Factory activity in the Mid-Atlantic region rebounded in July, but stubbornly high new filings for jobless benefits suggested an expected pick-up in economic growth in the second half of 2011 would be modest.

The Philadelphia Federal Reserve Bank said its business activity index, which gauges factory activity in the region, rose to 3.2 from a near two-year low of minus 7.7 in June. Orders, hiring and shipments all improved.

The increase, the first since March, showed underlying resilience in manufacturing -- a sector that has shouldered the economy's recovery from the 2007-09 recession but that has lost some steam recently.

Initial claims for state unemployment benefits increased 10,000 to 418,000, the Labor Department said a separate report, holding above the 400,000 mark that is usually associated with steady employment growth.

Jobless claims are a leading economic indicator. These numbers don't support the case for having 3.5 to 4 percent growth in the second half of the year that some people had talked about, said John Silvia, chief economist at Well Fargo in Charlotte, North Carolina.

The economy grew at a 1.9 percent pace in the first quarter and estimates for the April-June quarter range between 1 percent and 1.9 percent. The government will release its first estimate for second-quarter GDP on July 29.

Details of the Philadelphia Fed's survey, which beat economists' expectations, were relatively upbeat, with employment rising and a measure of new orders showing slight growth after contracting in June.

Even more encouraging, prices paid by manufacturers were the lowest in nine months, in line with other indicators showing a commodity-led spike in inflation was subsiding.

A lot of firms had attributed slowing activity to higher prices, so moderating prices is consistent with a story of improving growth over the next six months, said Michael Trebing, a senior economic analyst at the Philadelphia Fed.

JOBLESS CLAIMS ELEVATED

U.S. financial markets were little moved by the economic reports, with investors taking their cue from signs of progress in Congress on raising the statutory borrowing limit and the determination of euro zone leaders to tackle the problems of heavily indebted governments in the region.

Stocks on Wall Street ended higher, while Treasury debt prices fell. The U.S. dollar hit a two-week low against the euro.

The jobless claims data covered the survey period for the closely watched nonfarm payrolls count for July, which will be released on August 5.

Initial claims fell 11,000 between the June and July survey periods. Along with the rise in the Philadelphia Fed survey's employment gauge, the data suggested a modest improvement in payrolls after a paltry 18,000 jobs gain in June.

Some economists said it was hard to put much stock in the jobless claims data because it tends to be volatile in July.

There are large swings in the seasonal factors this time of year, which often overestimate moves in the non-seasonally adjusted data, said Daniel Silver, an economist at JPMorgan in New York.

The auto plant shutdowns that normally occur around July 4 are on an abnormal schedule this year since some plants closed earlier in the year when supply chains were disrupted by the disasters in Japan, which should also be impacting the claims data.

Still, it is clear the labor market has weakened considerably compared to the first quarter of the year when payrolls growth averaged more than 165,000 per month.

Job growth has faltered in the last two months. A rise in layoffs held back employment in May, according to a separate report released by the department last week.

Layoffs were probably behind the downshift in employment growth in June as well.

The weak labor market is constraining consumer spending and eroding profits for some major consumer goods producers.

Whirlpool Corp missed Wall Street expectations for quarterly earnings and issued a disappointing 2011 forecast. PepsiCo Inc -- the maker of Pepsi-Cola, Frito-Lay snacks and Quaker oatmeal -- tempered its full-year outlook.

The consumer demand picture is the most concerning to us at this point, said PepsiCo Chief Executive Indra Nooyi. In fact, the modest pickup in total consumer spending almost all U.S. businesses saw earlier in the year has reversed in the past several months.

In a third report on Thursday, the private sector Conference Board said its Leading Economic Index increased 0.3 percent in June, slowing from a 0.8 percent rise in May.

(Additional reporting by Leah Schnurr and Ellen Freilich in New York; Editing by Neil Stempleman)

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