FOCUS U.S. data indicate no upturn likely in industrial sector in Q2

---- by CHRISTOPHER ANSTEY ----	

	    WASHINGTON (AFX) - U.S. data showing a sharper than expected decline in inventories, and a continuing fall in industrial output, indicate the U.S. 

industrial sector will not emerge from recession this quarter, analysts said.

	    "I continue to think this quarter will be essentially neutral (for the sector) -- basically dead in the water," said David Littmann, senior economist at Comerica Bank.

	    Carol Stone, deputy chief economist at Nomura Securities International, said: "We will continue to see declines in industrial production," as businesses continue to struggle to get inventories into line with weaker 

demand.

	    Any rebound in industrial production is dependent on a strengthening in consumer spending, economists concluded.

	    "The question going forward is whether consumer spending recovers," said James Glassman, senior economist at Chase Securities.

	    Although April retail sales did register a stronger than expected rise, Littman cautioned that this was significantly influenced by discounting to move excess inventories off shelves.

	    The Commerce Department earlier reported that March business inventories dropped by a larger than expected 0.3 pct, after a 0.4 pct fall in April.

	    The decline was also larger than the 0.1 pct fall assumed by the Commerce Department when it calculated a 2 pct rise in Q1 GDP, economists noted.

	    "This will help reduce the originally issued 2 pct rise," Littman said.

	    Glassman said the drop in inventories "was more fierce than we had assumed," and could indicate the worst may be over for the inventory correction.

	    Stone explained that the continuing inventory liquidation is a big reason behind the further declines in industrial production reported by the Federal Reserve.

	    The Fed said April industrial output dropped 0.3 pct, after a 0.1 pct fall in March. The March decline was originally reported as a 0.4 pct rise.

	    "These numbers are very weak indeed," noted Ian Shepherdson, economist at High Frequency Economics.

	    Glassman said: "This really has had the feel of a recession in the industrial sector."

	    The drop in April industrial output was the seventh consecutive monthly decline.

	    Glassman said "I don't think we're in for more aggressive declines. It may be that the worst is over for the sector," adding that today's indicators 

make it likely the sector will "still be contracting, but not getting any worse."

	    Much of the decline in April production was in the high technology sector, economists noted, as auto production actually registered a second consecutive monthly increase.

	    Nomura's Stone explained the "production declines in a variety of business equipment says that U.S. capital spending remains weak, and that (high technology) exports are also weak."

	    Shepherdson said: "The good news is that the rate of fall of non-technology, non-auto output is probably no longer accelerating, but the picture is still bleak."

	    Analysts concluded that the two reports underline predictions of a 50 basis point reduction in the key federal funds rate by the Federal Open Market Committee at tomorrow's meeting.

	    The data "bring back to the fore the need for further easing," Stone said.

	    "The Fed is going to continue to see the need for an insurance premium (on an economic recovery)," Littman said, sticking to his forecast of a 50

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