TOPWRAP 6-Mixed data for world economy amid signs of recovery

Published: 03 Jun 2009 17:34:41 PST

* Bernanke warns on rising long-term interest rates

* U.S. jobs report shows more layoffs than expected in May

* Euro zone service sector shrunk at slower pace in May

* UK service sector returned to growth in May

* Stocks drop in U.S., Europe; Dow down 1.2 pct

NEW YORK, June 3 - Economic caution flags rose over the United States Wednesday as reports raised questions over the strength of a possible recovery in the world's No. 1 economy, but news from the euro zone and Britain was upbeat.

Federal Reserve Board Chairman Ben Bernanke also threw a damper on the optimism of recent days, warning that rising U.S. debt was contributing to a spike in longer term interest rates, and it was time to rein in deficits.

But Bernanke, speaking before the House Budget Committee, also gave a relatively upbeat assessment of the economy, saying, "We continue to expect overall economic activity to bottom out and turn up later this year."

From Europe, the euro zone's dominant service sector shrank at a slower pace in May and Britain's service sector also improved, returning to growth in May. New car sales in Germany rose 40 percent in May.

But two reports -- revised data showing a record fall in first-quarter euro zone GDP, and producer prices for April -- gave timely reminders that European economies are still very much at a low point.

And U.S. data was also discouraging. Companies axed 532,000 private sector jobs in May, according to ADP Employer Services, more than economists had expected but fewer than in April. April's data was revised by ADP to show more cuts than previously estimated, 545,000 instead of 491,000.

Planned layoffs at U.S. firms, however, fell for a fourth month in May, reaching the lowest level in eight months.

SERVICES SECTOR

The U.S. services sector -- 80 percent of the economy -- shrank again in May, by more than economists expected. The Institute for Supply Management's index edged up to 44.0 in May from 43.7 in April, while economists expected a reading of 45. A number below 50 represents contraction.

And the spiking interest rates that Bernanke warned about, which have surged to their highest level since late January, helped send U.S. mortgage applications down last week by 16 percent.

The report from the Mortgage Bankers Association was particularly worrisome as a recovery in U.S. housing, where the global financial crisis began, is seen as the linchpin to a wider economic rebound.

New orders received by U.S. factories rebounded in April, according to government data, but the previous month's figure was revised sharply downward. The U.S. Commerce Department said factory orders rose 0.7 percent in April after a revised 1.9 percent drop in March, the second increase in the last three months.

Markets pulled back. The Standard & Poor's 500 Index fell 1.9 percent. The pan-European FTSEurofirst 300 fell 2.0 percent. Earlier, stocks rose in Tokyo, with the Nikkei 225 index closing up 0.4 percent to an eight-month high.

Oil futures settled about 3.5 percent lower at $66.12, as the dollar rose and data showed crude inventories surprisingly grew in the past week.

The dollar, which had been near a recent 2009 low on growing investor appetite for risk, got a boost after Reuters reported that leading Asian countries see no alternative to the U.S. unit as the world's main reserve currency.

But Bank of Japan policy board member Hidetoshi Kamezaki warned of downside risks to the economy and said long-term bond yields should reflect the outlook. "It's desirable for long-term interest rates to move in a way that is consistent with the economic and price outlook," he said.

A BETTER MAY IN EUROPE

Markit revised its Eurozone Services Purchasing Managers Index to a seven-month high of 44.8 for May from the first estimate of 44.7, above April's 43.8 and forecasts of 44.7.

It said business expectations rose to a 15-month high on hopes the worst of the recession was over, and, if the trend continued, the service sector would return to growth by August.

"The expectations component increased very sharply in May, suggesting that the run of increases will probably continue in the coming months," said BNP Paribas economist Ken Wattret.

A survey from leading British mortgage lender Nationwide Building Society showed consumer confidence at a six-month high.

German new car registrations in May, helped by cash incentives for buyers to junk old cars, rose 40 percent year-on-year in Europe's biggest market to 384,578 units.

Eurostat said January-March output in the euro zone shrank a record 2.5 percent quarter-on-quarter, in line with an earlier reading issued on May 15, the result of plunging corporate investment and exports. It revised lower the annual fall to 4.8 percent from 4.6 percent.

Eurostat also said factory gate prices logged their biggest annual fall on record in April, the 4.6 percent figure pointing to negative inflation in coming months and more monetary easing from the European Central Bank.

Australia's economy grew at a stronger-than-expected 0.4 percent in the first quarter as the best trade performance in almost half a century helped offset a slump in business and housing investment.