Third quarter strong as jobless claims up

WASHINGTON (Reuters) - A gauge of future economic activity weakened for a second straight month in November and manufacturing in the mid-Atlantic region softened, according to reports on Thursday showing a widening slump in growth.

Signs that weakness was spreading beyond the housing sector overshadowed a government report confirming the economy posted its fastest growth in four years during the third quarter -- just when the subprime mortgage crisis and housing slowdown were beginning to bite.

In a final downbeat note, the Labor Department said new initial claims for jobless benefits climbed more steeply than forecast, signaling that the labor market is softening.

The Commerce Department said gross domestic product, which measures the total output of goods and services within U.S. borders, expanded at a 4.9 percent annual rate in the third quarter, the same as estimated a month ago and the strongest since the third quarter of 2003.

But private-sector analysts and the White House foresee a significant slowdown through at least this year's closing quarter and the first three months of 2008, with rising risks it could turn into recession.

President George W. Bush, speaking at a news conference, said the economy remained fundamentally strong but also said he was willing to consider all options to give growth a boost.

A report from the Conference Board showed its index of leading indicators weakening sharply for a second straight month in November, with seven of the private-sector research group's 10 measures of economic activity down from October.

Separately, the Philadelphia Federal Reserve Bank said factory activity in the Mid-Atlantic region fell to a four-year low in December. Its business activity index dropped to minus 5.7 in December -- lowest since April 2003 and far below forecasts -- from 8.2 in November.

The Labor Department said initial claims for jobless benefits rose 12,000 last week to 346,000 and the four-week moving average of claims -- a more reliable gauge of labor market conditions -- hit its highest in more than two years.

Despite the deluge of negative economic news, stock prices eked out modest gains as stronger profits for some key firms, like Oracle Corp, offset nagging worry about financial companies' exposure to bad debt.

The Dow Jones industrial average added 38.37 points to 13,245.64. The Nasdaq Composite Index rose 39.85 points to 2,640.86.

Bond prices were mixed as investors mulled where to put their money. Shorter-dated issues benefited as some sought safety, helping two-year notes rose 2/32 in price to yield 3.09 percent. But benchmark 10-year U.S. Treasury notes fell 2/32 and were yielding 4.04 percent.

Analysts said the economic outlook was darkening.

"All in all, the fourth quarter seems headed for between zero and 1 percent growth, and as the credit squeeze tightens its grip, we expect little different in the first quarter," said economist Nigel Gault of Global Insight Inc in Lexington, Mass.

Economist Kurt Karl of reinsurer Swiss Re in New York said that based on the economy's current performance, the third-quarter GDP figure seemed "outrageously unrealistic" and that the economy's future looks increasingly perilous.

"The probability continues to rise for a recession," Karl said, especially in light of the weakening in the labor market. "It's still hiring, not firing, but now we're getting to the firing point."

The Manufacturers Alliance/MAPI said in its quarterly report that the housing market troubles will probably cause the manufacturing sector to experience "turbulent times" next year. The nonprofit research group said it expects housing starts to fall 28 percent in 2008, foreshadowing the worst housing market in the post-World War II period and preventing manufacturing from growing.

The GDP report showed spending on new-home building contracted at a 20.5 percent rate during the third quarter, the steepest quarterly fall since the start of 1991, when the economy was headed toward a recession.

A price gauge closely watched by the Fed -- personal consumption spending excluding food and energy -- rose at a revised 2 percent rate, well ahead of the 1.4 percent pace posted in the second quarter.

Separately, the Chicago Federal Reserve Bank said its National Activity Index declined again in November, though less rapidly than in October.

The index -- a weighted average of 85 indicators that covers production, consumption and housing as well as sales, factory orders and inventories -- has been negative, indicating below-trend growth, since August.

(Additional reporting by Nancy Waitz; Editing by Dan Grebler)