By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing output barely rose in September and contracts to buy previously owned homes recorded their largest drop in nearly 3-1/2 years, the latest signs the economy's momentum ebbed as the third quarter ended.
The reports on Monday showed economic activity was on weak footing even before a 16-day partial shutdown of the U.S. federal government early in October that is expected to weigh on fourth quarter growth.
"The economy seems to be losing steam as higher mortgage rates have hit the housing market and destructive government policy will likely bash the rest of the economy," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.
Manufacturing production edged up 0.1 percent last month after advancing 0.5 percent in August, the Federal Reserve said.
Factory output was held back by a 0.5 percent drop in computer and electronic goods production. Output of electrical appliances also fell.
While automobile output increased 2.0 percent, that was a sharp slowdown from the 5.2 percent rise logged in August.
Separately, the National Association of Realtors said its Pending Homes Sales index, based on contracts signed last month, plunged 5.6 percent to the lowest level since December.
The decline was the largest since May 2010.
The index, which leads home resales by a month or two, has now dropped for four straight months. Realtors believe home resales, which dropped in September, peaked in July and August.
The reports come on the heels of data last week showing a gauge of business spending tumbled in September. That data, combined with a disappointing reading on hiring released earlier this month, has offered a dull picture of economic activity.
Thomas Costerg, U.S. economist at Standard Chartered Bank in New York, said a run up in interest rates over the summer on expectations the Fed would soon trim its bond-buying stimulus appeared to be holding back the economy.
"This will make the Fed even more cautious when they next start to hint at tapering," he said.
Rates on 30-year fixed rate mortgages rose to an average of 4.49 percent in September from an average of 3.54 percent in May, according to Freddie Mac. But a surprise decision by the central bank in mid-September not to cut its purchases and soft economic data have pulled rates lower since then.
With politicians in Washington still to agree on a budget, uncertainty over fiscal policy may also continue to hinder growth, making it unlikely the Fed will be in a hurry to start scaling back its purchases.
Fed officials meet on Tuesday and Wednesday and are expected to maintain their $85 billion per month bond-buying pace.
WEAK DOMESTIC AND GLOBAL DEMAND
While manufacturing accounts for only about 12 percent of U.S. economic activity, it was the main driver of the economy from the 2007-09 recession.
Factory output rose at a 1.2 percent rate in the third quarter, rebounding from a 0.1 percent fall in the prior three months. Economists expect manufacturing slowed in October as the federal government shutdown hurt business confidence.
The weak manufacturing data contrasts with fairly upbeat business surveys. For example, a closely watched gauge from the Institute for Supply Management has been pushing higher since contracting in May.
"We are inclined to focus on actual activity gauges like manufacturing production, rather than surveys, which have given several false signals during this recovery," said Peter D'Antonio, an economist at Citigroup in New York.
"The soft manufacturing output reflects weakness abroad, little need to build inventories, and the general slowdown in demand in the first half of the year."
Despite the softness in factory output, a rebound in utilities output lifted overall industrial production 0.6 percent, the largest increase since February.
Utilities rebounded 4.4 percent in September after five straight months of declines. Mining production rose 0.2 percent, but that was a slowdown from at 0.6 percent increase in August.
Last month, the amount of industrial capacity in use rose to 78.3 percent, the highest level since July 2008, from 77.9 percent in August.
(Reporting By Lucia Mutikani, additional reporting by Jason Lange; Editing by Andrea Ricci and Meredith Mazzilli)
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