U.S. data points to lackluster economic growth

WASHINGTON (Reuters) - Manufacturing activity in the U.S. mid-Atlantic region shrank in August for the fourth straight month, a worrisome sign for the economic recovery although the pace of contraction eased.

Other data on Thursday showed a downward trend in the number of Americans filing new claims for jobless benefits. Groundbreaking on new U.S. homes inched down in July while new building permits rose sharply.

The Philadelphia Federal Reserve Bank said its business activity index was at minus 7.1 in August, a smaller contraction than registered in July. Economists were expecting a reading of minus 5.

Taken together, the data reinforced the view that economic growth might pick up in the second half of the year but would still be lackluster. After a disappointing start to the year, the data reinforces the argument that more stimulus from the Federal Reserve could be on the way, although perhaps not as soon as next month.

"For the Fed the issue was whether the economy was sliding toward the abyss and it doesn't seem to be. But it's certainly not improving," said Pierre Ellis, an economist at Decision Economics in New York.

In the Philadelphia Fed report, any reading below zero indicates contraction in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

It is one of the first monthly indicators of the health of U.S. manufacturing leading up to a national report by the Institute for Supply Management, which also showed the sector shrank in June and July.

Separately, the Labor Department said initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 366,000. That was in line with economists' forecasts in a Reuters poll.

Claims data, which swung wildly in July due to shifts in seasonal auto plant shutdowns, are now giving a clearer picture of modest improvement in the labor market.

"Overall, they (the data) are consistent with our outlook that growth will be a little bit better in the U.S. but not as upbeat as some people think," said Brian Kim, a currency strategist at RBS Securities in Stamford, Connecticut.

The four-week moving average for new claims, a better measure of labor market trends, dropped 5,500 to 363,750. That was the lowest since March - and the second lowest since April 2008.

U.S. nonfarm payrolls increased 163,000 in July after three months of gains below 100,000, although the unemployment rate ticked higher to 8.3 percent.

The pickup in hiring last month, along with gains in retail sales and manufacturing output, has dampened expectations the Fed could announce at its next meeting a plan to stimulate the economy with a third round of bond purchases. Officials at the Fed next review policy on September 12-13.

U.S. stocks opened higher but gave up gains following the data from the Philadelphia Fed.

The U.S. economy still faces a number of threats, including the looming possibility the government will raise taxes and cut spending next year. That is already hurting business sentiment.

Europe's festering debt crisis also menaces and is weighing on the global economy. China's Commerce Ministry said on Thursday the outlook for its exports has darkened.

Wal-Mart Stores Inc forecast full-year earnings that could fall short of Wall Street expectations as growth in international markets slows, even as its U.S. discount stores saw improved sales in a tepid U.S. economy.

HOUSING STARTS STUTTER

In another somewhat downbeat sign, the Commerce Department said housing starts dropped 1.1 percent last month to a seasonally adjusted annual rate of 746,000 units.

The reading was below the median forecast in a Reuters poll of a 757,000-unit rate.

The government also revised lower its estimates for starts in recent months. But economists said the readings, which are prone to significant revisions, still pointed to healing in the housing market.

"This is nothing but normal statistical noise," said Stephen Stanley, an economist at Pierpont Securities in Stamford, Connecticut.

The U.S. housing market, which fell into a deep rut six years ago, has been a relative bright spot in the economy this year.

Home prices have shown signs of stabilizing and many economists think housing construction will give a small boost to the economy this year.

There were also some positive signals in Thursday's report. New permits for building homes rose 6.8 percent in July to a 812,000 unit pace, the highest rate since August 2008.

But outside of housing, the broader economy has looked wobbly this year, which could hold back gains in home building.

(Reporting by Jason Lange; Editing by Neil Stempleman)