U.S. manufacturing output contracts in May

Factory production shrank 0.4 per cent last month, the Federal Reserve said on Friday. Total industrial output, covering factories, mines and utilities, declined 0.1 per cent.

The slackening U.S. recovery and a worsening debt crisis in Europe have increased expectations of a further easing of monetary policy by the Fed, although economists are divided on whether the central bank will act when it meets on Tuesday and Wednesday.

Hiring by U.S. employers has slowed for four straight months, while retail sales contracted in May and new applications for jobless benefits have risen for five of the last six weeks.

In a sign factory sector weakness could extend into June, the New York Federal Reserve Bank's "Empire State" index fell to 2.3, a 15-point drop from the month before and the lowest level since November 2011. That was far below economists' expectations of 13, although the level still points to some growth.

"That is another indication that the U.S. economy is slowing," said Justin Hoogendoorn, a fixed income strategist at BMO Capital Markets in Chicago. "It's an ugly situation."

U.S. stock indexes opened higher on Friday as optimism over possible coordinated action by major world central banks if Sunday's Greek vote causes financial turmoil offset disappointment over the factory data.

Europe's snowballing debt crisis threatens to send the global economy into recession.

Within the Fed's report on U.S. industry in May, the softness in the factory sector was widespread. Output for durable - or long-lasting - goods dropped 0.5 per cent as auto production slid 1.5 per cent. Production for nondurables fell 0.2 per cent.

Utilities output increased 0.8 per cent, while mining was up 0.9 per cent.

Capacity utilisation, a measure of how fully firms are using their resources, slipped to 79.0 per cent in May from 79.2 in the prior month.

Officials at the Fed tend to look at utilisation measures as a signal of how much "slack" remains in the economy - how far growth has room to run before it becomes inflationary.