By Burton Frierson
NEW YORK (Reuters) - A measure of U.S. Mid-Atlantic factory activity jumped unexpectedly in September, according to data released on Thursday that offset news of an increase in weekly claims for jobless benefits.
The news provided respite for financial markets roiled by credit turmoil. Sentiment also received a major boost from news, according to a congressional aide, that U.S. Treasury Secretary Henry Paulson was talking to lawmakers about a plan to solve the bad loans crisis that has brought the financial sector to its knees.
The Philadelphia Federal Reserve Bank said its business activity index soared to 3.8 in September from minus 12.7 in August, rising into positive territory for the first time in 10 months as new orders improved and price pressures fell.
The data was a rare dose of good news about an economy weakened by the worst housing slump since the Great Depression and a severe tightening of credit conditions. However, it is unlikely to calm worries for long.
"The demand for manufactured products is still essentially moribund despite robust export orders," said Steven Wood, an economist at Insight Economics in Danville, California.
The Labor Department said the number of U.S. workers filing new claims for unemployment benefits rose by 10,000 last week as the first wave of job losses from Hurricane Gustav rolled in after reporting delays in Louisiana.
Still, the stronger-than-expected Philadelphia Fed report supported stocks on Wall Street early in the session. Later they soared on news Paulson has been shopping around a proposal to Congress that would create an entity to deal with bad debt.
"This is what the government is supposed to do. When things get drastic they are supposed to take drastic action. And they can do some creative stuff," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.
"It develops a lot of questions. But, it's a good idea, I think. They've got to do something. There is just a void of confidence obviously across all markets."
U.S. government bonds -- which usually benefit from signs of economic weakness -- fell sharply.
PHILADELPHIA STORY
Wall Street economists had expected a reading of minus 10.0 for the Philadelphia Fed index, according to a Reuters poll. Their forecasts ranged from minus 15.0 to minus 4.5.
Any reading below zero indicates contraction in the region's manufacturing sector.
The survey covers factories in a region encompassing eastern Pennsylvania, southern New Jersey and Delaware and is looked at closely as one of the first indicators of the health of the U.S. manufacturing sector.
It also showed inflation pressures dropped, which should make it easier for the Federal Reserve to shore up the economy by keeping interest rates low. The prices paid index fell to 31.5 in September from August's 57.5.
That was the lowest prices paid index since September 2007, reflecting a steep drop in oil prices since they hit record highs in July this year.
The data appeared to conflict with a report on Monday that showed manufacturing in New York state unexpectedly contracted in September, though price pressures also tumbled there.
The Labor Department, in its report, said initial claims for state unemployment insurance benefits rose to a seasonally adjusted 455,000 during the week ended September 13 from 445,000 the prior week. Analysts polled by Reuters had forecast claims to drop to 440,000 last week.
Normal seasonal factors predicted a 10.3 percent rise in jobless claims because of the typical rebound that occurs after the Labor Day holiday week, a Labor Department official said.
However, claims increased 12.3 percent as Louisiana was able to report numbers for the first time in two weeks as power in the state's reporting office was restored, the official said. Those numbers were much higher than what the department had estimated.
Another report by a private research group showed the index of leading U.S. economic indicators fell by a larger-than-expected 0.5 percent in August to 100.8, the lowest since 100.7 in October 2004.
Analysts polled by Reuters had forecast the index, a key forecasting gauge, to drop only 0.2 percent in August after a 0.7 percent fall to a revised 101.3 reading in July.
In the last seven months, the index has risen only twice, a 0.1 percent rise in April and a revised 0.1 percent rise in June, showing the U.S. economy has been wobbling for most of 2008. The index has fallen 1.1 percent from February through August, the Conference Board said.
Additional Reporting by Doug Palmer and David Lawder in Washington; Editing by Chizu Nomiyama
Our Standards: The Thomson Reuters Trust Principles.
