanship in 2000 because of his links to a party-financing scandal under former Chancellor Helmut Kohl.

West German Veteran

As Kohl’s chief of staff in the mid-1980s, Schaeuble (pronounced SHOY-blah) is the only minister to have held a government post in pre-unification West Germany. He was chief negotiator for the West for the 1990 treaty that merged communist East Germany into the federal republic. He has served in parliament since 1972.

A native of the southwestern city of Freiburg, Schaeuble was assailed as interior minister by civil-liberties and privacy advocates who blasted plans to search personal computers, monitor online activity and deploy the military for domestic security.

He may make more enemies as he tries to rein in spending for a government that’s accumulated record debt.

Schaeuble has previously involved himself in finance issues. He championed a CDU plan to simplify the tax system in the late 1990s as leader of the party’s parliamentary group. Last year he pilloried executives earning inflated salaries soon after the financial system nearly collapsed.

Correcting ‘Excesses’

“It wouldn’t be bad if this crisis led to a correction of excesses,” Schaeuble said in an interview with Stern magazine last November. He cited “self-serving attitudes — a clique of managers endorses three-digit-million checks in a closed system that nobody can leave once he’s inside it.”

Schaeuble’s most testing time came when he became embroiled in the CDU funding scandal. He admitted to accepting 100,000 marks ($77,000) in cash from arms dealer Karlheinz Schreiber without ensuring it was registered in the party accounts. Pressure on Schaeuble to resign as CDU chairman mounted after he admitted he had lied by denying a second meeting with Schreiber. That cleared the way for Merkel’s ascent.

The CDU’s seizure of the finance ministry was a blow to the FDP’s Hermann Otto Solms, who had been touted by some analysts as a candidate. Solms advocates replacing the progressive income tax and its multitude of exemptions with three fixed brackets.

International Posts

The highest FDP post went to Westerwelle, whose lack of experience in foreign affairs has led to doubts about his credentials for the post, which traditionally goes to the leader of the junior party in a governing coalition.

The FDP will also take over the Economy Ministry with the appointment of Rainer Bruederle. He’ll succeed Guttenberg, who will now oversee the presence of more than 4,300 German troops in Afghanistan. The post would give an international profile to a CSU politician who previously focused on domestic affairs.

The youngest minister will be Philipp Roesler, 36, at the health ministry. He’d been deputy premier of the state of Lower Saxony.

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Sales of existing U.S. homes probably climbed in September to the highest level in two years as buyers rushed to take advantage of a government tax credit before it runs out, economists said before a report today.

Purchases rose 4.9 percent to a 5.35 million annual rate, according to the median forecast of 76 economists surveyed by Bloomberg News. A gain would be the fifth in six months.

The $8,000 credit for first-time buyers, due to expire Nov. 30, probably pulled sales and construction forward, signaling housing may cool in coming months. While Congress is considering extending the incentive, factors such as lower prices and mortgage rates have also contributed to steadying a market that endured the worst slump since the Great Depression.

“Fears the tax credit will expire certainly would account for a certain amount of the run-up in the market,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Fundamentally, home sales have begun to pick up on their own outside of government help.”

The National Association of Realtors’ report is due at 10 a.m. in Washington. Bloomberg survey estimates ranged from 5 million to 5.6 million. Sales reached a 5.1 million pace in August, up from a 4.49 million pace in January that was the lowest level since comparable records began in 1999.

Combined sales of existing and new homes reached an almost two-year high in July as asset purchases by the Federal Reserve helped drive mortgage rates to all-time lows. Record foreclosures also caused prices to tumble, making houses more affordable for Americans.

Builder Shares

The Standard & Poor’s Homebuilder Supercomposite Index is up 29 percent so far this year, compared with a 21 percent gain for the broader S&P 500.

Purchases of previously owned homes, which make up more than 90 percent of the market, are tabulated when sales close and therefore reflect contracts signed a month or two earlier. Sales of newly built residences, which make up the rest, are counted when a contract is signed, and may therefore cool months before the tax credit expires.

The Commerce Department’s report on new-home purchases is due Oct. 28.

The Realtors’ group and the National Association of Home Builders are lobbying to extend the first-time homebuyers credit on concern demand will wane after it lapses. Lawmakers this week took up the call.

Need All ‘Tools’

“The work of stabilizing the housing market won’t be done” when the credit expires next month, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said during a panel hearing. “We still need to use every tool at our disposal to fix this problem.”

Dodd and Republican Senator Johnny Isakson of Georgia, a former real estate agent, urged their colleagues to extend the credit through next June. They also proposed expanding it beyond first-time buyers to include all households up to an income cap of $300,000 for couples.

The Fed this week said its 12 district banks saw “stabilization or modest improvements” in many areas of the economy, led by housing and manufacturing. “Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle- priced houses,” the Fed said in its Beige Book of economic conditions in September and early October.

Housing-related companies are still trying to recover. USG Corp., North America’s largest maker of gypsum wallboard, posted its eighth straight net loss last quarter as sales dropped 32 percent from the same time last year.

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China’s stimulus-induced lending binge probably propelled growth in the third quarter to its fastest pace in a year. Now, policy makers have to figure out how to wean the economy off state support.

The country’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. The program ends next year, forcing Premier Wen Jiabao to find new ways to sustain the expansion with increased consumer spending and the financing of small businesses.

“This has been growth on steroids,” said Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns Cos. “The question now is how to stop pumping so much money into the system without a sharp reduction in growth.”

State-directed support will make up more than four-fifths of growth this year, says the World Bank, spurring record iron- ore production at Rio Tinto Group and car sales in China at Volkswagen AG. An exit from the stimulus won’t be easy without unnerving investors: A plunge in July loan growth sent the Shanghai Composite Index down more than 20 percent in August.

Extending the stimulus for too long risks the diversion of funds into stocks and real estate, an erosion of bank asset quality and inflationary pressures, the Asian Development Bank said in a report last month.

‘Severe’ Reaction

“Such a scenario might trigger a round of severe monetary tightening in the medium term that would pull growth down again,” the lender said.

China’s cabinet late today said that it will continue with monetary and fiscal stimulus measures even after the economy exceeded officials’ expectations for the first nine months of the year. At the same time, the State Council signaled that inflation concern will be an increasing focus of policymaking as the rebound strengthens.

The recovery remains at a “critical stage” and China will “maintain the continuity and stability of macro-economic policies,” the State Council said in a statement on a government Web site. “The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations,” it also said.

Policy Shift

“They are cautious about the speed at which inflation will return,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland Group Plc in Hong Kong. “It’s not a change of policy tone yet, but I think we will get that change in the first quarter of next year.”      The state-driven credit boom, which led to a record $1.27 trillion in new loans in the first nine months, the stimulus plan and resulting growth in car and property sales will help the economy expand 11.2 percent in the fourth quarter, according to Frankfurt-based Deutsche Bank AG. That follows a 7.9 percent expansion in the second quarter of this year, the first acceleration in growth since the last three months of 2006.

The benchmark Shanghai Composite Index of stocks reached a two-month high today before tomorrow’s economic data releases, including gross domestic product. The gauge rose as high as 3,105.51 before trading at 3,087.84 as of 2:03 p.m. local time.

Industrial output probably grew 13.2 percent in September and investment in properties and factories surged 33.1 percent in the first nine months, pushing GDP growth to 9 percent in the third quarter. It was the fastest pace since the third quarter of last year, according to the median estimate of 34 economists surveyed by Bloomberg News. The data will be released tomorrow.

Inflation Gauge

Figures this week will probably show no signs of inflation, allowing the People’s Bank of China to keep in place what it calls its “moderately loose” monetary policy. China will stick to that policy, guide reasonable loan growth to boost domestic demand and further cement the nation’s economic recovery, the central bank said Sept. 29.

