WASHINGTON Factory activity in the U.S. Midwest accelerated in June, fostering hopes for a pick-up in economic growth in the third quarter, despite signs of lingering weakness in the labor market.
The Institute for Supply Management-Chicago said on Thursday that its business barometer jumped to 61.1 after slowing abruptly to 56.6 in May. The gain defied economists' expectations for a drop to 54.
The sturdy factory activity in the automotive-heavy region snapped a string of weak regional manufacturing surveys and raised optimism the economy may start to emerge from the soft patch it became stuck in the first half of the year.
"This may be an indication that we are at least at the bottom of this slowdown, not only in manufacturing but also economic," said Millan Mulraine, senior macro strategist at TD Securities in New York. "In the months ahead we are likely to see a resurgence in growth."
But optimism was tempered somewhat by a separate report from the Labor Department showing initial claims for state unemployment benefits slipped just 1,000 to 428,000 last week. Economists had expected claims to drop to 420,000.
It was the 12th straight week that claims have been above 400,000, a sign the labor market has stagnated. Employment stumbled badly in May, with employers adding just 54,000 jobs -- the fewest in eight months.
JAPAN ON THE MEND
The economy has been slammed by high gasoline prices and supply chain disruptions in the auto sector after the March earthquake in Japan.
Many economists and the Federal Reserve, which ends its latest round of monetary stimulus on Thursday, have always maintained the obstacles to growth in the first six months of the year were temporary.
Still, some analysts had begun to speculate the Fed might be forced to offer further stimulus given signs of weakness.
Thursday's factory data and falling gasoline prices, which are down 39 cents from a peak of $4.02 a gallon in early May, suggest the central bank's forecast is on track, lessening the need for more monetary support for the economy.
The brightening manufacturing picture was enhanced by a Kansas City Fed survey that showed factory production in its region rebounded strongly this month after slumping in May.
The bullish reports prompted some institutions, including Deutsche Bank and JPMorgan, to raise their forecasts for Friday's Institute for Supply Management index of national factory activity. They now expect the index to show underlying strength in a sector that has led the economic recovery.
"The recovery in the Chicago PMI strongly suggests that manufacturing activity got a noticeable boost from improving auto sector conditions in the back half of the month," said Joseph LaVorgna, Deutsche Bank chief U.S. economist.
Recent surveys from the New York and Philadelphia regional Fed banks have shown steep declines in factory activity in those two areas, but LaVorgna said the Chicago PMI has a bigger weighting in the ISM index than the other two combined.
A report on Wednesday showed Japanese factory output jumped by the most in almost 60 years in May, pointing to a speedy restoration to earthquake-damaged supply chains.
The relatively strong factory data and optimism Greece would avoid a debt default helped stocks on Wall Street to post their biggest four-day rally since September.
Prices for U.S. government debt fell. The dollar weakened against a basket of currencies.
Details of the Chicago PMI survey were generally upbeat, with new orders and production rising. The employment index was lower but it still indicated expansion.
A shortage of parts from Japan had forced some U.S. automakers to bring forward their summer annual plant shutdowns, which may have helped to keep jobless claims elevated. Automakers normally shut down for retooling in July.
"We believe there could have been an upward bias to the most recent claims data due to earlier than normal auto plant shutdowns this year and some severe flooding," said Daniel Silver, an economist at JPMorgan in New York.
Data on business lending also offered hope the economy is poised to pick up in coming months.
The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose a record 26 percent in May from a year earlier to its highest since July 2008.
(Additional reporting by Ann Saphir in Chicago; Editing by Andrea Ricci and Andrew Hay)