Weak U.S. output points to recession

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. industrial output posted its biggest drop since 1974 in September, while a regional factory index slumped this month and labour markets showed softness, suggesting the economy has fallen into recession.

The series of grim reports Thursday made clear that even if unprecedented government measures to stabilise financial institutions succeed in restoring lending, the underlying economy has been seriously damaged from months of turmoil.

"The data suggests the U.S. economy is mired in recession and things are getting worse rather than better," said Sal Guatieri, an economist for BMO Capital Markets in Toronto.

At the same time, consumer prices held steady last month as energy prices slipped, which could give the U.S. Federal Reserve room to cut interest rates further to lift to an economy that could be facing a protracted slump.

The data pressured stock markets and major indexes were down slightly in early afternoon a day after their worst session since the 1987 crash. Prices for U.S. government bonds gained as investors sought a safe haven.

Production at the nation's factories, mines and refineries tumbled 2.8 percent last month, the Federal Reserve said, far worse than economists had expected. Business equipment production dropped 7 percent, a sign companies were retrenching as the credit crisis intensified.

The Fed said Hurricanes Gustav and Ike, as well as a strike at aircraft maker Boeing, "severely curtailed" output. But analysts said even taking those factors into account, a downdraft was unmistakable.

"Over the last three months, production is down 5.8 percent and is consistent with a recession," John Silvia, chief economist at Wachovia Corp, said in a note to clients.