Consumer prices dropped an estimated 0.8 percent in September, according to the survey.

Retail sales rose 15.5 percent last month, the fastest pace since January, according to the data survey. Car sales surged 84 percent to more than 1 million units for the first time, putting China on course to overtake the U.S. this year as the biggest market for sales of new cars.

The stimulus, record lending, tax cuts and subsidies may help push China’s imports 30 percent higher to $313 billion this quarter, according to Zurich-based Credit Suisse Group AG payday loans with low fees. Iron ore imports jumped to a record 64.6 million metric tons last month while copper imports rose 23 percent.

Global ‘Locomotive’

China’s demand for goods from overseas can play “a critical role in some locomotive way for the world,” Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, said in a Sept. 2 research note.

The lending boom, equivalent to about 50 percent of China’s GDP in the first half, drove public and private investment in factories and properties 33 percent higher in the first eight months, helping restore investor confidence in stocks and property after the start of the financial crisis.

The Shanghai index has soared 70 percent this year as government-influenced spending helped growth rebound from 6.1 percent in the first quarter, the slowest pace of expansion in almost a decade.

Volkswagen Sales

Wolfsburg, Germany-based Volkswagen, the biggest overseas carmaker in China, sold 150,000 cars last month, a monthly record, as sales for the first nine months surged 37 percent. Car sales were buoyed after the government halved sales taxes and announced 5 billion yuan in subsidies to help rural residents to buy vehicles. Volkswagen is investing 4 billion euros ($5.9 billion) to expand capacity in China through 2011.

“China is the steam engine of the world economy,” Volkswagen sales chief Detlef Wittig said in a Sept. 25 interview in Frankfurt. “The lust for mobility there seems almost bottomless. We’re very well positioned there and will keep investing to secure our share of the market.”

Iron-ore production at London-based Rio Tinto, the world’s third-largest mining company, rose 12 percent in the third quarter to a record 47.5 million tons on demand from steelmakers in China, the company said in an Oct. 14 statement.

China Mobile Ltd., the world’s biggest phone company by market value, reported that subscriber numbers rose to 508.4 million at the end of September, more than the populations of the U.S. and Japan combined.

World Bank’s Remedies

The effect of stimulus spending will taper off starting in mid-2010; the overall impact will be less than half what it was this year, said Wang Tao, a UBS AG economist in Beijing.

On the World Bank’s list for measures to reduce dependence on investment-led growth are: boosting spending on health, education and social welfare to aid low-income earners and reduce their reluctance to consume; providing greater funding for small- and medium-size enterprises; and allowing more flexibility for the yuan to appreciate, making imports cheaper.

“Keeping the Chinese economy growing is very important for employment generation and to avoid social instability,” said Yolanda Fernandez Lommen, chief China economist at the ADB in Beijing. “The easy part has been done. The real challenge is ahead.”

By developing service industries and ensuring easier access to consumer products and credit, China can boost domestic consumption by $2.2 trillion, or more than France’s annual output, by 2025, the McKinsey Global Institute said in an Aug. 21 report.

Driving Investment

Some areas of the economy may emerge as new drivers of growth even as stimulus and new lending slow. Net exports may contribute 0.5 percentage point to next year’s expansion after slashing more than 3 percentage points from this year’s GDP rise, said UBS’s Wang.

A rebound in property construction, which contributes about a quarter of urban fixed-asset investment, will also pick up some of the slack in 2010, said Wang. Property sales jumped 73.4 percent in the first nine months of 2009 from a year earlier to 2.75 trillion yuan.

China may still have to get used to a lower average annual growth rate as reduced demand from Western nations slows exports. The World Bank estimates 2 percentage points may be shaved off the average 10 percent yearly growth recorded over the past decade, the ADB envisions a trajectory of 8 percent to 9 percent and Pettis says the economy may have to adjust to a trend growth rate of 5 percent to 7 percent.

