Jobless claims jump as factory sector contracts

By Burton Frierson

NEW YORK (Reuters) - U.S. manufacturing contracted for a third straight month in April while the number of workers claiming jobless benefits hit a four-year high and planned layoffs soared, according to data on Thursday that showed the economy remained on shaky ground.

Other data showed personal spending in March was higher than expected, but that underlying inflation pressures were unexpectedly strong. In a sign of weakening consumer demand, U.S. auto sales fell sharply in April.

The manufacturing data, released by the Institute for Supply Management, was marginally better than expected, though it was the fourth month in five that the index showed a contraction in manufacturing.

"The ISM index in April confirms that the manufacturing recession continues, but that the severity of the downturn is on the mild side," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an economic research group.

Wall Street stocks traded in positive territory after the ISM data and later rallied, adding strongly to those gains. The dollar also rose to a five-week high against the euro.

U.S. government bonds, which generally benefit more from weak economic data, retreated in the face of higher stocks.

The Institute for Supply Management's index of national factory activity was unchanged in April from March at 48.6. That was better than economists' median forecast for a result of 48.0, according to a Reuters poll, but still below the level of 50 that separates growth from contraction.

"It looks like we came in slightly above expectations, so this number is consistent with positive growth in the economy," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

"This is a very sharp slowdown and it's possible we'll have a recession, but if it doesn't happen in the next quarter, it won't happen. The idea that it is a deep and long collapse is just flatly incorrect. There's no evidence of that," he added.

A housing crisis has chilled U.S. growth and led the Federal Reserve to slash interest rates aggressively. It cut rates another 25 basis points on Wednesday to 2 percent, but hinted it could put its monetary easing cycle on pause as it assessed the growth outlook and inflation pressures.

ISM's gauge of inflation was at its highest since May 2004, highlighting the dilemma of slow growth and strong price pressures facing the Fed.

General Motors Corp (GM.N) posted a 23 percent decline in April sales whiled Ford Motor Co's (F.N) dropped 19 percent.

The two leading U.S. automakers said preliminary data suggested industry-wide sales had fallen below 15 million units on an annualized basis, which would mark the weakest result in more than 15 years.

GLOOMY JOBS REPORTS

The Labor Department said the number of workers remaining on jobless benefits jumped to 3.019 million in the week ended April 19, the highest since April 2004.