U.S. economic activity improved again in July from extremely weak levels earlier this year, suggesting the recession is waning, a report from the Federal Reserve Bank of Chicago showed on Monday.

Production-related indicators turned positive for the first time since October 2008.

A less-volatile three-month moving average of economic indicators improved, but remained at a level consistent with recession.

The Chicago Fed said its National Activity Index was minus 0.74 in July, up from minus 1.82 in June, and its highest level since January 2008. June's index was originally reported at minus 1.80.

The index has been negative, indicating below-trend growth, since June 2007.

The three-month moving average, which smoothes out monthly fluctuations, rose to minus 1.69 in July from June's 2.18, previously reported at minus 2.12.

The Chicago Fed targets a level of 0.20 in the three-month average to suggest a recession is over.

July's improvement came mostly in production and income indicators. Manufacturing output rose 1 percent on the month, the biggest increase since December 2006, and capacity utilization rose to 65.4 percent from 64.7 percent.

Employment-related indicators were less weak in July as nonfarm employment fell by a smaller amount and average weekly initial jobless claims fell.

Overall, of the 85 indicators tracked by the Chicago Fed, 35 made positive contributions in July and 50 made negative contributions. Some 61 indicators improved from June to July, 23 deteriorated and one was steady.

The Chicago Fed said the amount of slack in the economy indicates low inflationary pressure from economic activity over the coming year.

Following are details of the index:

Monthly index:

Jul 09 Jun 09 (prev) May 09 (prev) Jul 08

-0.74 -1.82 -1.80 -2.50 -2.30 -1.29

Three-month moving average:

Jul 09 Jun 09 (prev) May 09 (prev) Jul 08

-1.69 -2.18 -2.12 -2.71 -2.65 -1.17

NOTES:

Zero values in the index indicate a national economy expanding at historical trends, while negative values indicate below-trend growth and positive values signal growth above trend, the Chicago Fed said.

The 85 economic indicators that comprise the Chicago Fed's index are drawn from four categories: production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories.

Inflation