The number of Americans filing for jobless benefits fell to the lowest level since January last week, a decline linked to upheaval in the auto industry, while a key regional manufacturing index slipped more than expected in July, reports showed on Thursday.

A jump in U.S. home foreclosures to a record high in the first half of 2009 and warnings about consumer credit woes underscored the frailty of the U.S. economy at a time many forecasters see the nation poised to climb out of a deep recession that started in December 2007.

This is going to be a bumpy ride for the next six months for the economy. We are going to have volatility in the data because they are not all going to all turn at the same time, said Kurt Karl, chief U.S. economist at Swiss Re in New York.

The data had a muted impact on U.S. equities markets, and share prices climbed late in the day on optimism about quarterly earnings. The Dow Jones industrial average rose for a third day, finishing up more than one percent.

Economist Nouriel Roubini, chairman of RBE Global Monitor, also helped out sentiment with comments that the worst of the economic crisis is over.

The Philadelphia Federal Reserve said its index of factory conditions in the U.S. Mid-Atlantic region fell to minus 7.5 in July from June's minus 2.2. Analysts had expected a slightly smaller decline this month after a sharp increase in June.

Any reading below zero shows contraction in the business sector in a region that spans eastern Pennsylvania, southern New Jersey and Delaware.

The number is still in line with the Fed's forecast as we saw in the FOMC minutes, that the economy is not as bad as it looked earlier this year, and that we could be near the end of the recession, said Gary Thayer, senior economist with Wells Fargo Advisors in St. Louis, Missouri.

The central bank's Federal Open Market Committee on Wednesday released minutes from its June policy meeting, including slightly upgraded forecasts on growth for 2009 and 2010.

Among the components of the Philadelphia index, perhaps the most closely watched regional manufacturing measure, employment slipped but new orders were less weak.

The report was termed consistent with views that the initial stages of a U.S. recovery will be far from robust.

Overall, it is a mixed story. ... But when you look at the bottom line, it is that this index is negative and showing a contraction, said Rudy Narvas, senior analyst at 4CAST Ltd in New York.

JOBLESS SEASONALS DISTORTED

In news on the closely watched jobs market, the U.S. Labor Department said initial claims for state unemployment insurance fell 47,000 to a seasonally adjusted 522,000 in the week ended July 11.

The figure was much lower than expected, but was not seen as a sign of a sudden, sharp improvement in the labor market.

Claims were massively distorted by the shift in timing of summer shutdowns, economists John Ryding and Conrad DeQuadros at RDQ Economics in New York said in a note to clients.

A Labor Department official said there had been far fewer seasonal layoffs than anticipated in early July in the automotive sector and elsewhere in manufacturing.

Many of the jobs typically shed for just a few weeks for summer retooling were cut earlier, and in some cases permanently, as the industry slashed output in the spring to reflect extremely weak demand.

The big drop is not necessarily a reflection of what is going on in the economy, the official said.

The jobs report, however, still fed ideas that the worst of the U.S. labor market retrenchment is over, even if net job creation is months away.

It is difficult to determine the true trend in claims in this environment, suggesting we will have to wait until early August for a better signal. We suspect that the data will ultimately show that claims have been drifting lower, said Michelle Meyer, economist with Barclays Capital Research.

REALTY REALITY CHECK?

The effects of the weak labor market were seen on the rising rate of home foreclosures. Foreclosure filings jumped to a record 1.9 million on more than 1.5 million properties in the first half of 2009, RealtyTrac reported.

James Saccacio, chief executive of RealtyTrac, said in a statement that unemployment-related foreclosures accounted for much of the increase.

Major U.S. bank JPMorgan Chase & Co also warned on Thursday that rising unemployment will add to pressure on credit losses.

Credit quality for both mortgages and credit cards is weakening faster than expected, said the bank, which reported a surge in consumer credit losses for the quarter, even as its profit jumped.

News from lender CIT Group that its bailout talks with the government had ended was yet another sign of pressure in the credit market. The news fueled fears of a potential bankruptcy by CIT, a major lender to retailers and other small and mid-sized businesses.

But in a positive note for housing, the National Association of Home Builders said U.S. home builder sentiment in July jumped to its highest level since September 2008.

In the mortgage market, average interest rates fell to 5.14 percent for the popular 30-year fixed rate in the week ended July 16, a third straight weekly decline, said home funding company Freddie Mac.

(Additional reporting by Lynn Adler, Julie Haviv and Burton Frierson in New York, and Alister Bull in Washington, Editing by Chizu Nomiyama)

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