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WASHINGTON/NEW YORK (Reuters) - Manufacturing closed out its weakest quarter in three years this month and the number of Americans filing new claims for jobless benefits held near two-month highs last week, suggesting the economic recovery is failing to gain traction.
Other reports on Thursday suggested the economy's weakness could prove protracted, with factory activity in the Mid-Atlantic contracting for a fifth straight month in September and a measure of future economic activity dipping in August.
"I don't think the economy is going anywhere fast," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "The jobs market is still very difficult and manufacturing, which was a key pillar of the recovery is beginning to crack."
The economy grew at a sluggish 1.7 percent annual rate in the second quarter, and economists said growth this quarter was unlikely to have picked up much -- particularly with factory activity showing fatigue.
Financial information firm Markit said its U.S. "flash," or preliminary, manufacturing Purchasing Managers Index stood at 51.5 in September, unchanged from August. A reading above 50 indicates expansion.
The index averaged 51.5 in the third quarter, below the 54.2 registered between April and June, for its worst showing since the third quarter of 2009. At 51.2, the output component was the lowest since September 2009.
"With output growing at the slowest pace since the recovery began, the manufacturing sector may have even acted as a slight drag on the economy in the third quarter," Markit chief economist Chris Williamson said.
A separate report from the Labor Department showed initial claims for state unemployment aid edged down just 3,000 to a seasonally adjusted 382,000 last week.
Economists had attributed a spike in claims in the prior week to Tropical Storm Isaac, but the minimal improvement in the latest reading pointed to fundamental weakness.
The four-week moving average for new claims, a better measure of labor market trends, rose for a fifth straight week to its highest level since June.
The uninspiring U.S. data and signs of increasing economic weakness in China and Europe pushed U.S. stocks lower. Prices for U.S. government debt rose, while the dollar gained versus a basket of currencies.
Lackluster labor market conditions prompted the Federal Reserve last week to launch an aggressive stimulus program. It vowed to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained upturn on the jobs front.
Boston Federal Reserve Bank President Eric Rosengren, one of the more vocal "doves" at the U.S. central bank, said the new program was need to "avoid a prolonged economic stagnation.
The jobless claims data covered the period for the government's September nonfarm payrolls survey. Claims have risen 8,000 between the August and September survey periods, suggesting job growth remained modest this month.
U.S. employers added only 96,000 jobs in August, a step down from July's 141,000 count. While the unemployment rate dropped to 8.1 percent in August from 8.3 percent, it was because many Americans gave up the search for work.
The jobless rate has been stuck above 8 percent for more than three years, the first time this has happened since the Great Depression.
Economists say fears of the so-called U.S. fiscal cliff -- the $500 billion or so in expiring tax cuts and government spending reductions set to take hold in 2013 -- and Europe's long-running debt problems have made businesses cautious about boosting production and hiring.
"There is really no incentive for manufacturing firms here in the U.S. to ramp up production or hiring anytime soon," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "They are sitting back and assessing the data as it comes in, what happens in November and what Congress does before year end."
The problem extends beyond manufacturing. Publisher Scholastic Corp said on Thursday that schools had cut spending on books out of fear of the budget cuts that could come if the economy hits the "fiscal cliff.
In a third economic report, the Philadelphia Federal Reserve Bank said its business activity index was at minus 1.9 this month compared with minus 7.1 in August.
While new orders rebounded for the first time since April, shipments extended their slide and there was little improvement in the measure of regional factory jobs.
Separately, the Conference Board's Leading Economic Index dipped 0.1 percent in August after rising 0.5 percent in July.
Additional reporting by Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann