Weak data on U.S. home sales and factory activity showed an economy stuck in low gear although a drop in claims for jobless aid offered hope the labor market's recovery was on track.
Thursday's reports suggested growth was being hampered by a combination of bad weather at home and supply disruptions caused by the March earthquake in Japan, but analysts said the economy should regain momentum by the second half of the year.
What you are looking at is second-quarter growth which may be a little softer than what people are expecting, but that's going to be temporary, said Rudy Narvas, an economist at Societe Generale in New York.
First-time claims for state unemployment benefits fell 29,000 to 409,000 last week, the Labor Department said.
The bigger-than-expected drop eased fears that a large increase last month reflected a fundamental deterioration in the jobs market, buttressing the view that the run-up was due to auto plant shutdowns and other one-time factors.
In a separate report, the Philadelphia Federal Reserve Bank said its business activity index -- a gauge of factory activity in the Mid-Atlantic region -- slumped to a seven-month low.
The flow of orders and shipments slowed significantly, while unfilled orders and inventories dropped. Employers, however, added workers.
While the Mid-Atlantic region does not have a high concentration of auto assembly plants, economists said part of the slowdown in factory activity last month reflected supply chain disruptions, which should prove to be temporary.
The report, together with data on Monday showing factory activity in New York state was the slowest in five months in May, implied manufacturing nationwide cooled further this month.
A Fed report on Tuesday showed U.S. motor vehicle output dropped 8.9 percent in April, causing manufacturing to contract for the first time in 10 months.
GROWTH FORECASTS MAY BE CUT
Estimates for second-quarter U.S. economic growth are currently ranging between a 3 percent and a 3.5 percent annual pace, but some analysts have started trimming forecasts as the impact of the supply chain disruptions becomes more evident.
The economy grew at a 1.8 percent rate in the first three months of this year after a 3.1 percent clip in the fourth quarter of last year.
Although some of the factors hindering growth may prove temporary, housing will remain a headache.
Sales of previously owned homes fell 0.8 percent last month to an annual rate of 5.05 million units, the National Association of Realtors said. Housing is buckling under the weight of foreclosed properties, which are depressing prices.
The economy is not going to grow at a 3 percent pace or more on a sustainable basis until we clear this backlog of foreclosed properties and housing begins to recover, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
The data suggested the Fed -- the U.S. central bank -- will be in no hurry to shift from its ultra-easy monetary policy stance.
New York Fed President William Dudley and Chicago Fed President Charles Evans reiterated the consensus view at the Fed that the economy still needs support.
Dallas Fed President Richard Fisher one of the Fed's most strident inflation hawks, said he was still not sure when the right time might be to begin pulling back on the stimulus.
CLAIMS STILL ELEVATED
Investors on Wall Street shrugged off the weak housing and manufacturing data, focusing instead on the drop in claims. U.S. stocks <.SPX> rose for a second day, while prices for government debt were mostly up and the dollar fell broadly <.DXY>.
While the initial claims decline was more than economists' expectations for a fall to 420,000, they remained anchored above the 400,000 level that is normally associated with stable job growth for a sixth straight week.
The claims data covered the survey period for the government's closely watched employment report for May, which will be released early next month. Claims rose 5,000 between the April and May survey periods, indicating a loss of momentum in the pace of labor market improvement.
Based on this and other incoming data, we look for a gain of 190,000 in May nonfarm payrolls and a 210,000 increase in private payrolls, said Michael Gapen, a senior U.S. economist at Barclays Capital in New York.
Employers added 244,000 jobs in April, the most in 11 months. However, the unemployment rate rose to 9 percent from 8.8 percent in March.
Though home sales continue to struggle, gains in employment are helping to ease mortgage defaults.
Mortgage delinquencies 90 days past their due date in the first quarter were the lowest since the beginning of 2009, the Mortgage Bankers Association said.
(Additional reporting by Ann Saphir in Chicago and Rachelle Younglai in Washington; Editing by James Dalgleish)