WRAPUP 4-US jobless claims, price data back low rates policy

* New jobless claims unexpectedly rise last week

* Consumer prices post biggest drop in nearly 1-1/2 years

* Core inflation rate barely rises, backs low rates

* Mid-Atlantic manufacturing activity slows sharply
(Updates markets to close, economist comment)

By Lucia Mutikani

WASHINGTON, June 17 (BestGrowthStock) – New U.S. claims for jobless
aid rose last week while consumer prices notched their largest
decline in nearly 1-1/2 years in May, suggesting interest rates
will remain ultra low to nurse the fragile economic recovery.

Fears growth was slowing were heightened by news on
Thursday that factory activity in June in the country’s
Mid-Atlantic region braked to its slowest pace in 10 months.

Analysts had generally expected the recovery from the most
painful recession since the 1930s to moderate in the second
half of this year as a boost from a rebuilding of business
inventories and massive stimulus from the government faded.

“We are seeing that now. It is slowing as the temporary
lifts from the stimulus and inventories recede, but not
something that is consistent with a contraction of the
economy,” said Keith Hembre, chief economist at First American
Funds in Minneapolis, Minnesota.

Absent a credit shock from the sovereign debt crisis that
started in Greece, analysts do not expect the domestic economy
to slip back into recession. Belt-tightening by European
governments already looks set to slow economies there and take
a small bite out of U.S. growth.

For the labor market, the recession’s biggest casualty,
head winds are proving problematic.

Initial claims for state unemployment benefits increased
12,000 to 472,000 last week as manufacturing, construction and
education sectors shed workers, the Labor Department said.

Financial markets had expected claims to fall to 450,000.
Last week’s data was in the survey period for the government’s
closely monitored employment report for June, and suggested a
soft reading on private payroll growth.

In a second report, the department said the Consumer Price
Index fell 0.2 percent last month, the largest drop since
December 2008, after dipping 0.1 percent in April. This came as
gasoline prices fell by the most in 17 months.

UNINSPIRING GROWTH PACE

“The economy may be expanding, but at a pace that isn’t
inspiring and any concerns about upward price pressure for U.S.
consumers in the near term are dissipating,” said Jim Baird,
chief investment strategist at Plante Moran Financial Advisors
in Kalamazoo, Michigan.

The sluggish growth pace was underscored by the
Philadelphia Federal Reserve Bank’s business activity index
which dropped to 8.0 this month from 21.4 in May. That was well
below expectations for 20.9. A reading above zero indicates
expansion in the region’s manufacturing.

An employment measure in the survey dropped to a seven
month low, although orders rose. Manufacturing has been boosted
by businesses rebuilding inventories, which were liquidated to
record low levels during the recession.

A record $787 billion stimulus package from the government
also boosted demand, but analysts believe its effect on
spending has longed peaked.

U.S. stocks (Read more about the stock market today. ) initially fell on the claims and factory data,
but eked out small gains in late trade. Prices for U.S.
government debt rose, but the dollar fell versus the euro as
Spain’s bond auction attracted stronger-than expected demand.

Although some fatigue is starting to show in the recovery,
it appears firmly intact. The Conference Board’s leading index,
which tries to predict future levels of economic activity, rose
to a record in May, after stagnating in April.

After falling rapidly last year, jobless claims have
stabilized at troublingly high levels. Analysts see this as a
sign that while layoffs have abated, companies are still not
confident enough to add to payrolls.

A near 10 percent unemployment rate is hurting President
Barack Obama’s approval ratings, and dissatisfaction with the
economy could cost the Democratic Party control of Congress in
November’s mid-term elections.

FED ON HOLD

With unemployment still high and inflation pressures muted,
the Federal Reserve is expected to extend its pledge to hold
overnight interest rates exceptionally low for “an extended
period” when policymakers meet on Tuesday and Wednesday.

The U.S. central bank is not seen lifting rates, currently
near zero, until next year.

“The Fed’s job is very straightforward — provide maximum
monetary accommodation,” said Brian Bethune, chief U.S.
financial economist at IHS Global Insight in Lexington,
Massachusetts. “This will reduce short-term risks of a fall
back and provide a basis for a gradual strengthening in the
underlying momentum of the economy.”

Last month, core inflation, which excludes the volatile
energy and food prices and is closely watched by Fed officials
— edged up 0.1 percent after being flat in April.

In the 12 months to May, the core rate rose just 0.9
percent after increasing by the same margin in April. The
annual core rate has slowed from 1.8 percent in December and is
now at levels last seen 44 years ago.

“We are pushing back our expectations for the first rate
hike from the second quarter of next year to the fourth quarter
of next year,” said Michael Feroli, an economist at JPMorgan in
New York.

Fed officials are alert to the slowdown in core inflation,
but believe a sustainable economic recovery is building and
that prices will soon bottom and turn higher.
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Graphic on jobless claims: http://link.reuters.com/kax52m

Graphic on CPI: http://link.reuters.com/hyz52m

Breakingviews column on CPI ID:nN17102988
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Stock Market
(Additional reporting by Pedro Nicolaci da Costa in Washington
and Burton Frierson in New York; Editing by Neil Stempleman)

WRAPUP 4-US jobless claims, price data back low rates policy