Claims for U.S. unemployment benefits fell sharply for the third straight week last week, the government said on Thursday in a report that offered hope the massive U.S. economic slowdown may be nearing an end.

But another report showed new orders from U.S. factories fell in June, suggesting the hard-hit manufacturing sector is still struggling to climb out of a painful recession.

The factory report was not all bad news, however. Inventories at U.S. factories fell for the fifth straight month in June, a trend economists said could indicate manufacturing activity may pick up in the near future.

The Labor Department said claims for state unemployment benefits in the week ended July 28 fell 23,000 to 346,000, the lowest level since 333,000 in the Feb. 17 week and well below Wall Street expectations of a rise to 385,000.

Labor said seasonal factors were partly at play last week as workers returned to jobs following annual summer layoffs. But economists said the report was positive all the same.

Investors appeared to take the same view and Treasury bonds sank as the upbeat jobless report softened expectations of heavy future rate cuts from the Federal Reserve.

``Although claims can be pretty volatile in July...I still think it is an encouraging trend,'' Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis, said. ``It is consistent with what you'd expect once the Fed rate cuts start to kick in and the excess inventories situation has cleared up.''

The closely watched four-week moving average, considered a more reliable gauge since it smooths out weekly fluctuations, fell to 395,250 from 409,750 for the four weeks that ended a week earlier.

It was the lowest four-week moving average since a matching 395,250 in the period that ended April 21.


The weekly claims data came out a day before the government issues its monthly employment report, which analysts will anxiously scan for a read on the health of the U.S. labor market and the economy as a whole.

Economists in a Reuters poll predict the unemployment rate rose to 4.6 percent in July from 4.5 percent the month before, with a decline of 50,000 jobs outside the farm sector. That compares with June's job loss of 114,000.

The data will be closely watched by Fed officials who are scheduled to gather August 21 to discuss interest rates. The Fed is widely expected to cut rates for the seventh time this year following the meeting, this time by a quarter-percentage point. So far in 2001, the Fed has cut rates by 2-3/4 percentage points.

In the factory order report released on Thursday, the Commerce Department said the value of new U.S. factory orders fell 2.4 percent in June to a seasonally adjusted $334.55 billion after a 2.2 percent increase in May.

That decline, led by weaker orders for transportation goods, was much larger than the 1.2 percent fall forecast by economists in a Reuters poll.

Orders for transportation goods, the largest category of goods produced in U.S. factories, dropped 3.3 percent in June to a seasonally adjusted $52.56 billion. Within that category, orders for motor vehicles, parts and trailers fell 3.8 percent in June after a 2.0 percent gain in May.

For long-lasting durable goods, orders fell 1.7 percent in June after a 2.8 percent gain in May. Orders for computers and electronic products, meanwhile, slipped 1.3 percent after a 1.1 percent gain in May and machinery orders declined 1.2 percent after a 2.3 percent gain in the previous month.


Although the report reinforced recent data that have shown the U.S. factory sector -- which accounts for 15 percent of the broader economy -- remains mired in recession, some economists saw a silver lining.

Inventories fell 0.7 percent in June to $473.3 billion, marking the fifth straight month of declines.

Factories have suffered from major inventory problems this year as a sharp slowdown in the U.S. economy left firms scrambling to decrease abundant inventories that were built up in the expectation that the good times would continue.

With the amount of goods on the shelves far outpacing demand, factories were forced to slow production or shut their doors altogether, leading to massive layoffs in the factory sector. But with inventories declining, factories may start humming again soon, economists said.

``The largest part of the inventory adjustment is over but the rebound in manufacturing activity still lies ahead,'' Charles Lieberman, chief economist at Advisors Financial Center in Suffern, N.Y., said.