Job market, factory data show weakness (Reuters)

WASHINGTON (Reuters) – New claims for jobless aid unexpectedly rose last week and factory activity along much of the Eastern seaboard contracted early this month, backing the view the Federal Reserve would move soon to boost growth.

However, industrial production edged higher in August and consumer prices rose more than expected, factors that could give U.S. central bankers some pause over putting in place aggressive new measures to help the economy.

Still smarting from the 2007-2009 recession, the U.S. economy barely grew in the first half of this year and a bruising spending battle in Congress spooked consumers into shutting their wallets last month. With growth limping along, the economy also looks very vulnerable to an escalation in Europe's debt crisis.

"Business activity has slowed and confidence has fallen ... but we haven't slipped into a recession yet," said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. "The Fed can still do some additional easing."

The number of Americans filing new claims for state unemployment aid rose unexpectedly to 428,000 in the week ended September 10, the Labor Department said on Thursday.

It was the second straight weekly increase and took initial claims to their highest level since the week ended June 25. Wall Street analysts expected a modest dip.

Despite the data, U.S. stocks rose and debt prices fell after a plan was offered by global central banks to reintroduce dollar liquidity into the strained European banking system.

Peter Kenny, managing director of Knight Capital in Jersey City, New Jersey, said much of the data was bad but not "apocalyptic," and other analysts agreed.

The Philadelphia Federal Reserve Bank said its business activity index registered minus 17.5 in September, an improvement from August but still pointing to contraction for the second straight month.

The New York Federal Reserve Bank said its manufacturing index for New York state fell to minus 8.82 in September -- its lowest level since November. It was the fourth straight month pointing to contraction.

FED TO THE RESCUE

The data could provide an added sense of urgency for Fed Chairman Ben Bernanke and his colleagues, who plan to take an extra day at their policy review next week to deliberate their options. Many economists expect the central bank to unveil new measures to lift growth when the meeting concludes on Wednesday.

Despite dim prospects of the nation's 9.1 percent unemployment rate coming down much any time soon, many Fed watchers expect a relatively modest step to try to bring down long-term interest rates without ramping up dollar printing.

The unexpectedly stiff reading on inflation could provide fodder for a lively central bank debate.

The Labor Department said in a separate report that its Consumer Price Index increased 0.4 percent last month after rising 0.5 percent in July. The reading was higher than analysts' forecasts, with food prices posting their biggest gain since March.

"It will make it more difficult for the Fed to talk about lower rates, even if the economy needs it," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

Analysts now put the odds of a new U.S. recession at nearly one-in-three after recent reports showed no employment growth in August and a plunge in consumer confidence. Consumer spending ground to a halt in August as well.

The core price index -- which excludes food and energy -- rose 0.2 percent last month, in line with expectations and the same as in July. Both the headline and core year-on-year readings moved higher.

In its report on output at the nation's mines, factories and utilities, the Fed said manufacturing production rose 0.5 percent last month as auto production picked up. Utilities' output fell a sharp 3 percent as August was cooler following a bout of unusually hot weather in July. Mining output increased 1.2 percent.

(Additional reporting by David Lawder in Washington and Leah Schnurr and Gertrude Chavez-Dreyfuss in New York; Editing by Andrea Ricci)

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Factory and housing data point to weak growth (Reuters)

WASHINGTON (Reuters) – Factory output in the U.S. central Atlantic region dropped to a two-year low in August and new home sales hit a five-month low in July, the latest signs to suggest the economy is at risk of stalling.

The Richmond Federal Reserve Bank said on Tuesday its index of factory activity in its district fell to minus 10 from minus 1 in July as new orders and shipments weakened sharply.

It was the lowest reading since June 2009.

While the survey covers only a small portion of U.S. manufacturing, it follows a report last week that showed a steep decline in factory activity in the mid-Atlantic region, signaling a potential shrinking in the sector that has shouldered the economy's recovery.

"The manufacturing sector was one of the most consistent pockets of strength in this recovery and all of a sudden it seems to be taking a very severe beating that goes beyond the supply chain disruptions related to the Japan earthquake," said Anthony Karydakis, chief economist at Commerzbank in New York.

