The Federal Reserve said Monday that output at the nation's factories, mines and utilities dropped by 0.5 percent in February, the biggest decline since a 0.6 percent fall last October.

It was a far weaker reading than the slight increase of 0.1 percent that many analysts had been expecting. It served to underscore the severity of the current economic slowdown.

Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, said he believed that the manufacturing sector fell into a recession in October and the overall economy followed in December.

"The economic shock of a housing collapse, credit crunch, including financial sector turmoil, and sky-high oil prices have squeezed consumers' budgets to the point where there is no growth left," he said.

On Wall Street, the Dow Jones industrial average rose 21.16 points to close at 11,972.25, after falling nearly 200 points earlier in the day as investors grappled with the JPMorgan Chase & Co.'s government-backed buyout of troubled investment bank Bear Stearns Cos.

The Federal Reserve moved aggressively over the weekend to keep a crisis in financial markets from spreading and Fed officials are expected to follow with another sizable cut in interest rates for consumers at their regular meeting on Tuesday.

However, many economists believe the moves have not come in time to keep the country out of a recession although analysts said they should limit the severity of the downturn.

Meanwhile, the deficit in the broadest measure of foreign trade declined in 2007 after setting records for five straight years. The 9 percent improvement reflected strong growth in U.S. exports which offset a soaring foreign oil bill.

The Commerce Department reported the current account deficit fell to $738.6 billion last year, falling from an all-time high of $811.5 billion in 2006.

The current account is the broadest measure of trade because it covers not only goods and services but also investment flows between the United States and other countries. It also represents the amount of dollars flowing into foreign hands to finance the country's overall trade deficit.

The deficit for 2007 represented 5.3 percent of the total economy, down from a record 6.2 percent of the economy in 2007. Even with the decline to a deficit of $738.6 billion, it still means the United States is borrowing $2 billion every day to finance its appetite for foreign-made cars, televisions and crude oil.

So far, foreigners have been happy to ship their products to the United States and take dollars in return. However, the ever-rising supply of dollars in foreign hands leaves the United States vulnerable if there is a sudden reversal of that trend. Worries have grown recently given the sharp decline in the value of the dollar, which has fallen to record lows against the euro and is at the lowest level against the Japanese yen since 1995.

The current account deficit was also down for the fourth quarter to $172.9 billion, a 2.5 percent drop from the third quarter deficit of $177.4 billion. It marked the third quarter quarterly drop in the deficit and pushed the quarter imbalance to its lowest level since the summer of 2004.

Economists believe the deficit will keep falling this year, reflecting in part a severe slowdown, and possibly a recession, in the United States. The trade balance is also being helped by the weaker dollar, which makes U.S. goods more competitive on overseas markets and makes foreign goods more expensive and thus less attractive to American consumers.

For the year, the deficit for goods dropped to $815.4 billion while the surplus on services, items such as airline tickets, increased to $106.9 billion. U.S. investors earned $74.3 billion more on their overseas investments than foreigners earned on their U.S. investments, up significantly from 2006.

The deficit on unilateral transers, the category that includes U.S. foreign aid, rose to $104.4 billion last year.

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