Economy Is Showing More Weakness--And Inflation

The economy is continuing to show further signs of weakness as well as rising inflation, according to the latest government reports.

Factory activity in the U.S. Mid-Atlantic region plunged to its weakest in over four years
in December, a survey showed, while jobless claims rose more than expected last week and a widely watched inflation gauge also was above forecasts.

The Philadelphia Federal Reserve Bank said its business activity index was at minus 5.7 in December, its lowest level since April 2003, versus 8.2 in November. Economists polled by
Reuters had forecast a reading of 6.0.

Any reading below zero indicates contraction in the region's manufacturing sector. The survey covers factories in a region encompassing eastern Pennsylvania, southern New Jersey
and Delaware.

Stocks fell to session lows in reaction to the report, which was released at noon Eastern time, while U.S. Treasury debt prices extended gains.

"Very worrisome, there is no escaping it," said David Resler, chief economist at Nomura Securities International in New York. "It's a much bigger decline and a much weaker index than anyone I know thought we might see."

Earlier in the day, the Labor Department said initial claims for state unemployment insurance rose to 346,000 in the week ended Dec. 15 from a slightly upwardly revised 334,000 in the prior week, the Labor Department said.

Wall Street economists predicted claims would rise to 335,000 from the originally reported 333,000 claims for the week ended Dec. 8.

The rise in new claims nudged the four-week moving average to up to 343,000, its highest since October 2005 when they measured 358,250. The moving average, which irons out
week-to-week fluctuations, was 338,750 the prior week.

Meanwhile, a final estimate of third-quarter economic growth showed a price gauge closely watched by the Fed -- personal consumption spending excluding food and energy -- rising at a revised 2 percent annual rate in the third quarter instead of the 1.8 percent it estimated a month ago.

The same report showed that the gross domestic product rose at a 4.9% annual rate in the July through October quarter, the fastest rate in four years. But many experts think that the economy has slowed sharply since then because of the continued housing slump and credit crisis.

Third-quarter growth was the strongest since GDP expanded at a 7.5 percent rate in the third quarter of 2003.

Faster exports and increased inventory-building accounted for the pickup in third-quarter growth from the second quarter's 3.8 percent pace, but many economists say the ongoing
drag from a weak housing sector and credit market turmoil will slow fourth-quarter expansion to 1 percent or less.

Spending on new-home building contracted at a 20.5 percent rate during the third quarter, the steepest fall in more than 16 years, since a 21.7 plunge at the start of 1991 when the
economy was headed toward a recession.

The GDP report showed a price gauge closely watched by the Fed -- personal consumption spending excluding food and energy -- rising at a revised 2 percent annual rate in the third
quarter instead of the 1.8 percent it estimated a month ago. Prices rose at a more modest 1.4 percent pace in the second quarter.

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