By Lucia Mutikani
WASHINGTON (Reuters) - U.S. industrial output fell to its lowest level in almost seven years in February and manufacturing in New York state slumped further this month, according to data released on Monday that pointed to a deteriorating economy.
Adding to the economy's problems, the Treasury said foreigners were net sellers of U.S. securities in January, a worrying development at a time when the government is rolling out a massive spending plan to break the 14-month recession.
The Federal Reserve said industrial production fell 1.4 percent last month, following a 1.9 percent drop in January and worse than market expectations for a 1.1 percent decline.
Compared with February 2008, output declined 11.2 percent, with the index at 99.7, the lowest since April 2002, the Fed said.
Despite the poor data, U.S. stocks were on a firm footing as they extended their recovery from 12-year lows hit earlier this month, boosted by optimism that some stability might be returning to the financial sector.
Prices of government bonds fell, losing some of their safe-haven allure as equities rallied. The U.S. dollar dropped, with the euro touching a five-week high as investors took a dim view of the capital outflows in January.
Analysts said the data dashed hopes that the economic downturn, which started in December 2007, is close to finding a bottom. That optimism had been fanned by a report last week showing a modest decline in February retail sales.
"Hopes that the U.S. recession is close to ending are not supported by these nasty figures," said Roger Kubarych, an economist at Unicredit Markets & Investment Banking in New York. "Several more months of declining industrial production are highly probable."
Industrial capacity utilization dropped to 70.9 February, matching a December 1982 record low for the series, which dates back to 1967, from 71.9 in January, the Fed said.
Manufacturing eased 0.7 percent in February after sliding 2.7 percent in January. The pace of decline slowed due to an increase in the production of motor vehicles and parts after extended plant shutdowns in January, the Fed said.
EXPORTS EVAPORATING
"The manufacturing sector is still declining as firms struggle to pare inventories and come to grips with lower consumer spending, evaporating exports and the full force of a capital spending downturn," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI.
"These negative forces are a lot to absorb and it is too early to see a turnaround in the industrial sector. The best we can say is that the industrial side of the economy is declining at a decelerating rate."
Separately, the New York Federal Reserve's Empire State factory index showed manufacturing activity in New York State slumped in March. It dropped to a record minus 38.23 in from February's minus 34.65.
One silver lining in the report was the six-month expectations gauge of business conditions, which bounced back into positive territory. But this was coupled with more signs that tight credit conditions were hampering business.
The report's new orders and shipments indexes also dropped sharply to record lows. Investment was suffering as well, with gauges on expectations of capital spending and technology spending falling to their weakest on record.
Housing, which is at the center of the global economic and financial crisis, remains stuck deep in recession. The NAHB/Wells Fargo Housing Market index was flat at 9 in March, marking a fifth consecutive month of single-digit readings.
There was more bad news for the recession-hit economy, with the Treasury Department saying net overall capital outflows from the United States were a record $148.9 billion in January.
Demand for long-maturity securities like bonds, notes and equities shifted from an inflow in December. This comes as the government lays out a $787 billion stimulus plan to halt the economy's downward spiral.
But there was some comfort, as China and Japan, the largest holders of U.S. securities, increased their Treasury holdings.
"The reluctance of foreign investors to buy U.S. assets is a concern for the dollar going forward," said Matthew Strauss, senior currency strategist, at RBC Capital Markets in Toronto.
(Additional reporting by Burton Frierson and Nick Olivari in New York, Editing by Dan Grebler)