U.S. machine tool demand plunged nearly 23 percent to its lowest annual level on record in 2002 as overcapacity and competition overseas reduced consumption for U.S. manufacturing equipment, two industry groups said on Sunday in a joint report.

The American Machine Tool Distributors' Association and the Association for Manufacturing Technology said total 2002 demand for manufacturing equipment fell to $2.060 billion, down 22.8 percent, from $2.669 billion in 2001.

However, December consumption rose 45.5 percent to $198.19 million from November's $136.18 million.

Even if the economy manages to regain its footing, the industry groups said machine tool demand will continue to drag because many businesses already possess a glut of capacity leftover from the go-go days of the 1990s.

"We are a long way from where we were (in the 1990s), and I don't think we will see a return in 2003, or for that matter in 2004," Ralph Nappi, AMTDA president, told Reuters.

"We'll get back, but it will be a different mix of business than it ever was in the past," he said.

The mix will likely include a variety of products including both new machines and software designed to improve the productivity of existing equipment, Nappi said.

Tool makers have begun pushing for new incentives to keep businesses from fleeing overseas to countries such as China, where labor costs are lower.

Some officials said the Bush administration's economic stimulus plan introduced last year has done little to boost capital investment, which has since fallen 20 percent.

"Let's not ask the government to give incentives," said Nappi. "Let's ask them to take down the barriers so we can be more competitive."

The U.S. economy showed signs on Friday that it may be shrugging off recent weakness, with jobs in January being created at the fastest pace in more than two years.

The Labor Department (news - web sites) said 143,000 new jobs outside the farm sector were created in January, nearly double Wall Street forecasts, sending the unemployment rate to a four-month low of 5.7 percent.

The surprising turnaround in January marked a vast departure from December when the economy shed 156,000 jobs.

Machine tools are used to shape metal for such products as car engines, refrigerators and television sets. Demand for these tools can provide a leading indicator of the pace of manufacturing.

The machine tools report is generally based on a survey of about 200 manufacturers, distributors and importers of machine tools that represent 76 percent of the machine tool market.