U.S. industrial production fell 0.2% in May, the U.S. Federal Reserve announced Tuesday, its third drop in the past four months.

Economists surveyed by Bloomberg News had expected industrial production to rise 0.1% in May. Industrial production fell 0.7% in April.

Further, manufacturing output was unchanged in May, the Fed said, while utilities output declined 1.8%, and mine output increased 0.1%. The Fed added that factory output was boosted by a small pickup in the index for motor vehicles and parts; the end in late May of a strike at a parts producer had little effect on vehicle output for the month.

Also, capacity utilization declined to 79.4% in May from 79.6% in 79.7 in April. Economists surveyed by Bloomberg News had expected capacity utilization to total 79.7 in May. The May utilization rate is 1.6 percentage points below its average for 1972-2007 and is at its lowest level since November 2004. Capacity utilization totaled 80.3% in March and 80.9% one year ago, in May 2007.

U.S. economy operating well below capacity

Economist David H. Wang said U.S. industrial production continues to operate well below capacity. "We are continuing to see a downward path of industrial production and this is not a good sign. Industrial production has declined for about one year, and this will weigh on commercial activity. It's also a major job loss area," Wang said. "The U.S. economy is complex and multi-faceted but it's hard for GDP to grow without industrial production increasing."

Wang added that one of the idiosyncrasies of the current economic slowdown is the length of time the economy has lingered / meandered right around the 0.5-1.0% GDP growth rate. Typically, the economy displaying downtrend characteristics would fall into a recession: in this cycle, the economy has not, so far.

"Perhaps it has to do with the increased wealth in the United States compared to the previous economic cycle, or the increase in export activity, but the economy's remaining at a barely growing rate remains a puzzle," Wang said. "Still, the economy remains very weak. In any month we are in danger of a stall. I would be very surprised if GDP does not turn negative in Q2."

The monthly industrial production statistic indicates how much factories, mines, utilities and related plants are assembling/forging. Further, although the manufacturing sector accounts for less than 20% of the U.S. economy, because a considerable portion of it is cyclical activity, the report has a major impact on the stock market. Many economists and analysts also argue that industrial output reflects longer-term trends in the U.S. economy, due to the large capital amounts and long-term planning involved in initiating industrial operations.