Deepening slump envelops factory sector

By Glenn Somerville

WASHINGTON (Reuters) - A spreading economic slowdown seeped into U.S. factory activity in February and March as waning demand more than offset the export benefits of a cheaper dollar, a series of reports on Monday showed.

A Federal Reserve report on industrial output showed that factories were running at their slowest rate in more than two years during February while a key gauge of factory business in the Northeastern U.S. slumped to a record low in March.

Taken together, the reports reinforced concern that the world's largest economy stalled during the first quarter and was in an actual downturn, though Bush administration officials refuse to concede a recession has started.

The New York Fed said its "Empire State" gauge of general business activity plunged in March to a record minus 22.23 from minus 11.72 in February, far worse than analysts had expected as was the case with the broader industrial production report.

The Fed report showed overall industrial production by the nation's mines, factories and utilities fell by an unexpectedly steep 0.5 percent in February. That followed a slight 0.1 percent January gain and was biggest decline in total output since last October.

Market participants were transfixed by developments in the U.S. financial sector after a weekend collapse of one large firm and new Fed action to add to liquidity and paid scant attention to the latest economic numbers.

The Dow Jones industrial average was off more than 100 points at noon and bond prices were broadly higher as shell-shocked investors moved to the sidelines ahead of a Fed meeting on Tuesday that is widely expected to deliver the central bank's next move, a cut in its benchmark federal funds rate.

The stress on factory businesses showed up in manufacturing activity, where output fell 0.2 percent in February after being flat in January. That left the manufacturing sector running at 79.3 percent of total operating capacity, the lowest rate since 79.2 percent in October 2005.