The U.S. recession might be loosening its grip, data released on Wednesday suggested, although analysts cautioned recovery was likely to be long and slow.

U.S. industrial output declined at a slower pace in June and a key regional U.S. factory survey posted its strongest reading in a year this month. Another report showed core U.S. consumer prices edged up at a moderate pace in June, providing further evidence that the U.S. recession was not pushing the country toward a Japan-style deflation and stagnation.

We have no doubt that the post-Lehman collapse in output is over ... but a recovery is still a long way off, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The failure of investment bank Lehman Brothers in September sparked a global financial crisis that pushed the economy much deeper into a recession that began in December 2007.

The U.S. Federal Reserve also gave a somewhat more optimistic outlook, saying the economy probably would not contract as sharply as previously thought in 2009.

In its updated economic projections, released along with minutes from its June policy-setting meeting, the Fed nudged up its 2009 GDP forecast to a range of -1.5 percent to -1 percent, from its April outlook for -2.0 to -1.3.

However, it also raised its unemployment forecast for this year and next, warning that the economic recovery would probably be too anemic to generate much job growth.

Federal Reserve data released earlier on Wednesday showed that U.S. industrial production fell by a smaller-than-expected 0.4 percent last month, reinforcing hopes the pace of the economy's decline was slowing, although the result was helped by strong utilities production.

For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter, when production fell at a 19.1 percent rate.

Wall Street was sharply higher on Wednesday, buoyed by the brightening outlook for the economy and solid quarterly results from Intel Corp.

A separate report from the New York Federal Reserve Bank showed the decline in factory activity in New York state was easing, bolstering recovery hopes. The Empire State business conditions index rose to minus 0.55 in July, the highest reading since April 2008, from minus 9.41 in June.

The improvement reflected a big jump in the new orders index, which reached its highest point since December 2007, while the inventories index fell to a record low.

Economists expect plummeting inventories to lead to a rebound in production and possibly help pull the U.S. economy out of the worst recession in decades.

SLUMP SLOWING

It's still a tentative sign, but consistent with other reports showing that the recession may be near an end, said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis.

Data showing U.S. crude oil stocks fell last week boosted oil prices, but analysts said it was premature to draw any conclusions about the level of industrial demand from the figures.

The U.S. economy shrank at a 5.5 percent annual pace in the first quarter, but economists say the rate of decline appears to have moderated sharply in the second quarter.

A Reuters poll of 70 economists released on Wednesday found that growth was expected to shrink at an annual 1.8 percent rate in the second quarter, before beginning a long, slow recovery.

Conditions for many U.S. households remain tough. Capital One Financial Corp said credit card default rates rose last month as Americans struggled with debt in the face of rising unemployment.

The recession has dampened inflation, but the worry that the downturn could spur a debilitating, broad-based downward spiral in prices has abated.

Consumer prices rose 0.7 percent in June, the biggest gain since July 2008, although most of the increase was due to soaring gasoline prices and so-called core inflation remained relatively tame, Labor Department data showed.

Gasoline prices jumped 17.3 percent last month, the largest increase since September 2005.

Still, compared with the same period last year, the Consumer Price Index was down 1.4 percent, the biggest decline since the period ended January 1950.

Stripping out volatile energy and food prices, the closely watched core CPI edged up 0.2 percent in June to stand 1.7 percent above its year-ago level.

The year-over-year increase of 1.7 percent ex-food and energy clearly shows that last year's deflation fears should now be solidly over, said Tom Sowanick, chief investment officer at Clearbrook Partners in Princeton, New Jersey.

(Additional reporting by Jennifer Ablan and Ellen Freilich in New York; Editing by Neil Stempleman)

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