The Institute for Supply Management's index of national manufacturing activity stood at 50.9 in July and economists said it would likely fall below the 50 mark in August, which would indicate a contraction.

The index has been steadily declining since March, but that weakness had been blamed mainly on supply chain disruptions from Japan. The August survey will be published on September 1.

The Philadelphia Fed said on Thursday that an index covering factory activity in its region dropped to a near 2-1/2 year low in August.

That survey covered businesses in eastern Pennsylvania, southern New Jersey and Delaware, while the report from the Richmond Fed covered the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia.

Analysts cautioned against interpreting the regional weakness as a sign the economy was already in recession.

RECESSION RISKS UP

The Philly Fed survey has a very small correlation with the national ISM index and much of the decline this month reflected the extreme turmoil in financial markets, which has eroded both business and consumer sentiment.

"Our forecast is for ISM manufacturing index to fall below the 50 mark for the first time since mid-2009, though it will remain above the 46 mark which is consistent with overall economic contraction," said Millan Mulraine a senior U.S. macro strategist at TD Securities in New York.

Economists estimate the odds of a contraction in overall economic activity as high as 50 percent.

Those risks were reinforced by a Commerce Department report showing new single-family home sales slipped 0.7 percent in July to a 298,000-unit annual rate, the lowest since February.

Economists polled by Reuters had forecast sales at a 310,000-unit rate. In the 12 months through July, new home sales rose 6.8 percent.

July's weak sales pace left the supply of new homes on the market unchanged at 6.6 months' worth.

"The recovery cannot count on the housing sector adding much to growth," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the soft data, U.S. stock prices rallied on speculation that a string of weak data could prompt Federal Reserve Chairman Ben Bernanke to announce stimulative measures to support the economy at a gathering of gathering global central bankers in Jackson Hole, Wyoming, later this week.

Bernanke will deliver a keynote address on Friday morning. Traders expecting the Fed chief to outline plans for a new round of bond purchases are likely to be disappointed.

Instead, he is most likely to outline gradualist measures, such as how the Fed could tweak its balance sheet as a way to put further downward pressure on medium- and long-term interest rates.

(Additional reporting by Jason Lange and Glenn Somerville, editing by Neil Stempleman)

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Regional factory activity hits 2-1/2 year low (Reuters)

WASHINGTON (Reuters) – Factory activity in the U.S. Mid-Atlantic region slumped to a nearly 2-1/2 year low in August and home resales unexpectedly dropped in July, dashing hopes for a quick revival in economic growth.

Other data on Thursday also pointed to a darker outlook for the economy, with consumer inflation rising at its fastest pace in four months in July and more Americans than expected claiming new jobless benefits last week.

Stock markets worldwide tumbled on the weak economic data, which stoked concerns that recovery is on the rocks.

Still, economists did not believe that the sharp drop in manufacturing activity signaled that the U.S. economy was sliding back into recession.

"Without a strong rebound in the coming months this will be taken as a very worrying development for policymakers charting the outlook for the second half of the year," said Peter Newland, a senior economist at Barclays Capital in New York.

"That said, 'hard' data so far available for the third quarter have taken a clearly stronger tone and timely jobless claims data are not indicative of a dramatic weakening in the economy," he added.

So far, data ranging from retail sales to industrial production suggest the economy found some momentum early in the third quarter after barely growing in the first half of the year.

New York Federal Reserve President William Dudley said on Thursday the risk of a double-dip recession is "quite low".

"The risks have risen a little bit, but I think we very much still expect the economy to recover. We expect ... growth to be significantly firmer than it was during the first half of the year," he told New Jersey business leaders.

The Philadelphia Federal Reserve Bank's business activity index plummeted to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July.

That was much worse than economists' expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region's manufacturing.

"This report clearly reflects the fact that businesses cut their outlook as a result of the debt limit crises and the resulting downgrade of the U.S. credit rating," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

"I would not read too much into this in terms of the outlook on the economy since manufacturing had been on the rebound in autos and exports and the economy was stuck in first gear for two years."

A second report showed sales of previously owned homes fell 3.5 percent to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.90 million-unit pace.

Separate data from the Labor Department showed initial claims for state unemployment benefits increased 9,000 to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June.

