Jobless claims and factory data fan recovery fears

The data on Thursday added to worries over the risk of a double-dip recession which has spooked investors and pummeled share prices in recent days. Analysts, however, think another downturn is unlikely.

Just because the economy is slowing doesn't mean it's going into a recession, that's the nuance the market has not figured out. The market has pretty much fully priced in a double-dip recession; at this point we don't agree, said John Canally, an economist at LPL Financial in Boston.

Initial claims for state unemployment benefits increased by 13,000 to 472,000, the U.S. Labor Department said. The market had expected claims to decline to 452,000.

In a separate report, the Institute for Supply Management said its barometer of growth in U.S. manufacturing activity slipped to a six-month low of 56.2 in June from 59.7 the prior month. The reading remained above the 50 level that marks expansion. The employment sub-index slipped slightly.

Stocks on Wall Street ended down for a fourth straight day, as investors worried that sluggish economic growth would hurt earnings. Yields on U.S. government bonds were little changed after falling earlier in the day, but the U.S. dollar slumped to a six week low against the euro and a seven month low against the yen.

While layoffs have slowed sharply from early last year, businesses remain skeptical of the strength of the recovery and are holding back on hiring, analysts said.

The data on jobless claims comes a day ahead of the closely watched monthly U.S. government report on employment.

High unemployment is a sore spot for President Barack Obama, whose approval ratings have plummeted, and it could cost his fellow Democrats dearly at the polls in November.

More than 8 million Americans lost their jobs during the recession, but employment growth has been so tepid that it could take years for many of the jobless to find work again.

PAYROLLS EXPECTED TO FALL

A Reuters survey found economists expect Friday's U.S. Labor Department report on June non-farm payrolls to show a decline of 110,000, due to a reversal of the May hiring of temporary workers to conduct the decennial U.S. census. In May, the government hired 411,000 census workers. However private sector hiring is forecast to rise by about 112,000 in June, up from only 41,000 in May.

Economists had been expecting non-government hiring to accelerate, but an industry report on Wednesday that showed a gain of only 13,000 private sector jobs last month led some to reduce their payrolls forecasts.

It's looking more and more like the job market is treading water. Layoffs are down from 2009, but hiring hasn't really picked up and this is disappointing, said Stephen Bronars, a senior economist at Welch Consulting in Washington.

There is a lot of uncertainty on the hiring side. In order for the recovery to give people confidence it needs to cut across different sectors of the economy.

Adding to the darkening cloud, contracts for sales of previously owned homes plunged a record 30 percent in May, the National Association of Realtors said on Thursday. The NAR's pending sales index fell to 77.6, its lowest level since the measurement started in 2001. The decline followed the April 30 expiration of a popular homebuyer tax credit.

Manufacturing has largely led the recovery from the longest and deepest recession in the United States since the 1930s, but the recovery had looked to be broadening earlier this year.

However, data ranging from retail sales to home sales has hinted at a slackening in the pace of growth over the past couple months.

U.S. auto sales slipped in June from the previous month's pace and major automakers said there was no sign of the second-half recovery that the embattled industry had expected at the start of the year.

Although U.S. manufacturing activity slowed last month, it remains stronger than in China, where it hit its slowest pace in more than a year, exacerbating fears the global recovery could be at risk. Euro zone manufacturing growth fell in June to its slowest pace in four months.

Analysts blamed some of the pullback in U.S. manufacturing on the sovereign debt crisis in Europe, which is expected to choke off growth in the region as governments slash spending to cut massive budget deficits.

The U.S. ISM report showed declines in new orders and exports. A steep drop in the price index backed views the Federal Reserve would be in no hurry to back away from its ultra-low interest rate policy. Fed officials in recent days have struck a cautious tone on the recovery's prospects.

Forward momentum is slowing down in the manufacturing sector, but there are no signals in this report that an abrupt growth slowdown is in the cards, said Brian Bethune, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Price pressures have virtually vanished. The Fed is expected to be on extended hold in this environment.

In the Labor Department report on jobless benefit claims, the four-week moving average of new jobless claims -- considered a better measure of underlying labor market trends -- rose to its highest level since early March.

And the number of people still receiving benefits after an initial week of aid rose more than expected, increasing by 43,000 to 4.62 million in the week ended June 19, the latest week for which the data was available.

Separately, the number of planned layoffs at U.S. companies rose slightly last month, but remained close to a four-year low, global outplacement consultancy Challenger, Gray & Christmas said.

(Additional reporting by Corbett Daly in Washington and Edward Krudy and Richard Leong in New York)