U.S. data, gloomy steel/car outlooks cloud recovery

WASHINGTON (Reuters) - Two U.S. government reports and gloomy outlooks from global steel and car companies helped suggest economic recovery will be gradual even if growth returns later this year as many economists expect.

A Federal Reserve survey said the pace of the U.S. economic recession slowed or stabilized in most areas of the country but the report pointed to protracted job market weakness and a possible threat to consumer spending.

Wages and compensation were steady or falling in most areas, said the U.S. central bank in its Beige Book survey of economic conditions through July 20.

Earlier, a report showed new orders for U.S. durable goods in June posted their biggest drop in five months. But after stripping out the volatile transportation sector, hit by weak aircraft orders, the data showed a 1.1 percent increase that economists called encouraging.

Upbeat earnings reports in the past few weeks have driven global stock markets higher and prompted investors to take on more risk in their portfolios as they grow increasingly confident the world economy is on the path to recovery.

But U.S. equity markets fell further following the Beige Book report after opening weaker on the durable goods orders.

Falling commodity prices depressed shares in the energy and resources sectors and investors worried that China's banks might be ready to hit the brakes on lending to stem market excesses.

The Dow Jones industrial average .DJI dropped 26 points, or 0.29 percent, to close at 9,070.72 with other stock indexes also moderately lower. European shares had closed generally higher.

U.S. 30-year Treasury bonds gained in price on buying in response to lower share values, while the U.S. dollar also rose broadly on safe-haven demand, hitting a two-week high against the euro. Its rise marked a recovery from recent weakness as rallies in oil prices and stock markets stalled.

"As more reports like this come out, reinforcing the view that the economy is not on the mend just yet, we are going to see Treasuries find support," said Bulent Baygun, head of U.S. interest rate strategy at BNP Paribas in New York.

DEBT DEMAND DOUBT

However, poor demand at a U.S. Treasury auction of $39 billion in five-year debt raised worries about declining appetite for the U.S. government's burgeoning debt.

It was the second lackluster showing in as many days, convincing analysts that the stellar results of debt auctions just a few weeks ago were a fluke and that Thursday's $28 billion seven-year offering could suffer a similar fate.

U.S. crude prices dropped nearly 6 percent, by $3.88, to $63.35 a barrel after an unexpected rise in crude stocks. London Brent slid $3.35 to $66.53 a barrel.

Earlier, data from the U.S. Mortgage Bankers Association showed U.S. mortgage applications fell last week for the first time in four weeks, driven by a drop in demand for home refinancing loans as interest rates climbed.

U.S. President Barack Obama launched a spirited defense of his economic policies, declaring that they had helped save the country from plunging into a depression.

With a spate of polls showing Americans have growing doubts about his policies, Obama said bank and auto bailouts and stimulus spending were needed to stop the economic bleeding.

"We may be seeing the beginning of the end of the recession," he told a campaign-style town hall meeting at a North Carolina school gymnasium on Wednesday.

"Here's what's true. We have stopped the freefall. The market is up and the financial system is no longer on the verge of collapse. That's true. We're losing jobs at half the rate we were when I took office six months ago," Obama said.

STEEL, AUTO OUTLOOKS BEARISH

ArcelorMittal (ISPA.AS) and Nippon Steel Corp (5401.T), the world's two biggest steelmakers, posted quarterly losses on Wednesday and ArcelorMittal's finance chief said he expected global demand for steel, a gauge of the strength of economies, to fall 10 percent this year.

Carmakers, key consumers of steel, also gave downbeat assessments of recovery prospects.

Japan's Nissan (7201.T) said it did not see a convincing recovery in global car demand, despite some bright signs in China. Honda (7267.T) lifted its annual forecast but the boost came from cost cuts and executives were downbeat on demand.

France's Peugeot (PEUP.PA) said Europe's car market would not start recovering until late 2010.

On Wall Street, Time Warner Inc's (TWX.N) quarterly revenue fell a steeper-than-expected 9 percent due to a slump in the major media company's advertising spending and DVD sales, but cost cuts helped profit beat forecasts.

Retail sales in Japan offered more gloom.

They fell a deeper-than-expected 3 percent in June from a year earlier, suggesting worsening job and income conditions were offsetting government stimulus measures in the world's second-biggest economy.

BUBBLE FEARS

This contrasted with more optimistic expectations of many economists, who had expected the United States, the world's biggest economy, to start clawing its way out of the housing-led recession in the third quarter.

According to a Reuters survey, the U.S. economy will show its fourth straight quarter of gross domestic product declines in the second quarter, but at a slower pace. U.S. GDP data is due to be released on Friday.

China's economic growth, fueled by a 4 trillion yuan ($586 billion) pump-priming package and record bank lending, continues to spark economic activity, including infrastructure investment.

Two Chinese construction companies shone in their stock market debuts on Wednesday, with China State Construction Engineering Corp (601668.SS) surging as much as 90 percent in Shanghai and building materials group BBMG Corp (2009.HK) rising 59 percent in Hong Kong.

But they heightened concerns about a speculative stock market bubble forming, and how Beijing might respond, prompting a Shanghai market sell-off.

The main index .SSEC, which is off-limits to most overseas investors, dropped 5 percent in its biggest one-day fall for eight months after a 65 percent rally since March.

(Reporting by Reuters reporters around the world; Writing by Georgina Prodhan; Editing by Matthew Lewis and Tim Dobbyn)