U.S. factory, consumer confidence data darken second-quarter outlook

WASHINGTON (Reuters) - U.S. industrial production fell for a fifth straight month in April due in part to a further decline in oil and gas drilling, painting a lackluster picture of economic growth in the second quarter.

The economy's struggle to pick up steam after a dismal first quarter was underscored by other data on Friday showing a sharp drop in consumer confidence in early May and only a mild rebound in factory activity in New York state.

Coming on the heels of weak retail sales and producer inflation data this week, Friday's reports suggest the Federal Reserve will probably not raise interest rates anytime soon.

"It means in the next month or so we are unlikely to see a massive rebound in growth momentum. These are not the numbers that would inspire confidence in the Fed to tighten policy," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Industrial output slipped 0.3 percent after a revised 0.3 percent drop in March, the U.S. central bank said. Economists had forecast industrial production edging up 0.1 percent after a previously reported 0.6 percent fall in March.

A plunge of 14.5 percent in oil and gas well drilling pushed mining production down 0.8 percent last month. It was the fourth straight monthly decline in mining output.

Crude oil prices have fallen by about 50 percent since last June, resulting in a sharp drop in well drilling activity.

Companies like Schlumberger , the world's No. 1 oilfield services provider, and Halliburton have slashed their capital spending budgets for this year. Caterpillar Inc has cut its 2015 profit outlook and warned that lower oil prices would hurt its energy equipment business.

"We see a further drop in mining investment over the next few quarters and are not convinced that business investment ex-mining will be strong enough to sufficiently offset this drag," said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York.

The economy was slammed earlier in the year by bad weather, port disruptions, the strong dollar and deep spending cuts by energy firms.

The government reported last month that GDP expanded at a 0.2 percent annual pace in the first quarter. But trade and inventory data published after the GDP snapshot suggested the economy actually contracted.

In a separate report on Friday, the University of Michigan said its consumer sentiment index fell to 88.6 early this month from a reading of 95.9 in April.

U.S. stock indexes were little changed, while prices for longer-dated U.S. government bonds rose. The dollar fell marginally against a basket of currencies.

DOLLAR DAMPENS MANUFACTURING

Last month, utilities production tumbled 1.3 percent, also contributing to the weakness in industrial output. Manufacturing production was unchanged after gaining 0.3 percent in March.

Manufacturing, which accounts for about 12 percent of the economy, has been dampened by the strong dollar. Even as the dollar rally fades, manufacturing is unlikely to rebound much because of the challenges in the energy sector.

In a separate report, the New York Fed said its Empire State general business conditions index rose to 3.09 in May from -1.19 in April, which had been the first negative read for the index since December.

Economists polled by Reuters had expected the index to rise to 5.0 this month. A reading above zero indicates expansion.

Manufacturing output in April was restrained by a 0.9 percent drop in machinery production.

Industrial capacity use fell to 78.2 percent last month, the lowest since January of last year, from 78.6 percent in March.

Officials at the Fed tend to look at capacity use as a signal of how much "slack" remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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