New claims for jobless aid rose unexpectedly last week and factory activity along much of the Eastern seaboard contracted early this month, bolstering the case for more action to support the struggling economy.

However, industrial output edged higher in August and consumer prices rose more than expected, reinforcing expectations the Federal Reserve will offer only modest stimulus measures.

The economy barely grew in the first half of this year and a bruising spending battle in Congress spooked consumers into shutting their wallets last month. With growth still limping along, the economy looks very vulnerable to an escalation in Europe's debt crisis.

Business activity has slowed and confidence has fallen ... but we haven't slipped into a recession yet, said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. The Fed can still do some additional easing.

The number of Americans filing new claims for state unemployment aid rose unexpectedly to 428,000 in the week ended September 10, the Labor Department said on Thursday.

It was the second straight weekly increase, taking initial claims to their highest level since the week ended June 25. Wall Street analysts expected a modest dip.

Despite the data, stocks rose and debt prices fell after a plan was offered by global central banks to reintroduce dollar liquidity into the strained European banking system.

Peter Kenny, managing director of Knight Capital in Jersey City, New Jersey, said much of the data was bad but not apocalyptic, and other analysts agreed.

The Philadelphia Federal Reserve Bank said its business activity index registered minus 17.5 in September, an improvement from August but still pointing to contraction for the second straight month.

The New York Federal Reserve Bank said its manufacturing index for New York state fell to minus 8.82 in September -- its lowest level since November. It was the fourth straight month pointing to contraction.


The data could provide an added sense of urgency for Fed Chairman Ben Bernanke and his colleagues, who are expected to unveil new measures to lift growth when a two-day policy review concludes on Wednesday.

Despite dim prospects of the nation's 9.1 percent unemployment rate coming down much any time soon, many Fed watchers expect a relatively modest step to try to bring down long-term interest rates without ramping up dollar printing.

The unexpectedly stiff reading on inflation could provide fodder for a lively central bank debate.

The Labor Department said in a separate report that its Consumer Price Index increased 0.4 percent last month -- higher than analysts expected, with food prices posting their biggest gain since March.

It will make it more difficult for the Fed to talk about lower rates, even if the economy needs it, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

The core price index -- which excludes food and energy -- rose 0.2 percent last month, in line with expectations. Both the overall and core readings in August rose more from a year earlier than they did in July.

Analysts now put the odds of a new recession at nearly one-in-three after recent reports showed no employment growth in August and a plunge in consumer confidence. Consumer spending ground to a halt in August as well.

In its report on output at the nation's mines, factories and utilities, the Fed said manufacturing production rose 0.5 percent last month as auto production picked up.

Underscoring the consensus view the U.S. will dodge the recession bullet, General Electric Co Chief Executive Jeff Immelt said he sees good, decent economic growth everywhere, including the United States.

Still, few expect growth to hum until consumers can heal personal finances damaged by the popping of a housing bubble and subsequent 2007-2009 financial crisis.

Default notices on homes notched their biggest monthly increase in four years in August, a report by RealtyTrac said.

Weak consumers are keeping businesses on edge.

The last few months, we've seen a bumpy ride that may likely continue, said United Parcel Service Chief Executive Scott Davis, despite his affirmation that the package delivery company was on track for record results this year.

(Additional reporting by David Lawder in Washington, Leah Schnurr and Gertrude Chavez-Dreyfuss in New York and Lynn Adler in Louisville, Kentucky; Editing by Neil Stempleman)