By Lucia Mutikani
WASHINGTON (Reuters) - A raft of U.S. economic data on Thursday from claims for jobless aid to factory activity and consumer prices pointed to a still tepid recovery and supported the argument for the Federal Reserve to maintain its monetary stimulus.
The Fed is currently buying $85 billion in bonds per month and has said it would keep up purchases until the labor market outlook improves substantially, although officials are increasingly divided over the wisdom of that course.
"The economy is in a holding pattern. It's not going to strengthen sufficiently to justify an end of the current program," said Millan Mulraine, senior economist at TD Securities in New York.
Initial claims for state unemployment benefits increased 20,000 last week to a seasonally adjusted 362,000, unwinding the bulk of the prior week's decline, the Labor Department said.
A second report from the department showed consumer prices were flat for a second straight month in January as gasoline prices fell and the cost of food held steady.
In the 12 months through January, consumer prices rose 1.6 percent, the smallest gain since July. That suggested there was little inflation pressure to worry the Fed.
Concerns over tepid job growth prompted the U.S. central bank last year to embark on its open-ended bond buying program.
However, minutes of the Fed's January 29-30 policy meeting published on Wednesday showed some policymakers feel the central bank may have to slow or stop the asset purchases before it sees an acceleration in job growth because of concerns over the financial risks of the program.
Those diverging views were evident on Thursday, with two Fed officials signaling support for scaling back the program, while another outlined the case for maintaining bond purchases until well into the second half of the year.
News on the manufacturing sector, which has supported the economy's recovery from the 2007-09 recession, was downbeat.
The Philadelphia Fed's business activity index dropped to minus 12.5 in February, the lowest level since June. The index, which measures factory activity in the mid-Atlantic region, had fallen to minus 5.8 in January.
A reading below zero indicates contraction in the region's manufacturing sector. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.
Another report from financial data firm Markit that tries to gauge overall national factory activity showed manufacturing growth slowed in February but remained near a nine-month peak.
"We believe manufacturing activity will continue to expand early in 2013," said Daniel Silver, an economist at JPMorgan in New York.
The claims and factory reports, as well as weak data from Europe weighed on U.S. stocks. The Standard & Poor's 500 index recorded its worst two-day loss since November.
Prices for U.S. government debt rose and the dollar touched a 5-1/2-month high against a basket of currencies.
Growth in the U.S. economy braked sharply in the fourth quarter, but it expanded at a 2.2 percent clip for the full year. Output is being hampered by lackluster demand as employment struggles to gain traction.
Job growth has been far less than the at least 250,000 per month over a sustained period that economists say is needed to significantly reduce the ranks of unemployed. The unemployment rate rose 0.1 percentage point to 7.9 percent in January.
Last week's claims data covered the survey period for the government's closely watched monthly tally of nonfarm jobs. Claims were up 27,000 between the January and February survey periods.
However, the increase probably does not suggest any material change in the pace of job growth given that claims have been very volatile since January because of difficulties smoothing the data for seasonal fluctuations.
Despite the weak factory and jobs data, there is reason for optimism about the economy. The housing market recovery is gaining momentum.
A report from the National Association of Realtors showed existing home sales rose 0.4 percent last month, pushing the supply of homes on the market to a 13-year low. The median home price rose 12.3 percent from a year earlier.
Rising home values should help to support consumer spending.
Although consumer prices excluding food and energy rose 0.3 percent - the largest gain since May 2011 - most of that reflected outsized increases in apparel and education costs.
"January is a tough month because you get a lot of price hikes at the start of the new year and the seasonals have a hard time sort of adjusting," said Omair Sharif, an economist at RBS in Stamford, Connecticut.
"I don't expect the core CPI to maintain that pace of increase in the near term."
(Additional reporting by Jason Lange in Washington and Steven C Johnson in New York; Editing by Andrea Ricci and James Dalgleish)