Industrial output slows unexpectedly in May; weekly jobless claims dip

WASHINGTON (AP) — Industrial production unexpectedly fell in May, reflecting weakness in manufacturing, as the economy flashed more signals of a spring slowdown, but jobless claims fell to the lowest level in nearly four months last week, defying the picture of softness.

The Federal Reserve reported Thursday that output at the nation's factories, mines and utilities dropped 0.1% last month following an increase of 0.8% in April.

The weakness last month reflected a slowdown of autos and auto parts as the U.S. auto industry continued to struggle with soaring gasoline prices that have sapped demand for sport-utility vehicles.

Production of autos and auto parts fell 1.3% last month following a smaller 0.2% drop in April.

The 0.1% drop in industrial production marked the first drop since a similar 0.1% fall in January. Economists believe that manufacturing, which had finally started to recover from the 2001 recession, will slow in coming months as overall economic growth slows.

The economy expanded at a sizzling pace of 5.3% in the first three months of the year but many economists believe that will slow to around 3% in the April-June quarter, as consumers struggle with rising interest rates, soaring gasoline prices and cooling home sales.

The Labor Department reported that jobless claims dropped to 295,000 last week, a decrease of 8,000 from the previous week. It marked the second straight week that claims have fallen, pushing the total to the lowest level since the week of Feb. 18.

Even with the two-week improvement, economists are still looking for the labor market to gradually weaken in coming months, reflecting a slowdown in overall economic growth.

The four-week moving average of claims, which smooths weekly fluctuations to provide a better picture of labor market trends, fell to 315,750 from 328,000 the previous week.

The number of people who continued to file for benefits after receiving an initial week of aid rose by 15,000 to 2.425 million in the week ended June 3, the latest for which that data is available.

The weakness in industrial production reflected a 0.1% decline in manufacturing output and a 0.2% drop in mining production, a category that includes oil and natural gas production. Utility production rose 0.2% last month.

The small decline left U.S. industry operating at 81.7% of capacity in May, down slightly from an April operating rate of 81.9% of capacity.

The Fed keeps a close watch on the operating rate to see if it is approaching levels where bottlenecks could develop and threaten to boost inflationary pressures.

The reports will likely continue the guessing game about what the Federal Reserve will do at its June meeting.

A quarter-point hike is almost a sure thing, investors believe.

But with New York Fed manufacturing activity posting a surprising jump in June and weekly jobless benefit applications dipping to their lowest in nearly four months, talk began to emerge of an even bigger move.

Now, with contradicting reports the guessing continues.