US recession fears recede as factories show growth

US manufacturing unexpectedly grew in August and fewer Americans filed new claims for jobless benefits last week, despite a slump in confidence that threatened to push the economy back into recession.

The reports are the latest in a series to suggest the economy remained on a slow-growth path and offered hope it would dodge a recession.

"I am breathing a little sigh of relief that the bit of data that we have had over the course of August is weak but not giving the recessionary type of signal," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

More light will be shed on the health of the world's largest economy when the government releases its closely watched employment report for August on Friday.

The Institute for Supply Management's index of national factory activity edged down to 50.6 from 50.9 in July, confounding economists' expectations for a fall to 48.5.

A reading below 50 indicates a contraction in the nation's factory sector. Initial claims for state unemployment benefits dropped 12,000 to a 409,000, a separate report from the Labor Department showed.

The drop in claims offered no sign layoffs have picked up in the wake of slumping business and consumer confidence on the back of a steep plunge in the stock market last month and Standard & Poor's decision to strip the nation of its AAA credit rating.

But claims are still above the 400,000 usually associated with a stable labour market and key details of the ISM survey, including production, new orders and employment were weak.

"The ISM survey is consistent with an economy staggering forward at a weak pace of growth. When the economy tips into recession, the ISM index usually drops into the low 40s," said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts.