Energy plunge helps factories, jobless claims ease

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - Mid-Atlantic factory activity declined less rapidly in August while weekly jobless claims fell, in two reports on Thursday that revealed morsels of good news in an otherwise bleak economic environment.

However, an index of leading economic indicators published by industry group The Conference Board posted its largest one-month decline in nearly a year, suggesting the underlying picture continues to deteriorate.

The Philadelphia Federal Reserve Bank said its business activity index rose to minus 12.7 in August, the highest since December, from minus 16.3 in July. Below zero readings point to contraction in the sector, which by this measure has been shrinking since late last year.

Weekly applications for unemployment benefits, meanwhile, fell by 13,000 to a seasonally-adjusted 432,000 in the week ending August 16.

Fewer people applied for jobless benefits than economists had expected, which helped the dollar and stocks briefly cut some losses.

However, the number of jobless claims remained above the threshold generally associated with recessions.

"The recent spike hence suggests that the U.S. economy has entered a dark period, which is likely to be marked by increased joblessness," said Tony Crescenzi, a market strategist at Miller Tabak. "Many are expecting the U.S. economy to contract in the fourth quarter, possibly by a large amount."

The leading indicators added to those fears. The Conference Board's index plunged 0.7 percent, more than three times the drop Wall Street had forecast and the index fell to the lowest level since October 2004.

"A few months ago, there was discussion about a second-half recovery," said Ken Goldstein, a labor economist with the group. "If there's a second-half recovery, it'll be the second half of 2009."

Retrenchment was also the message from manufacturers. While the Philly survey certainly showed signs of improvement, much of it was tied to the past month's vertiginous drop in energy costs.

Strip that out, and the prevailing sentiment among business executives was still one of reluctance and uncertainty.

"The region's manufacturing sector remains weak," the Philly Fed said in its report.

Improvement came mainly from the biggest drop in prices paid since October 2005, when the economy recovered from the shocks of Hurricane Katrina which had devastated the U.S. Gulf Coast.

The prices paid index dived to 57.5 from 75.6.

(Additional reporting by Glenn Somerville and Lisa Lambert; Editing by Tom Hals)