Factories weak in early May, job market soft

By Burton Frierson

NEW YORK (Reuters) - The U.S. factory sector started the month on a weak note after declining in April, data showed on Thursday, while the number of workers stuck on jobless rolls hit a four-year high.

Together with poor sentiment among home builders, the data paints a weak picture of the U.S. economy. But it also sends mixed signals on inflation, leaving the Federal Reserve in a dilemma as it seeks to support the economy while keeping price pressures in check.

Factory activity in the U.S. mid-Atlantic region shrank for a sixth straight month in May, and manufacturing in New York State also declined this month, according to reports by regional Federal Reserve banks.

The poor start to May came after nationwide industrial production tumbled a bigger-than-expected 0.7 percent in April due to the most severe contraction in the manufacturing sector in nearly three years, the Federal Reserve said.

"The decline in April industrial production and reduction in manufacturing production is conclusive evidence that the industrial side of the U.S. economy is in a recession," said Daniel J. Meckstroth, chief economist for industry research group Manufacturers Alliance/MAPI.

Stocks rose, shrugging off the weakness in the data and drawing optimism from news of a deal between key members of the U.S. Senate on a sweeping housing rescue plan.

The dollar rose against the euro EUR=, boosted by stocks, as well as concerns that strong euro zone economic growth may be at risk. Government bonds, which benefit from weak economic conditions, were higher.

The Philadelphia Federal Reserve Bank said its business activity index was at minus 15.6 this month, improving from minus 24.9 in April. Economists polled by Reuters had forecast a reading of negative 19.0.

On the labor market front, a government report showed the number of people who remained on jobless benefit rolls after drawing an initial week of aid increased 28,000 to 3.06 million in the week ended May 3.

It was the third consecutive week that continued claims were above 3.0 million and also the highest since March 2004.

The New York Fed's "Empire State" general business conditions index fell to minus 3.23 in May from positive 0.63 in April.

The result was below economists' expectations of a 0.0 reading and was the third time in four months it has been below zero.

U.S. home builder sentiment fell for the first time in four months in May, edging closer to the record low set in December, as market conditions continued to worsen.

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index fell to 19 from 20, within one point of the record low of 18 set in December 2007. The gauge started in January 1985.

INFLATION KERFUFFLE