WRAPUP 5-U.S. jobless claims fall, manufacturing stumbles

* New unemployment claims near two-year lows

* Producer prices fall for third straight month in June

* Industrial production barely rises, manufacturing falls

* Factory activity slows sharply in two regions in July
(Updates markets to close)

By Lucia Mutikani

WASHINGTON, July 15 (BestGrowthStock) – New U.S. claims for jobless
benefits tumbled to a near two-year low last week, but a modest
gain in industrial output and a third monthly drop in wholesale
prices in June confirmed a slackening in the economy’s
recovery.

Other data on Thursday also implied the slowdown in
manufacturing extended into July, but analysts said there was
no evidence the economy was sliding back into recession.

“The numbers are consistent with a slowdown in the rate of
growth in the U.S. and the global economy, but not a double
dip,” said Nigel Gault, chief U.S. economist at IHS Global
Insight in Lexington, Massachusetts. “The evidence is not
saying we have lapsed; the factory indicators are still
pointing to growth.”

Initial claims for state unemployment benefits dropped
29,000 to 429,000 last week, the lowest level in 23 months, as
seasonal layoffs at factories eased, the Labor Department said.
That was well below market expectations for a fall to 450,000.

In a second report, the department said producer prices
fell 0.5 percent last month as gasoline prices dropped and food
costs recorded their largest decline since April 2002.

Stripping out food and energy costs, prices edged up 0.1
percent after increasing 0.2 percent in May.

The relatively good news on employment was overshadowed by
a Federal Reserve report showing industrial production rose 0.1
percent last month, braking sharply from May’s 1.3 percent
advance. Manufacturing output declined 0.4 percent, snapping a
three-month streak of gains.

That weakness probably persisted this month, with measures
of factory activity in New York state and the mid-Atlantic
region slowing sharply from June. Growth in New York state was
the slowest in seven months, while expansion in the
mid-Atlantic region retreated to levels last seen in August.

Stocks on Wall Street initially fell on the sluggish
manufacturing, but recouped losses to end flat as financial
shares rose on reports the Securities Exchange Commission was
going to settle fraud charges with Goldman Sachs (GS.N: ).

But the data ignited a government bond rally, which pushed
the yield on the two-year Treasury note to an all-time low. The
U.S. dollar index (Read more about the global trade. ) (.DXY: ), which measures the greenback against
six major currencies, hit a two-month low.

RECOVERY LOST MOMENTUM

The manufacturing reports reinforced views that the
recovery from the worst recession since the 1930s lost momentum
in the past few months — much sooner than most economists had
expected. The data followed a report on Wednesday showing a
second monthly decline in retail sales in June.

“We are in this economic environment now where it’s one
step forward, one step back. We will skate along the bottom
with slow growth for a long time,” said Howard Simons, a
strategist at Bianco Research in Chicago.

The recovery that started in the second half of 2009 has
been largely driven by the rebuilding of inventories from
record low levels and government stimulus, which spurred
consumption by households. The inventory cycle appears to be
running its course and the flow of stimulus money is slowing.

The Fed trimmed its 2010 growth forecast at its last
policy-setting meeting in June. Many private economists have
cut growth estimates for the second quarter and the full year.

“We are pausing a bit in the recovery because the scramble
to rebuild inventories is coming to an end and we are depending
on underlying demand growth, which is fairly slow. But I don’t
think it’s negative,” IHS Global Insight’s Gault said.

The moderation in factory activity in the mid-Atlantic
region reflected a drop in new orders. Employment measures in
both New York and the mid-Atlantic region both pulled back this
month and working hours were reduced.

Labor market weakness, characterized by a 9.5 percent
unemployment rate, is putting a damper on consumer spending.

A decision by manufacturers such as General Motors, who
normally shut down their plants this time of year for
retooling, to continue production helped to reduce the number
of people filing for unemployment benefits last week.

A Labor Department official said the drop in claims was not
restricted to the auto industry, but manufacturing as a whole,
a factor some analysts believed could result in industrial
output picking up this month after June’s small gain.

Last week, the four-week moving average of new jobless
claims, considered a better measure of underlying labor market
trends, fell 11,750 to 455,250.

With inflation subdued due to weak energy prices, high
unemployment and ample spare industrial capacity, analysts
believe the Fed will keep overnight interest rates near zero
until the second half of next year.

Industrial capacity in use held steady at 74.1 percent, up
sharply from a year earlier, but still 6.5 percentage points
below its average from 1972 to 2009, the Fed said.

The combination of sluggish manufacturing and producers’
inability to raise prices has some economists worried that
deflation is stalking the economy.

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Graphic on jobless claims: http://link.reuters.com/nyb77m

Graphic on producer prices: http://link.reuters.com/qec77m
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(Additional reporting by Emily Kaiser, Editing by Chizu
Nomiyama)

WRAPUP 5-U.S. jobless claims fall, manufacturing stumbles