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.