Manufacturing in the U.S. mid-Atlantic region stayed weak in early April as factories trimmed output and economic activity paused during the U.S.-led war in Iraq, but expectations for the future were more upbeat.

The Federal Reserve Bank of Philadelphia said Thursday its April index of factory business conditions fell to -8.8 from -8.0 in March, the second month of shrinking output. That was below the -4.9 reading forecast by economists, but not as weak as many in the market feared.

It was first time the index has been negative for two months in a row since Decs April 10, just one day after U.S. forces swept into Baghdad, bringing an earlier end to the battle than many had expected.

Economists have warned that indicators from early April may show greater weakness than data from the post-war period, and a national survey due in two weeks may not appear as bleak.

"The basic way I'm looking at a lot of the data being reported right now is that it needs to ignored because it's prewar data, and we really need to be thinking about the future economy that's going to be unshackled from the uncertainty of war," said Joseph Keating, chief investment officer at Amsouth Asset Management.

The dollar firmed and Treasuries pulled back from their highs after the report turned not to be as bleak as that of a neighboring manufacturing survey by the New York Fed.

New orders, a key indicator of future growth, fell to -11.2 from -4.3 in March after sliding 18 points the previous month.

In a special question, 25 percent of firms attributed the decline in new orders to the war.

The employment component dropped to -12.5 from -8.8 the previous month. But the six-month outlook for overall activity remained high at 45.8 compared to 46.4 in March.

The Federal Reserve has said it expects economic activity to pick up after the end of the war, and policymakers say it will take several weeks to get a clearer reading of the post-war economy. That likely goes beyond the next Fed policy meeting on May 6.

The Philadelphia Fed report is one of the first readings on manufacturing each month. It is closely watched for hints on the overall health of the sector, which makes up about one-sixth of U.S. economic activity.

The Philadelphia Fed, one of 12 regional Fed banks, serves Delaware, eastern Pennsylvania and southern New Jersey.