Gasoline, which rose 4.7 percent after falling 6.8 percent the prior month, accounted for about half of the rise in CPI last month.

But core CPI -- excluding food and energy -- rose 0.2 percent after rising 0.3 percent in June.

MARKETS SPOOKED

Morgan Stanley cut its global growth forecast and said that the United States and its major export partner the euro zone were "dangerously close to recession." In a research note that spooked investors, it lowered its U.S. estimate to 1.8 percent GDP growth for 2011 from 2.6 percent and for next year to 2.1 percent from 3.0 percent.

U.S. stocks were down about 4 percent, while Treasury debt prices rose sharply. The dollar rallied on safe-haven flows.

The Federal Reserve last week promised to keep interest rates near zero at least until mid-2013 to boost growth and said the outlook for inflation over the medium-term was subdued.

The claims data covers the survey week for August nonfarm payrolls. Claims dropped by 14,000 between the July and August survey periods, but there are fears that financial markets turbulence could have slowed hiring this month.

"Initial claims were a bit higher than expected, indicating a generally sluggish trend for hiring although still better than where we stood during the second quarter," said Avery Shenfeld, economist at CIBC World Markets in Toronto.

Despite the spike in consumer inflation last month, which also reflected a 0.4 percent rise in food prices, inflation generally remains contained.

New motor vehicle costs were unchanged after five straight months of hefty gains. This likely reflects an improvement in supplies as disruptions caused by the March earthquake in Japan fade. Motor vehicle production rebounded sharply in July.

In the 12 months to July, core CPI increased 1.8 percent -- the largest increase since December 2009. This measure has rebounded from a record low of 0.6 percent in October and Fed would like to see that closer to 2 percent.

Overall consumer prices rose 3.6 percent year-on-year, rising by the same amount for a third straight month.

Within the core CPI basket, shelter costs rose 0.3 percent, the largest gain since June 2008, after advancing 0.2 percent in June. Shelter has increased since October as a persistently weak housing market drives Americans into renting.

The increase in apparel prices slowed to 1.2 percent from June's 1.4 percent increase.

(Additional reporting by Leah Schnurr in New York; Editing by Andrea Ricci)

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Factory growth slows, casts shadow on economy (Reuters)

WASHINGTON (Reuters) – Manufacturing grew at its slowest pace in two years in July as new orders contracted, a troubling development for the faltering economy.

The Institute for Supply Management said on Monday its index of national factory activity fell to 50.9, the lowest level since July 2009, from 55.3 in June.

Economists had expected a reading of 54.9. A reading below 50 indicates contraction in manufacturing.

The economy almost ground to a halt in the first half of the year, government data showed on Friday, with output rising at a tepid a 1.3 percent annual pace in the second quarter after advancing just 0.4 percent in the prior period.

The ISM report suggested the much-anticipated bounce back in growth in the second half would probably be feeble.

"These are the types of numbers that are consistent with what we saw with the GDP numbers," said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis.

"Absent a governmental shock, we would dredge forward with this stagnant economic performance. We'll be mired in this 1 to 2 percent (growth) environment we have been in."

Congressional leaders were scrambling to line up Republican and Democratic votes for a White House House-backed deal to raise the U.S. borrowing limit and avert a debt default.

The deal, which raises the $14.3 trillion debt ceiling and cuts about $2.4 trillion from the deficit over the next decade, was hammered out on Sunday.

Stock indexes turned negative after the factory data while bond prices rose. The dollar fell against the yen and the Swiss franc, but rose against the euro.

Manufacturing, which accounts for about 12 percent of gross domestic product, has shouldered the weak recovery from the 2007-09 recession.

Activity last month was held back by weak new orders, whose index fell to 49.2 from -- the lowest in two years, from 51.6 in June. Prices paid index fell to 59 from 68, while the employment index fell to 53.5 from 59.9.

Nonfarm jobs likely rose 85,000 in July, according to a Reuters survey, after June's paltry 18,000 gain. The Labor Department will release its monthly jobs data on Friday.

A separate report from the Commerce Department showed construction spending advanced 0.2 percent to an annual rate of $772.32 billion, the Commerce Department said. May's construction spending was revised to a 0.3 percent increase rather than the previously reported 0.6 percent decline.

