U.S. industrial output appears on the mend

By Alister Bull

WASHINGTON (Reuters) - The U.S. recession might be loosening its grip, data released on Wednesday suggested, although analysts cautioned recovery was likely to be long and slow.

U.S. industrial output declined at a slower pace in June and a key regional U.S. factory survey posted its strongest reading in a year this month. Another report showed core U.S. consumer prices edged up at a moderate pace in June, providing further evidence that the U.S. recession was not pushing the country toward a Japan-style deflation and stagnation.

"We have no doubt that the post-Lehman collapse in output is over ... but a recovery is still a long way off," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The failure of investment bank Lehman Brothers in September sparked a global financial crisis that pushed the economy much deeper into a recession that began in December 2007.

The U.S. Federal Reserve also gave a somewhat more optimistic outlook, saying the economy probably would not contract as sharply as previously thought in 2009.

In its updated economic projections, released along with minutes from its June policy-setting meeting, the Fed nudged up its 2009 GDP forecast to a range of -1.5 percent to -1 percent, from its April outlook for -2.0 to -1.3.

However, it also raised its unemployment forecast for this year and next, warning that the economic recovery would probably be too anemic to generate much job growth.

Federal Reserve data released earlier on Wednesday showed that U.S. industrial production fell by a smaller-than-expected 0.4 percent last month, reinforcing hopes the pace of the economy's decline was slowing, although the result was helped by strong utilities production.

For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter, when production fell at a 19.1 percent rate.

Wall Street was sharply higher on Wednesday, buoyed by the brightening outlook for the economy and solid quarterly results from Intel Corp.

A separate report from the New York Federal Reserve Bank showed the decline in factory activity in New York state was easing, bolstering recovery hopes. The Empire State business conditions index rose to minus 0.55 in July, the highest reading since April 2008, from minus 9.41 in June.

The improvement reflected a big jump in the new orders index, which reached its highest point since December 2007, while the inventories index fell to a record low.

Economists expect plummeting inventories to lead to a rebound in production and possibly help pull the U.S. economy out of the worst recession in decades.

SLUMP SLOWING

"It's still a tentative sign, but consistent with other reports showing that the recession may be near an end," said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis.