An indicator of future U.S. economic activity slipped for a second month in March, hinting at slower growth ahead, while separate data showed Mid-Atlantic factory activity edged up in April despite higher costs.

A third economic report on Thursday pointed to continued strength in the labor market.

The reports supported many analysts' expectations that the torrid pace of first-quarter growth will cool to more sustainable levels, although tight labor markets will keep the Federal Reserve on watch for potential inflation pressures.

At the end of the day, we are seeing a bit of a softening in forward momentum, said Kathleen Stephansen, director of global economics at Credit Suisse.

This gives the Fed justification to say 'Let's take a pause here after May,' she said, referring to the next policy meeting for the central bank. The Fed has been steadily raising official interest rates for nearly two years in a campaign that is seen nearing its end.

The Philadelphia Federal Reserve Bank said its business activity index edged up to 13.2 in April from 12.3 in March, a touch below Wall Street estimates of 14.0, while surging commodities prices pushed inflation readings higher.

New orders dropped sharply in April, as did inventories, suggesting manufacturers will need to rebuild stocks in coming months.

Treasury debt prices eased modestly as dealers focused on the jump in inflation and employment components of the factory survey, while the dollar moved higher against the euro.

Benchmark 10-year Treasury notes were off 4/32 and yielding 5.04 percent, near highs not seen since mid-2002, while the euro was down 0.5 percent at $1.2315.

On Wall Street, stocks paid little attention to the economic data, with the Dow Jones industrial average <.DJI> ending at a six-year high on encouraging earnings news.

A MODERATE SLOWDOWN

Separately, the Conference Board said its index of leading economic indicators, which is aimed at forecasting future economic activity, fell 0.1 percent last month after a downwardly revised 0.5 percent decrease in February.

With the price of a barrel of oil rising above $70, and with interest rates slowly increasing, the global economy isn't likely to be picking up steam soon, said Conference Board labor economist Ken Goldstein.

Wall Street economists surveyed by Reuters had expected the March index to be unchanged.

The leading indicators have been much more volatile since Hurricane Katrina. However, the trend has been generally flat over the past six months, at levels that are well below where they were 12 to 18 months ago, said Steven Wood, chief economist at Insight Economics.

This suggests that economic growth in the year ahead should be weaker than in the past year. But it doesn't suggest that growth will be extremely sluggish or will turn negative, he added.

Government data showed new claims for jobless benefits fell by 10,000 last week, slightly more than expected, in the survey week for the monthly employment report that suggested a robust reading on April payrolls.

First-time claims for state unemployment benefits shrank to 303,000 in the week ended April 15 from 313,000 the previous week.

Overall it does suggest that labor market conditions are very tight still and the Fed probably still has one more tightening to do, because recent rhetoric suggests monetary policy will get more and more data dependent, said Jeff Cheah, fixed-income strategist with RBC Capital Markets in Toronto.

SKITTISH ON INFLATION

The Federal Reserve's policy-setting Federal Open Market Committee meets next on May 10, and economists largely expect one more rise of a quarter percentage point in the benchmark federal funds rate, to 5.0 percent. However, debate remains open on prospects of another hike in June.

Weekly jobless claims have been hovering around the 300,000 mark since early this year, a level that economists generally consider to be non-inflationary while still pointing to good job growth.

Patrick Fearon, senior economist at A.G. Edwards & Sons Inc., said the strong job market was a good sign for consumer spending. But he added that it could mean that the Fed remains skittish on inflation.

The Philadelphia Fed survey also pointed to solid job growth, with its employment index reaching the highest level since September 2004. Analysts said that could point to a rare monthly gain in factory jobs in the April payrolls report. (Additional reporting by David Lawder in Washington)

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