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REUTERS, NEW YORK - The US factory sector started the month on a weak note after declining in April, according to data released on Thursday, while the number of workers stuck on jobless rolls hit a four-year high.
The data paints a weak picture of the US economy but 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 US mid-Atlantic region shrank for a sixth straight month in May while manufacturing in New York State also declined this month, according to reports by regional Federal Reserve banks.
This poor start to May comes after nationwide industrial production tumbled a bigger-than-expected 0.7 percent in April due to a contraction in the manufacturing sector that was the most severe 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 US economy is in a recession," said Daniel J. Meckstroth, Chief Economist for industry research group Manufacturers Alliance/MAPI.
Stocks were slightly positive on the day after the data, which was generally weak but not as bad as expected in the case of the Philly Fed index of Mid-Atlantic activity.
The dollar fell against the euro, a move driven by news that euro zone growth was stronger than expected in the first quarter.
Government bonds, which benefit from weak economic conditions, were slightly higher on the day.
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.
On the labor market front, a government report showed the number of people who remained on the jobless benefit rolls after drawing an initial week of aid increased 28,000 to 3.06 million in the week ended May 3.
It was the third consecutive week that continued claims were above 3.0 million and also the highest since March 2004.
The New York Fed's "Empire State" general business conditions index fell to minus 3.23 in May from positive 0.63 in April.
The result was below economists' expectations for a reading of 0.0, and was the third time in four months it has been below zero.
INFLATION KERFUFFLE
The Empire State's prices paid measure of inflation rose to the highest since the start of the data series in July 2001, but a fall in prices received suggested companies were struggling for pricing power over their clients.
Further supporting this, the difference between the two price measures was the biggest since the start of the data series in 2001.
"Perhaps we're trying too hard, but we'd read this set of data as bond-market friendly with Empire weaker-than-expected, and prices paid at a wide spread to prices received, which we think stresses corporate profits," said David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut.
There was more news of softening inflation pressure in the industrial production report.
Total industry capacity use stood at 79.7 percent of capacity, the lowest since September 2005. Economists were expecting capacity utilization of 80.1 percent.
However, the Philly Fed report bucked this trend, with prices paid and prices received both rising.
In potentially troubling news for an already weak US dollar, net overall US capital flows reversed sharply in March to show outflows of $48.2 billion. This follows a revised $48.9 billion inflow in February, the US Treasury Department said.
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