By Tim Ahmann
WASHINGTON, May 15 (Reuters) - U.S. wholesale prices posted a record drop last month and industrial output shrank, reports released on Thursday showed, but other data raised hopes the beleaguered factory sector may be on the mend.
The producer price index, which measures prices paid at the factory, farm and refinery gate, plummeted 1.9 percent in April, the biggest drop on records dating to 1947, the Labor Department said.
Much of the decline was caused by an 8.6 percent fall in energy prices, which reflected a big decline in the cost of oil from its late-February high as fears over a supply disruption tied to the war in Iraq eased.
However, prices for cars, SUVs and other light trucks, and cigarettes also fell, dragging the so-called core-PPI, which excludes volatile food and energy prices, down a sharp 0.9 percent -- its biggest plunge since August 1993.
While the price drops were much larger than economists on Wall Street expected, analysts cautioned against jumping to the conclusion that deflation, a persistent drop in overall consumers prices, was about to set in.
"The trend is still there to softer prices. The economy is shaking off the war-related paralysis from March and April, but the question is will growth be sustained or will it be just a return to the slow pre-war growth?," said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein in New York.
In a separate report, the Federal Reserve said output at the U.S. manufacturing plants, mines and utilities slid 0.5 percent in April, its second consecutive drop, with the factory use rate falling to its lowest level since May 1983.
"The economy is still moving ahead but not very fast and it does not seem to have accelerated much from the 1 and half percent rate that we've been in the past six months," said Douglas Lee, president of Economics from Washington.
But Lee and other economists said there were some hopeful, if tentative, signs business conditions may be on the mend.
HOPE AMID DISTRESS
One sign was a report on Thursday that factories in New York State ramped up activity and hired workers in May.
The Empire State Manufacturing Survey's main index of business conditions jumped to 10.6 in May from -20.2 in April, the New York Federal Reserve Bank said. A reading above zero indicates improving rather than deteriorating conditions.
Most U.S. Treasury prices fell, pushing yields higher, as traders focused on the Empire State survey and discounted the industrial production report as old news.
"The bottom line is these are good numbers, showing inflation is tame but the economy may be picking up now that we're getting past war concerns," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.
Another small positive, analysts said, was a report showing sales at retailers, manufacturers and wholesalers climbed in March at their fastest pace in nearly a year.
Some economists also seized on a third consecutive weekly drop in the number of Americans filing first-time claims for unemployment aid as a sign of economic improvement, even though the number remained at lofty levels.
Initial jobless claims dipped 13,000 in the week ended May 10 to a seasonally adjusted 417,000 from a revised 430,000 in the prior week, the Labor Department said.
While claims declined last week, they remained above the 400,000 level for the 13th week in a row. Economists say claims above 400,000 indicate a stagnant labor market.
In addition, the number of jobless workers who remained on the benefit rolls in the May 3 week, the latest week for which data are available, rose a sharp 120,000 to 3.77 million. That marked its highest level since the middle of November 2001, when the U.S. economy was reeling from the Sept. 11 attacks.
DEFLATION?
Economists said the report on wholesale prices showed producers were having a tough time trying to raise prices.
Car prices fell 2.6 percent last month, their biggest drop since October 2001, while prices for light trucks fell 4.6 percent, the largest drop since February 1982.
Vehicle prices at the producer level have fluctuated sharply in recent months, reflecting on-again, off-again sales incentives from manufacturers.
In addition, cigarette prices slid a sharp 9.6 percent, their largest fall since August 1993.
If car, light truck and cigarette prices were excluded, the non-energy, non-food PPI would have risen 0.2 percent.
Record drops for the cost of gasoline and home heating oil partly accounted for the sharp drop in energy costs. Gasoline prices fell 22.3 percent, heating oil was down 29.3 percent.