WRAPUP 3-U.S. jobless claims tumble, service sector slows
* Jobless claims drop 27,000 last week
* ISM services index falls to 53.5 from 56.0
* Claims data may lift cloud over the job market
By Lucia Mutikani and Leah Schnurr
WASHINGTON/NEW YORK, May 3 (Reuters) - The number of Americans filing new claims for jobless aid dropped by the most in nearly a year last week, easing fears the United States' labor market recovery was stalling.
That relief was tempered, however, by other data on Thursday showing services employment declined in April to its lowest level since December, dampening activity in the vast sector. The report indicated U.S. companies are still hiring, though not as fast as they did early in the year.
"It's consistent with the idea that we're seeing moderate job growth overall," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
Recent data has suggested the U.S. economic recovery may have lost some momentum as the second quarter got underway. Those jitters were somewhat offset by data earlier in the week showing the U.S. manufacturing sector picked up pace in April.
The mixed labor market indicators precede Friday's much watched payrolls report in which analysts expect to see a rebound in hiring during April.
Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 365,000, the Labor Department said on Thursday. It was the biggest weekly fall in claims since early May last year and exceeded expectations for a fall to 380,000.
Separately, the Institute for Supply Management said its services employment gauge slipped to 54.2 from 56.7 in March.
The bigger-than-expected decline in new claims lifted some of the dark cloud cast on Wednesday by data from payroll processor ADP that showed private employers in April created the fewest jobs in seven months.
The jobless claims data falls outside the survey week for April payrolls and thus has no direct bearing on the jobs number. According to a Reuters survey, employers added 170,000 new jobs last month, an improvement over March's disappointing 120,000.
However, there is a downside risk to this forecast. Initial claims were elevated for much of April and the ADP survey showed private employers added only 119,000 jobs last month. The drop in the service sector employment gauge also adds to that risk.
Reports from U.S. companies reflected the muddled economic picture.
Citing "patchy" improvement in the economy, General Motors Co gave a disappointing six-month outlook.
Consumers also appeared to pull back somewhat in April as several large U.S. retailers, including Target Corp, Macy's Inc and Gap Inc, missed sales estimates.
SLOW START TO THE SECOND QUARTER
The Institute for Supply Management said its services index fell to 53.5 last month from 56.0 in March, missing economists' forecasts for a modest decline to 55.5.
A reading above 50 indicates expansion in the sector, which accounts for about two-thirds of U.S. economic activity.
The forward-looking new orders index dropped to 53.5 from 58.8. However, companies saw a build-up in orders and an increase in export orders, suggesting they will need to ramp up production.
"We're seeing some softness in the economy after a good start to the year," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis.
"We think it's a temporary cooling off and that the outlook is still favorable this year because of easy money policies around the world and declining inflation."
The day's data left U.S. stocks lower in mid-day trading. Treasuries prices were little changed.
The ISM data echoed a report from China that showed the services sector there also cooled in April, retreating from a 10-month high hit in March.
TALKING ABOUT THE WEATHER
Most economists have viewed the pull-back in job growth as payback after the weather-induced gains in the previous months. Nonfarm payrolls averaged 246,000 jobs per month between December and February.
Federal Reserve Chairman Ben Bernanke said last week the warm winter had probably brought forward some of the hiring by companies, likely artificially boosting payrolls in January and February.
Rounding out the picture of the labor market, a separate report from Challenger, Gray & Christmas on Thursday showed planned layoffs by employers rose 7.1 percent last month as cash-strapped state and local governments laid off teachers.
A second report from the Labor Department showed nonfarm productivity fell in the first quarter as companies hired more workers to maintain output. A moderate rise in wages suggested little pressure on company profits and inflation.
Productivity slipped at a 0.5 percent annual rate after rising at an upwardly revised 1.2 percent rate in the last three months of 2011.
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