Job market still sickly, factories remain weak

NEW YORK (Reuters) - The sickly U.S. labor market showed little sign of improvement last week and continued weakness in the manufacturing sector held out no hope that unemployed workers would find a place in struggling factories.

Government data showed on Thursday that the number of U.S. workers filing new claims for jobless benefits remained at recessionary levels last week, even though they eased from a 26-year peak.

The claims were up by more than 200,000 from a year ago and waves of layoffs announced by large corporations give little prospect they will ease soon to levels that resemble a healthy economy.

"This provides further evidence that not only are we in a deep recession, it may be one of the worst recessions seen in the past 50 years," said Dana Saporta, an analyst at Dresdner Kleinwort in New York.

Initial claims for state unemployment insurance benefits fell 21,000 to a seasonally adjusted 554,000 in the week ended December 13 from an upwardly revised 575,000 the previous week.

Weekly jobless claims of 400,000 to 500,000 have coincided with the most recent recessions.

Factory activity in the U.S. Mid-Atlantic region contracted in December but at a less severe rate than in the previous month, a survey showed.

The Philadelphia Federal Reserve Bank reported its business activity index at minus 32.9 after a reading of minus 39.3 in November. Economists had expected a drop to minus 40.0.

Still, any reading below zero indicates contraction in the region's manufacturing sector. Worse yet, the report's gauge of employment fell to its lowest level since 1982.

"The Philadelphia Fed's general business conditions index, though still very weak, was not as dire as forecasts," said John Ryding, chief economist at RDQ Economics. "However, the details of the report was weaker than the headline."

U.S. government bonds, which benefit from economic weakness, rose on the day. Stocks fell.

Economists believe the economy is on track for its longest recession since the Great Depression of the 1930s.

To halt the slide, the Federal Reserve has made unprecedented efforts. On Tuesday it cut its key overnight lending rate to a record low of zero-to-0.25 percent from 1.0 percent previously.

However it will take some time for the central bank's initiatives, which include programs to support mortgage and other lending markets, to work, while some analysts say a massive stimulus plan of job-creating public works projects is also needed.

GOOD NEWS FROM THE HOME FRONT

Still, there was good news from mortgage market, which will be key to reviving an economy that has been knocked to the floor by an implosion in house prices.

The average 30-year U.S. mortgage rate fell just over 1/4 point to 5.19 percent, the lowest level since Freddie Mac started its weekly survey 37 years ago.

Underscoring the weak economy, though, the U.S. Conference Board's index of Leading Economic Indicators fell to its lowest level in more than four years in November.

The index fell 0.4 percent to 99.0, the weakest reading since February 2004. Analysts had forecast a 0.5 percent fall.

"The economy has been in recession for a year and the latest indicator data show no signs of improvement in the first months of 2009," said Ken Goldstein, an economist at the Conference Board.

On the jobs front, analysts polled by Reuters had forecast 558,000 new jobless claims versus a previously reported 573,000 the week before.

The four-week moving average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, rose to 543,750 from 541,000 the prior week, keeping the average at a 26-year high.

Continuing claims fell to 4.38 million in the week ended December 6 after scaling a 26-year high of 4.43 million the previous week.

For now, the news is likely to get worse before it gets better. U.S. auto plant shutdowns over the holidays will likely boost claims for jobless benefits more than usual this winter, with Chrysler's month-long shutdown.

Chrysler LLC said it would shut down all of its manufacturing operations from the end of this week for at least a month, citing the credit crisis and dwindling sales.

"Looking ahead, the distortions that typically impact the initial claims data through early January are likely to be exacerbated by widespread auto plant closures," said Michelle Girard, a strategist at RBS Greenwich Capital.

(Additional reporting by Lucia Mutikani and Nancy Waitz in Washington, Lynn Adler in New York; Editing by Leslie Adler)