Lower output for the second month running had been expected due to stock levels in some industries getting too high. In the car industry particularly, weak sales meant big production increases in recent months had added to inventories.
The Federal Reserve said a drop of 4.4 per cent in the output of motor vehicles and parts in April accounted for half the 0.4 per cent decline in industrial production. However, there were smaller output falls in a broad range of industries, including previously strong performers such as equipment and home appliances.
Lacy Hunt, chief US economist at HSBC Markets in New York, said: ''The manufacturing sector is clearly developing significant weakness.'' He said demand was turning down, and there was some risk of tipping into a recession.
Capacity use rates fell for the third month in a row, retreating from their worryingly high level earlier this year. At 84.1, the rate of capacity utilisation has returned to last summer's level.
According to Elias Bikhazi, an analyst at Deutsche Bank Securities: ''This is especially good news for inflation down the road.'' Utilisation rates above 85 are considered inflationary.
A rise of only 0.4 per cent in housing starts last month came as a surprise. Most analysts had expected a big rebound in housebuilding after three consecutive monthly declines adding up to a 22 per cent drop. In fact, higher starts in the south and west were nearly offset by falls in the north and east, despite the encouragement of warm April weather. Josh Feinman, an economist at Bankers Trust, said falling mortgage rates this year had not yet stimulated the housing market.
Hope of an economic ''soft-landing'' and benign inflation prospects took the yield on the benchmark long-term US Treasury bond to 6.91 per cent yesterday, the lowest since before lasy year's bond market crash.
Comments by Alan Greenspan, Chairman of the Federal Reserve Board, fanned the warm and cosy feeling in the bond market. Speaking to the National Association of Realtors in Washington, Mr Greenspan said it was not the Fed's goal to encourage interest rate fluctuations, but it would take the policy actions needed to avoid unstable business cycles.
Many Wall Street analysts think the Fed will cut interest rates in August or September if the economy continues to slow. Few expect a move at the policy meeting on 23 May.