Factories and industry show more weakness

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By Burton Frierson

NEW YORK (Reuters) - The United States confronted more grim economic news on Monday, with manufacturing taking another hit and price declines in the sector providing a reminder that deflation may be on the horizon.

A gauge of manufacturing in New York State hit a record low in December, the New York Federal Reserve said. The report also showed a record drop in a key price gauge that will heighten concerns over tumbling demand.

The survey of manufacturing plants in New York state is one of the earliest monthly guideposts to U.S. factory conditions and was followed by a report that showed manufacturing as well as overall industrial output slid in November.

"The manufacturing sector is mired in recession," Steven Wood, chief economist at Insight Economics in Danville, California, said in a research note.

The one silver lining to Monday's reports was they were not as bad as depressed expectations on Wall Street.

Long-dated U.S. Treasuries, which generally benefit from weak economic conditions, erased their gains after the industrial output data. Stocks were lower in early trade.

The New York Fed's "Empire State" general business conditions index fell to minus 25.76 in December, versus minus 25.43 in November. Economists polled by Reuters had expected a December reading of minus 27.25.

Overall, conditions "deteriorated significantly," in December, the report said.

The prices paid component turned negative, charting a record monthly drop, falling to minus 7.45 in December from 20.48 in November.

The data comes a day before the government releases consumer price data for November.

Economists expect it to show prices fell for the third time in four months, on a monthly basis, which will stoke concerns that the United States is in the early stages of a deflationary trend of declining prices, wages and overall economic activity.

The Federal Reserve will also announce its latest interest rate decision on Tuesday. Markets expect it to cut the target for its key overnight federal funds rate by half a percentage point, taking it to 0.5 percent.

Employment in the Empire State report contracted again in December but at a less severe rate than the previous month.

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U.S. industrial production slipped by a slightly less-than-expected 0.6 percent in November and was a bit stronger the month before than previously thought, Federal Reserve data showed.

Economists polled by Reuters had expected a 0.7 percent decline in November after a revised rise of 1.5 percent in October. This was previously reported as a 1.3 percent increase.

November's manufacturing output decline of 1.4 percent reversed a 0.6 percent gain in October. Compared with November 2007, industrial output was down 5.5 percent, the Fed said.

Capacity utilization shrank to 75.4 percent in November from 76.0 percent the month before, previously reported as 76.4 percent. It had been forecast by economists to edge down to 75.7 percent in November. Manufacturing capacity usage decreased to 72.3 percent, the lowest level since April 2002.

Manufacturing slack has grown since the economy entered a recession last year after the collapse of the country's housing market. This sparked a global credit crisis that has hammered consumer and business confidence and withered spending.

Net capital inflows into the United States surged to $286.3 billion in October, from a revised inflow of $142.6 billion in September, the Treasury Department said.

October's capital inflows were more than enough to cover the month's trade deficit of $57.2 billion. The inflows came during a period when investors' aversion to taking risks led them to pile into U.S. Treasuries and other safe-haven assets.

(Reporting by Alister Bull in Washington and Gertrude Chavez-Dreyfuss and John Parry in New York; writing by Burton Frierson in New York; Editing by Andrea Ricci)

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