Manufacturing in the US mid-Atlantic region shrank for a second month in early April as factories trimmed production, while more Americans joined the ranks of the unemployed last week, reports showed.
One of the month's first glimpses into regional manufacturing performance, the Federal Reserve Bank of Philadelphia's sinking gauge of business conditions dealt a blow to hopes for a swift US industrial recovery.
Separately, a surprising jump in first-time unemployment benefits suggested it may take a while before Americans can begin to feel secure in their jobs, prompting analysts to fear that April payrolls could signal yet more gloom.
An April drop in payrolls could leave job losses over the past three months above 500,000, the sort of tally usually associated with recession.
Economists, expecting the worst from the Philadelphia Fed after spotty reports on the nation's factories earlier last week, found relief in data that, while troubling, showed a decline less dramatic than some had envisaged.
The report came in at -8.8, worse than the -8.0 March reading, but less alarming than the double-digit negative figures certain economists had predicted. Any reading below zero indicates contraction in the sector.
"The report was not as bad as people were braced for, but it's still pretty weak," said Jim O'Sullivan, an economist at UBS Warburg. "But if this sort of weakness continues into May, then it'll be time to worry."
In their hunt for something positive in an otherwise grim release, analysts found encouragement in the Philadelphia Fed's six-month outlook, which suggested that perhaps the latest data were not yet free from the burdens of war.
Stock investors clung to that ray of hope, and to earnings from other less-than-disastrous news on earnings from technology giants like Nokia.
Wall Street has lowered its bar for both data and earnings to such depths that any results short of the nightmare scenario are greeted with a cheer.
The Dow Jones industrial average climbed one per cent and the tech-heavy Nasdaq Composite trotted up a heftier 2.2 per cent higher.
Government bonds reversed earlier gains built on the jobs data, with the benchmark 10-year US Treasuries note edging 4/32 lower for a yield of 3.96 per cent. Optimists have their fingers crossed, hoping that the winding down of the war in Iraq will herald a full-fledged economic expansion after over two years of mediocre growth.
But if the reports are any measure, the dramatic turn in favor of US forces during April has yet to be reflected in economic data.
Military progress in the war on Iraq has lifted the spirits of consumers, and major indicators of confidence along with them. But analysts worry that fear of losing one's job could thwart the post-war improvement in sentiment.
Jobless claims jumped to 442,000 in the week to April 12, well above forecasts of 411,000 and erasing all of the previous week's sharp fall to 412,000.
It was the ninth straight week claims held above the 400,000 level, which implies job growth is not nearly enough to help lower the unemployment rate. Worse yet, the four-week moving average climbed to an 11-month peak of 425,500 and this in the week when the survey for the April payrolls report is taken.
The claims data is even worse than that during last month's payroll-survey week. In other words, this week's data could well translate into a dismal April jobs report.
The labour market has proved a sore spot for the economy in recent months, with payrolls collapsing by 465,000 in just February and March alone.
Officials at the Federal Reserve have cautioned that it would take a few weeks before war-related uncertainty was completely factored out of the economic data.
The April jobs report is due out on May 2, just four days before the Federal Reserve holds its next policy meeting. Another dismal result will put pressure on the central bank to cut interest rates again.
Consumers have helped prevent a renewed recession by spending their money even as they expressed dismay about the state of economic affairs to confidence surveys. Yet many analysts worry that if job growth fails to pick-up sometime soon, consumers could cave.
"The question is: How much will the labour market temper the uptick in consumer confidence that is related to the end of the war?" worried Kathleen Stephansen, senior international economist at Credit Suisse First Boston. "We need to take that seriously."