Manufacturing in the U.S. Mid-Atlantic region expanded in August for the first time in 10 months but new filings for unemployment benefits rose last week, an indication weak spending would constrain recovery.

The Philadelphia Federal Reserve Bank said on Thursday its business activity index rebounded to 4.2 in August, the highest since November 2007, from minus 7.5 in July. A reading above zero indicates growth.

While the Philadelphia Fed index was the latest report to chart an improvement in manufacturing as producers rebuild depleted inventories, a separate report from the Labor Department underscored the fragile state of the jobs market.

Initial applications for state unemployment insurance rose 15,000 to a seasonally adjusted 576,000 last week, tempering some of the optimism over an economy that is close or starting to pull itself out of the worst slump in 70 years and pointed to an anemic recovery.

The data we've seen is indicative of a modest recovery that's beginning to occur. We think the economy will see positive growth over the ensuing quarters, but we're expecting it to be a modest recovery, said Craig Hester, chief executive officer of Hester Capital Management in Austin, Texas.

The upbeat factory report and a surge in Chinese equities helped to shift attention away from the disappointing weekly jobless data, lifting U.S. stock indexes. U.S. government bond prices fell as they lost some of their safe-haven allure.

The Philadelphia Fed's survey showed new orders rose to 4.2 from minus 2.2 in July, also the highest since November 2007. The employment index rose to minus 12.9 from minus 25.3 last month.

Analysts said that survey, together with another this week showing manufacturing in New York state grew this month for the first time since April 2008, bodes well for the factory sector. Manufacturing accounts for about 11.5 percent of U.S. economic activity.


It suggests manufacturing recovery has expanded beyond autos because none of those regions have a very big autos related presence, said John Canally, economist at LPL Financial in Boston.

The fact that both were above zero or neutral is a good sign that we may get the national ISM above 50 for the first time since January 2008.

Separately, the index of leading economic indicators, which is supposed to forecast economic trends six to nine months ahead, rose for a fourth straight month in July.

While economic data points to a pending upturn from the recession that started in December 2007, doubts over the strength of the recovery are causing companies to be cautious.

Though the pace of layoffs has slowed markedly from early this year, unemployment remains high and continues to inflict big dents in household incomes. There are fears that consumer spending will be too tepid to drive the recovery.

The Labor Department said the number of people collecting long-term unemployment benefits edged up 2,000 to 6.24 million in the week ended August 8. However, the four-week moving average declined 2,500 to 6.27 million.

Analysts said rise in new claims for unemployment benefits last week was a likely indication that employers cut more jobs in August after reducing payrolls by 247,000 last month.

This is the survey week for the August employment report and with the data in hand our models suggest we may see some softening relative to the July report, said Julia Coronado an economist at BNP Paribas in New York.

After receiving a sizable positive boost from the auto sector in July, we could see a slightly larger loss in nonfarm payrolls in August, although we still expect it to be less than the June decline.

The insured unemployment rate, which measures the percentage of the insured labor force who are jobless, was unchanged at 4.7 percent in the week to August 8, the Labor Department said.

The four-week moving average, considered a better measure if labor market trends, nudged up 4,250 to 570,000 last week, advancing for a second straight week.

The report is indicative that this is definitely not going to be a V-shape recovery. For a real recovery we need the consumer to be in the game but with rising unemployment the consumer is not going to be out there spending, said Kurt Karl, chief U.S. economist at Swiss Re in New York.

Dwindling incomes as unemployment continue to rise are forcing many homeowners to default on their home loans.

Late payments on U.S. mortgages increased to a record high in the second quarter, with almost one in eight homeowners delinquent or in the process of foreclosure, the Mortgage Bankers Association said.

(Additional reporting by Ros Krasny in Chicago; Vivianne Rodrigues, Ryan Vlastelica and Julie Haviv in New York; Editing by Neil Stempleman)