WASHINGTON (Reuters) – Factory activity in the U.S. Midwest accelerated in June, fostering hopes for a pick-up in economic growth in the third quarter, despite signs of lingering weakness in the labor market.
The Institute for Supply Management-Chicago said on Thursday that its business barometer rose to 61.1 after slowing abruptly to 56.6 in May. The gain defied economists' expectations for a drop to 54.
The sturdy factory activity in the automotive-heavy region snapped a string of weak regional manufacturing surveys and raised optimism the economy may start to emerge from the soft patch it became stuck in the first half of the year.
"This may be an indication that we are at least at the bottom of this slowdown, not only in manufacturing but also economic," said Millan Mulraine, senior Macro Strategist at TD Securities in New York. "In the months ahead we are likely to see a resurgence in growth."
But optimism was tempered somewhat by a separate report from the Labor Department showing initial claims for state unemployment benefits slipped just 1,000 to 428,000 last week. Economists had expected claims to drop to 420,000.
It was the 12th straight week that claims have been above 400,000, a sign the labor market has stagnated. Employment stumbled badly in May, with employers adding just 54,000 jobs -- the fewest in eight months.
The economy has been slammed by high gasoline prices and supply chain disruptions in the auto sector after the March earthquake in Japan.
Many economists and the Federal Reserve, which ends its latest round of monetary stimulus on Thursday, have always maintained the obstacles to growth in the first six months of the year were temporary.
Some analysts had begun to speculate the Fed might be forced to offer further stimulus given signs of economic weakness, but Thursday's data suggested its forecast was on track.
The brightening manufacturing picture was also enhanced by a Kansas City Fed survey that showed factory production in its region rebounded strongly this month after slumping in May.
The bullish reports raised the possibility that Friday's Institute for Supply Management survey for June could show unexpected strength. National factory activity had been expected to cool.
"We look for the ISM manufacturing index to move lower again in June. Given the stronger-than-expected Chicago PMI reading, the risks are slightly to the upside," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
The relatively strong factory data helped stocks on Wall Street to rise for a fourth straight day. Prices for U.S. government debt fell and the dollar weakened against a basket of currencies.
JAPAN ON THE MEND
Details of the Chicago PMI survey were generally upbeat, with new orders and production rising. The employment index was lower but it still indicated expansion.
A shortage of parts from Japan has forced some U.S. automakers to bring forward their summer annual plant shutdowns, which may have helped to keep jobless claims elevated. Automakers normally shut down for retooling in July.
"We think in July definitely we will start to see the (claims) number drift back down," said Brett Ryan, an economist with Deutsche Bank in New York. "We do think from anecdotal evidence from Toyota and other automakers that hiring will go up in July."
Japanese factory output jumped by the most in almost 60 years in May, data showed on Wednesday, as manufacturers restored supply chains damaged by the earthquake.
Data on business lending on Thursday also offered hope the economy is poised to pick up in coming months.
The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose a record 26 percent in May from a year earlier to its highest since July 2008.
(Additional reporting by Ann Saphir in Chicago; Editing by Andrea Ricci)
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