Factory sector contracts, jobless claims jump

By Burton Frierson

NEW YORK (Reuters) - Manufacturing contracted for a third straight month in April while the number of workers claiming jobless benefits hit a four-year high and planned layoffs soared, according to data on Thursday that showed the economy remained on shaky ground.

Other data showed personal spending in March was stronger than expected -- a bit of good news in an economy that is largely fueled by consumer spending -- but inflation pressures increased.

The manufacturing news, released by the Institute for Supply Management, was marginally better than expected, though it was still the fourth time in five months the index showed manufacturing contracting.

"It looks like we came in slightly above expectations, so this number is consistent with positive growth in economy," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

"This is a very sharp slowdown, and it's possible we'll have a recession, but if it doesn't happen in next quarter, it won't happen. The idea that it is a deep and long collapse is just flatly incorrect. There's no evidence of that."

The Institute for Supply Management said its index of national factory activity was unchanged in April from March at 48.6. That was better than economists' median forecast for a result of 48.0, according to a Reuters poll, but still below the level of 50 that separates growth from contraction.

Stocks held steady in positive territory after the ISM data and the dollar rose to a five-week high against the euro.

Government bonds held steady at higher levels, though they generally benefit more from weak economic data.

The number of workers remaining on jobless benefits climbed to a four-year high, the Labor Department said, which earlier helped prices in the bond market as investors bet on another rate cut by the Federal Reserve.

The number of workers remaining on jobless benefits jumped to a bigger-than-expected 3.019 million in the week ended April 19. That was the highest level since April 2004.

A housing crisis has chilled U.S. growth and led the Federal Reserve to slash interest rates aggressively. It cut benchmark rates another 25 basis points on Wednesday to 2 percent but hinted it could put its monetary easing cycle on pause as it assessed the growth outlook and inflation pressures.

ISM's gauge of inflation was at its highest since May 2004, highlighting the dilemma of slow growth and strong price pressures facing the Fed.

GLOOMY JOBS REPORTS

Initial claims for jobless benefits increased more than expected to 380,000 in the week ended April 26, from a slightly upwardly revised 345,000 the previous week.

Adding to the gloomy jobs picture, a report from the Chicago-based Challenger, Gray and Christmas showed planned job cuts by U.S. companies rose 68 percent in April from the prior month to a 19-month high.

U.S. construction spending fell a steeper-than-expected 1.1 percent in March after the prior month was revised sharply higher, a Commerce Department report showed, with private home building suffering a record decline.

A separate release from the Commerce Department showed that U.S. personal spending rose by 0.4 percent in March, twice as much as forecast, while a key inflation measure was up by a bit more than expected.

Economists polled by Reuters had forecast personal spending to rise 0.2 percent compared with a 0.1 percent gain the previous month as the U.S. housing crisis chilled economic activity and pinched consumers.

The Commerce Department said that personal income was up 0.3 percent in March, slightly under forecasts for a 0.4 percent rise and after a 0.5 percent February gain. But adjusted for inflation, income stagnated after increasing by 0.3 percent in February.

The overall personal consumption expenditures price index, which measures the price pressures faced by consumers, rose 0.3 percent in March from a 0.1 percent increase the month before.

Excluding volatile food and energy prices, the core PCE price index, which is the Federal Reserve's preferred measure of inflation, was up 0.2 percent versus forecasts for a 0.1 percent rise. That followed a 0.1 percent gain in February.

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