WASHINGTON - -The economy took two steps forward and one step back in May as housing starts picked up but industrial production fell more than expected.
Housing starts jumped higher than expected, as did building permits, offering a glimpse of future building activity. Together both pieces of data suggested the housing slump might be closer to bottoming out and will stop being a drag on the economy.
However, the increase in residential building was not much help to the manufacturing sector, which continues to shrink.
Production fell at the nation's factories and mines in May for the seventh straight month, the Federal Reserve reported Tuesday, as automakers shut plants and overall demand remained weak.
Industrial production fell 1.1 percent, after falling 0.7 percent in April, which was revised downward.
The output of manufacturers and mines has fallen 16 of the past 18 months since the recession began in December 2007, as the housing slump killed demand for furniture, appliances and other big-ticket items, and consumers hunkered down.
The bankruptcies of two of the nation's largest automakers, Chrysler and General Motors, contributed to the drop last month. Both companies shut plants and cut jobs to streamline operations and emerge from bankruptcy more competitive.
Analysts had been expecting a fall of about 0.9 percent. A closely watched index of business activity released earlier this month showed the manufacturing sector contracting but at a slower pace than in previous months.
The decline in production has meant job cuts and shorter hours for workers. It has also left machinery and equipment unused, the data showed.
The nation's industrial capacity - the level of actual activity compared with maximum capability - fell to a new record of 68.3 percent, the new data showed. In April it fell to 69.1 percent. A reading closer to 80 percent is the norm in a healthy economy.
Industrial production and capacity utilization are among the key indicators that Fed policymakers watch. They are scheduled to meet next week to discuss the central bank's next moves in response to the recession. All eyes are on the Fed to see whether it steps up purchases of long-term Treasurys and mortgage-backed securities to help drive down consumer borrowing costs. Investors spooked by the potential for inflation once the economy recovers sold off long-term Treasurys, which move in the opposite direction from mortgage rates. Rates for home loans have risen from 5 percent to about 5.7 percent in two weeks.