“The government has been postponing the difficult and painful reforms,” said Fernandez Lommen. “It’s a huge task ahead.”

–Kevin Hamlin, with assistance from Andreas Cremer in Berlin. Editors: Anne Swardson, Chris Anstey.

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Industrial production in the U.S. rose more than anticipated in September, putting manufacturing at the forefront of the emerging economic recovery.

The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Another report showed consumer sentiment dropped more than projected this month.

The recent burst of activity on factory floors, spurred in part by a rebound at automakers, will likely give way to more moderate and sustainable gains in coming months as companies rebuild inventories and exports grow. The improvement has yet to generate jobs, one reason consumers remain anxious and underscoring why Fed policy makers say they will keep interest rates low for a long time.

“Manufacturing is turning around from deep recession to strong growth in a very short time,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “It’s going to be one of the important supports to growth.”

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.4 from 73.5 in September, which was the highest in more than a year, the group reported today. Measures of expectations for six months ahead and current conditions both fell.

Stocks Fall

Stocks dropped, depressed by disappointing results at General Electric Co. and Bank of America Corp. The Standard & Poor’s 500 Index fell 0.8 percent to close at 1,087.68. Treasury securities rose.

Industrial production was forecast to increase 0.2 percent after a previously reported 0.8 percent gain in August, according to the median estimate of 77 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.5 percent to a drop of 0.5 percent.

Manufacturing accounts for about 12 percent of the U.S. economy. The jump in production over the past three months was the biggest since late 2005.

Capacity use climbed to 70.5 percent last month from 69.9 in August, the report showed. It was estimated to rise to 69.8 percent, according to the Bloomberg survey median.

Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

Factory Production

Factory output, which accounts for about four-fifths of industrial production, increased 0.9 percent after a 1.2 percent gain the prior month.

Motor vehicle and parts production climbed 8.1 percent following a 6.1 percent increase the prior month.

“Cash for clunkers,” which offered incentives of as much as $4,500 for consumers to trade in old cars for more fuel- efficient ones, helped automakers trim stockpiles as sales climbed in July and August. Industry data showed sales plunged in September after the plan expired on Aug. 24.

General Motors Co. and Toyota Motor Corp. have predicted sales gains for the fourth quarter. GM on Oct. 7 said it plans to boost output to 655,000 vehicles in North America during this quarter to match increasing demand.

The increases in output last month were widespread. Factory production excluding motor vehicles increased 0.5 percent, and the diffusion index gauging the number of categories advancing was 56.9 in September, exceeding the 50 breakeven level for a second month.

October Gains

Regional reports yesterday showed gains in manufacturing extending into October. The New York Fed’s Empire State index soared to the highest level since mid-2004, while the Philadelphia Fed’s gauge eased off September’s two-year high.

Winnebago Industries Inc., the motor-home maker, yesterday reported a fiscal fourth-quarter loss that was smaller than analysts had estimated. The Forest City, Iowa-based company said it’s seeing a pickup in demand.

“Dealer inventory is very close to reaching the bottom, and our dealer partners will need to start to replenish soon to satisfy retail demand going forward,” Chief Executive Officer Bob Olson said in a statement.

Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week.

American factories may also get a boost as more than $2 trillion in government stimulus programs worldwide are reviving demand from Asia to Europe. Exports climbed in August for a fourth consecutive month to reach the highest level of the year, according to Commerce Department figures.

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Slowing inflation may give the upper hand to Federal Reserve policy makers who want to keep interest rates low for a long time to support a recovery from the worst recession since the 1930s.

The consumer-price index rose 0.2 percent last month, after a 0.4 percent increase in August, figures from the Labor Department showed today in Washington. Compared with a year earlier, consumer prices were down 1.3 percent.