Economists had expected construction spending to be flat in June. Overall construction spending fell 4.7 percent from a year ago.

Private construction spending rose 0.8 percent to a seven-month high as an increase in nonresidential outlays offset a second straight month of declines in spending on residential projects.

Spending on public construction projects dropped 0.7 percent to $278.91 billion, the lowest level since March 2007. The decline reflected weak spending on federal projects, which dropped 2.2 percent. State and local government spending fell 0.6 percent to the lowest level since November 2006.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

(This story is corrected in the fifth paragraph to read "second half" rather than "second quarter.")

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Data points to underlying factory strength (Reuters)

WASHINGTON (Reuters) – New orders for U.S. manufactured goods and a gauge of business spending plans rose in May, easing fears of a sharp slowdown in factory activity.

Durable goods orders increased 1.9 percent after dropping 2.7 percent in April, the Commerce Department said on Friday, with a proxy of business spending also rebounding strongly.

An improvement across the board in May and revisions to April's figures that showed smaller declines than previously reported, pointed to underlying strength in a sector that has powered the economic recovery.

Economists had expected durable goods orders, a leading indicator of manufacturing health, to rise 1.5 percent in May. Durable goods are items ranging from toasters to aircraft that are meant to last three years or more.

The report came as a relief to investors after recent regional factory data had shown some signs of fatigue.

Supply chain disruptions after the March earthquake and tsunami in Japan have been constraining production and Friday's data suggested the impact of the disasters might be waning.

The durable goods report also suggested the economy was likely to regain momentum later in the year.

"This supports our view that the economic 'soft patch' will not endure meaningfully into the second half," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

"It also leads us to wonder whether the recent, sharp declines in various production gauges, such as the New York Empire and Philly Fed surveys, were a reaction to negative news earlier in the quarter."

The better-than-expected report helped to curb losses on Wall Street, where stocks fell on concerns about the Italian banking sector and uncertainty about passage of a Greek austerity plan.

Prices for U.S. government debt were mostly up, while the dollar rose against a basket of major currencies.

GROWTH REVISED A TOUCH HIGHER

Despite its leading role, manufacturing only accounts for about 11.7 percent of U.S. gross domestic product and roughly 9 percent of total employment.

Both the Obama Administration and business leaders would like manufacturing to once again become the mainstay of the U.S. economy, after losing out to emerging markets where production costs are relatively low.

President Barack Obama on Friday launched an initiative to boost manufacturing jobs by teaming government up with companies and universities to invest more than $500 million in advanced technologies.

The economy grew at an annual rate of 1.9 percent in the first quarter, the department said in another report, up from a previously estimated 1.8 percent. That marks a sharp slowdown from the 3.1 percent rate in the fourth quarter.

The slowdown at the start of the year has lingered into the second quarter. The Federal Reserve on Wednesday cut its forecasts for U.S. economy growth for both this year and next, while stating hope some temporary restraints would soon lift.

Further clues on the health of the manufacturing sector will come next week in a series of regional surveys capped by data on Friday on national manufacturing from the Institute for Supply Management.

The weak surveys from the New York and Philadelphia Federal Reserve banks have raised the risk the ISM's index of national factory activity could contract in June after 22 months of expansion. Economists, however, are looking for a slowing in activity, not a decline.

TRANSPORTATION ORDERS UP

Durable goods orders in May were a buoyed by 5.8 percent bounce back in transportation equipment, with motor vehicle orders rising 0.6 percent after plunging 5.3 percent the previous month.

That suggested some improvement in auto production, which has been hit by a shortage of parts from Japan.

Excluding transportation, durable goods orders increased 0.6 percent after a 0.4 percent fall in April.

Outside of transportation, orders for machinery, primary metals, capital goods, electrical equipment and appliances, and computers and electronic products all rose.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rebounded to increase 1.6 percent last month after a 0.8 percent fall in April. Economists had expected a 1.0 percent increase.

"Business continues to spend on new equipment, the only mystery is why they are not adding to staff to run the machines they are buying," said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York.

Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of GDP product, increased 1.4 percent after falling 1.5 percent in April.

(Editing by Neil Stempleman)

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