Labor market, manufacturing and consumer price data released on Thursday portrayed the U.S. economy as steadily emerging from a protracted recession, with inflation under control.

The number of workers filing new claims for jobless benefits dropped to a nine-month low last week, while consumer prices rose slightly in September and New York state factory activity perked up this month.

Skeptics of the recovery found no friendly economic indicators today. They all point to an economy that is starting to grow again while inflation remains dormant, said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.

In a report that pointed to scant inflation pressure but some easing in the downward momentum on prices, the Labor Department said the Consumer Price Index rose 0.2 percent last month after increasing 0.4 percent in August.

The department also said initial claims for state unemployment benefits fell 10,000 to 514,000 last week, a second straight weekly drop that hinted at some easing in the pace of layoffs.

A third report from the New York Federal Reserve Bank showed a gauge of New York state manufacturing activity rising unexpectedly to its highest in five years on surging new orders, shipments and employment.

Stocks on Wall Street ended higher as investors overcame their disappointment over quarterly results from Goldman Sachs Group and Citigroup Inc . The blue-chip Dow Jones industrial average closed above 10,000 for a second day. <.N>

DEFLATION RISKS EASING?

Fed Vice Chairman Donald Kohn said this week an enormous amount of economic slack was likely to keep prices under pressure, and core prices have been trending lower even though the headline CPI already appears to have bottomed out.

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Today's figures won't shift the argument about inflation risks at the Fed. They don't show deflation, but nor do they show sufficient inflation pressures to make the doves want to tighten soon, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

A Reuters poll of economists released on Thursday indicated the Fed would likely hold interest rates at their current level near zero at least until the middle of next year.

Consumer prices last month were restrained by food and housing costs. Compared to September a year ago, prices were down 1.3 percent, with the food index declining from a year earlier for the first time in 42 years.

Stripping out volatile energy and food prices, the closely watched core measure of inflation also rose 0.2 percent.

A 0.4 percent increase in new vehicle prices following the expiration of the popular cash for clunkers program contributed to the rise. The program, which pushed down car prices by 1.3 percent in August, had offered discounts to consumers who traded in old gas-guzzling cars for new, fuel-efficient ones.

In contrast, rental and owners equivalent rent indexes recorded their first declines since 1992, which economists said portended tame inflation ahead.

The huge excess supply in the housing market is putting downward pressure on rents, said Zach Pandl, an economist at Nomura Securities International in New York. The inflation outlook is quite negative.

MIXED SIGNALS

There was more good news for the economy. Top U.S. executives were becoming more upbeat about the domestic business outlook, a survey showed.

In a further sign hinting at some stability in the labor market, the number of people collecting unemployment benefits after an initial week of aid dropped 75,000 to 5.99 million in the week ended October 3.

It was the first time these continuing claims had been below the 6 million mark since late March. However the decline could also be the result of workers exhausting their benefits.

In spite of the income squeeze from high unemployment, most credit card companies reported a fall in defaults in September from record peaks, though delinquencies rose.

While the New York Fed's Empire State business conditions index rose, a separate report tempered some of the optimism.

The Philadelphia Fed said its business activity index for the mid-Atlantic region slipped in October.

U.S. mortgage foreclosure filings fell for a second straight month in September, but remained near a record high, real estate data firm RealtyTrac said.

(Additional reporting by Burton Frierson in New York; Editing by James Dalgleish)

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