Recent comments have shown a growing rift between policy makers who believe the central bank has plenty of time to act before inflation flares and those saying rate increases may happen sooner, or with more force, than some investors anticipate. Bond-market trading shows investors expect inflation over the next 10 years to exceed the latest readings.

The Fed “can keep it low for quite some time,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York, referring to the benchmark rate. “There’s a lot of excess slack built into the system, and it’s not going to go away quickly.”

Ricchiuto forecasts central bankers won’t raise rates at least through the middle of 2011. The median estimate of economists surveyed by Bloomberg News from Oct. 1 to Oct. 8 showed policy makers will wait until the third quarter of 2010 to start raising that target for the overnight borrowing cost between banks as unemployment rises and inflation slows.

The rate has been near zero since December, the lowest on record.

Fed Minutes

The minutes of the policy-making Federal Open Market Committee’s Sept. 22-23 meeting, released yesterday, showed officials weighed the risks that an anemic recovery would lead to “subdued and potentially declining wage and price inflation.”

Fed Vice Chairman Donald Kohn, echoing the concerns of New York Fed President William Dudley, said this week that inflation and growth will probably stay below the Fed’s objectives for some time, warranting low interest rates for an “extended period.” In contrast, Kansas City Fed President Thomas Hoenig and Fed Governor Kevin Warsh have been among those saying rate increases may be needed sooner.

Today’s report on consumer prices showed the so-called core index, which excludes food and energy, climbed 0.2 percent in September, pushed up by health-care and a rebound in automobile prices. Compared with September 2008, prices climbed 1.5 percent after a 1.4 percent increase in the 12 months ended in August.

Inflation Outlook

The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, was at 1.97 percentage points today, the most in more than two months. The spread, which signals the expected inflation rate over the next 10 years, is little changed from the 2.18 percentage points average over the last five years.

Categories such as rents and food are among those making a pickup in inflation less likely, economists said. Rents, which account for almost 40 percent of the core index, dropped 0.1 percent last month, the fist decrease since 1992. Record levels of vacancies will probably continue to restrain those costs.

Food prices were down 0.2 percent in the 12 months to September, the first year-over-year drop since 1967.

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U.K. unemployment rose by the least in a year and fewer people signed on for jobless benefits than economists forecast as the recession eased.

The number of people seeking work in the three months through August rose by 88,000, the smallest increase since the quarter through July 2008, the Office for National Statistics said in London today. Claims for jobless benefits rose by 20,800 in September, less than the 24,500 median forecast in a Bloomberg News survey of 28 economists.

Prime Minister Gordon Brown is trying to revive the economy in time for an election due by June 2010 as opinion polls show his Labour Party trailing the opposition Conservatives. Gross domestic product, which has dropped for five quarters, may have stopped shrinking during the three months through September, curbing job losses.

“The slower rise is welcome but I wouldn’t get too excited,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “I still think we will see unemployment going through 3 million next year.”

The pound extended gains against the dollar after the report. The U.K. currency traded at $1.6005 as of 10:11 a.m. in London, from $1.5925 yesterday.

The unemployment rate in the three months through August as measured by International Labour Organisation standards was 7.9 percent, the statistics office said. That compares with 9.6 percent in the euro region, 9.8 percent in the U.S. and 5.5 percent in Japan.

Job Cuts

Alliance & Leicester, a unit of Banco Santander SA, announced the closure of its Heritage House site and the loss of 200 jobs across two Leicester sites in England, the Communication Workers Union said yesterday in a statement.

Overall unemployment was 2.47 million in the quarter through August, a drop of 1,000 from the three months through July. The total claimant count rose to 1.63 million in September, the highest since April 1997.

Labour advanced in a survey by Populus Ltd. after ministers attacked bankers and the rich, narrowing the Conservatives’ lead over the government. Labour had the support of 30 percent of voters compared with 40 percent for the opposition, according to the survey for the London-based Times conducted from Oct. 9 to Oct. 11.

