Jobs, factory, inflation data favor easy Fed policy

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By Lucia Mutikani | February 22, 2013 3:28 AM EST

More Americans filed new claims for jobless aid last week, factory activity slowed in February and consumer prices were flat in January, supporting the argument for the Federal Reserve to maintain its very accommodative monetary policy stance.

The reports come after signs of divisions at the Fed over its bond buying program aimed at stimulating the sluggish economic recovery.

"If the Fed is looking for evidence to keep their foot to the floor on policy, they are still getting it," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 362,000, unwinding the bulk of the prior week's decline, the Labor Department said.

It said in a second report that consumer prices were flat for a second consecutive month in January as gasoline prices fell and food costs were changed after several months of gains.

In the 12 months through January, consumer prices rose 1.6 percent, the smallest gain since July. They had advanced 1.7 percent in December.

Concerns over tepid job growth prompted the U.S. central bank last year to embark on an open-ended bond buying program.

It said it would keep up the program, which it hopes will push down borrowing costs, until it saw a substantial improvement in the outlook for the labor market.

The Fed also has committed to hold interest rates near zero until unemployment reaches 6.5 percent, provided inflation does not threaten to push over 2.5 percent.

However, minutes of the January 29-30 policy meeting published on Wednesday showed some Fed policymakers feel the central bank may have to slow or stop the asset purchases before it sees an acceleration in job growth because of concerns over the costs of the program.

MANUFACTURING SLOWING

News on the manufacturing sector, which has supported the economy's recovery from the 2007-09 recession was downbeat.

The Philadelphia Fed's business activity index dropped to minus 12.5 in February, the lowest level since June. The index, which measures factory activity in the mid-Atlantic region, had fallen to minus 5.8 in January.

A reading below zero indicates contraction in the region's manufacturing sector. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

The pace of U.S. manufacturing growth slowed in February but remained near a nine-month peak thanks to strong domestic demand, an industry survey showed on Thursday.

Financial data firm Markit said its "flash," or preliminary U.S. Manufacturing Purchasing Managers Index fell to 55.2 this month from 55.8, which had been the best showing since April, 2012. A reading above 50 indicates expansion.

The overall U.S. economy shrank 0.1 percent in the fourth quarter but grew at a 2.2 percent clip for the full year.

Stocks on Wall Street fell on Thursday morning, while U.S. Treasury debt prices rose. The U.S. dollar advanced against a basket of currencies after weak economic data was reported in Europe also.

The economy is being hampered by lackluster demand as employment struggles to gain traction.

Job growth has been far less than the at least 250,000 per month over a sustained period that economists say is needed to significantly reduce the ranks of unemployed. The unemployment rate rose 0.1 percentage point to 7.9 percent in January.

Last week's claims data covered the survey period for the February nonfarm payrolls report. Claims were up 27,000 between the January and February survey periods.

However this probably does not suggest any material change in the pace of job growth given that claims been very volatile since January because of difficulties smoothing the data for seasonal fluctuations.

Still, there is reason for optimism about economy. The housing market recovery is gaining momentum.

A fifth report from the National Association of Realtors showed existing home sales rose 0.4 percent last month, pushing the supply of homes on the market to a 13-year low. The median home price rose 12.3 percent from a year-ago.

Rising home values should help to support consumer spending.

Although consumer prices excluding food and energy rose 0.3 percent - the largest gain since May 2011 - most of the gain came from apparel. Economists did not believe this was the start of a new trend.

"The underlying inflation backdrop remains very supportive to the Fed's accommodative policy stance," said Millan Mulraine, a senior economist at TD Securities in New York.

(Additional reporting by Jason Lange in Washington and Steven C Johnson in New York; Editing by Andrea Ricci)

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