U.S. economic data weak

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices fell in March, posting their first 12-month drop in nearly 54 years, and industrial production slipped further, according to data on Wednesday that underscored the severity of the recession.

However, the Federal Reserve said economic activity in some parts of the economy appeared to be stabilizing, and other data showed that a decline in factory activity in New York state eased this month and that national homebuilder sentiment jumped, suggesting the economy's steep descent may be slowing.

"Today's indicators are consistent with the early stages of a bottoming-out process in the U.S. economy," said Stuart Dye, a senior economist at PNC Financial Services in Pittsburgh.

U.S. stock prices rose, with the Dow Jones industrial average .DJI ending up 1.4 percent at 8,029.62. U.S. government bond prices edged higher with traders focussing mostly on the inflation and industrial output data.

Analysts cautioned, however, that the economy faces a long road back to health from a 16-month-old recession that is set to become the longest since the Great Depression next month.

The data on consumer prices and industrial output showed the degree to which anaemic demand had eroded companies' pricing power and left the economy burdened with excess capacity.

"Although there has been some improvement in economic data recently, the recession is still ongoing. What we are seeing is a big increase in excess capacity in the economy," said Zach Pandl, an economist at Nomura in New York.

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