‘Significant Slowing’

“We’re seeing a significant slowing in the rate of increase of unemployment,” Employment minister Jim Knight said on Sky News. “We expect it to continue to rise for some months yet. That’s why we need to continue spending. If we choke off that investment as the Conservatives are proposing could make that level rise to 5 million. We should be borrowing now to invest to make sure we move to growth. It’s a big problem for young people.”

The U.K. economy shrank 0.6 percent in the second quarter, less than previously estimated, and the National Institute of Economics and Social Research said last week gross domestic product stopped falling in the three months through September.

Signs of recovery are allowing some companies to limit job losses. General Motors Co.’s U.K.-based Vauxhall unit, which employs more than 5,000 people, will suffer no compulsory job losses following its planned takeover by Magna International Inc. of Canada, the Unite union said yesterday.

Average earnings excluding bonuses grew an annual 1.9 percent in the quarter through August, the lowest since at least 2001, the statistics office said. Including bonuses, they increased by 1.6 percent.

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The U.K. inflation rate dropped in September by more than economists forecast to the lowest in five years as the worst recession in a generation purged cost pressures throughout the economy.

Consumer prices rose 1.1 percent from a year earlier, compared with 1.6 percent the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 31 economists was 1.3 percent. On the month, prices were unchanged for the first time in a September since records began in 1996.

Bank of England policy makers this month stuck to their plan to spend 175 billion pounds ($276 billion) of newly created money on assets to foster economic growth after five quarters of contraction. The U.K. may not have escaped recession in the third quarter, and the bank should consider buying more bonds to secure the recovery, the British Chambers of Commerce said today.

“Given high unemployment, inflation pressures are subdued,” said Alan Clarke, an economist at BNP Paribas SA in London. “The bank will probably expand quantitative easing, and if they’re going to do it, it will probably be in chunks of 50 billion pounds.”

The pound weakened to 94 pence per euro for the first time since March 27 after the inflation data. It was trading at 93.94 pence at 10:10 a.m. in London. The U.K. currency weakened 0.5 percent to $1.5726.

Utility Bills, Food

The main contributors to slower inflation were utility bills, food prices, and restaurant and recreation, the statistics office said. The 7.3 percent annual drop in prices for electricity, gas and other fuels was the biggest since records began. Transport and clothing costs rose on the year.

J Sainsbury Plc, the U.K.’s third-biggest supermarket owner, reported decelerating sales on Oct. 7 and said revenue growth will become more difficult to achieve as food inflation eases. Tesco Plc, the world’s third-largest retailer, said Oct. 6 that sales growth cooled due to slower food-price inflation low fee pay day loans.

Bank of England policy makers said in the minutes of the September meeting that “inflation would probably be higher in the short-term than the committee had thought a month ago, though it was still likely to be extremely volatile.”

Core inflation, which strips out the cost of tobacco, alcohol, food and energy, was 1.7 percent in September compared with 1.8 percent in August, the statistics office said.

Retail Prices

The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.4 percent annual drop, compared with a 1.3 percent decline in August, the statistics office said. Excluding mortgage interest payments, retail prices rose 1.3 percent on the year.

The Bank of England last week left the key interest rate at a record low of 0.5 percent and said it will spend the remainder of its planned bond purchases. The bank’s forecasts show inflation will probably drop below 1 percent later this year and miss its 2 percent goal in three years.

The BCC said today that the economy may not have exited the recession in the third quarter and that the central bank has room to expand asset purchases to 200 billion pounds next month. The Bank of England’s next decision is Nov. 5.

Quantitative easing may not be enough to revive demand for credit in the U.K., according to Howard Davies, formerly chairman of the Financial Services Authority and deputy governor of the Bank of England.

“The supply is there, the problem is demand,” Davies, now the chairman of the London School of Economics, said in an interview on Bloomberg Television in London today. “The economy is still flat on its back. Business demand for lending is actually quite low. I’m not convinced that keeping on pumping in from the bank side is going to solve that problem.”

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