* Factory activity slows in early October
* Jobless claims fall 12,000 in Oct. 19 week
* California backlog continues to influence data
* Trade deficit widens a bit in August
By Lucia Mutikani
WASHINGTON, Oct 24 (Reuters) - The number of Americans filing new claims for unemployment benefits fell less than expected last week, but a lingering backlog of applications in California makes it difficult to get a good read of labor market conditions.
While other data on Thursday showed manufacturing growing at its slowest pace in a year in early October, economists said fundamentals for the factory sector remained fairly healthy.
Initial claims for state unemployment benefits fell 12,000 to a seasonally adjusted 350,000, the Labor Department said.
"Underlying labor market conditions probably are not as bad as the recent claims data suggest," said Daniel Silver, an economist at JPMorgan in New York.
Technical problems as California converted to a new computer system have distorted the claims data since September and a Labor Department analyst said claims from the backlog in California were still working their way through the system.
Economists, who had expected first-time applications to fall to 340,000 in the week ending Oct. 19, say claims should drop back to levels consistent with a gradual labor market recovery once the backlog in California is cleared.
In a separate report, financial data firm Markit said its "flash," or preliminary, U.S. manufacturing Purchasing Managers Index fell to 51.1, the lowest since October 2012, from 52.8 in September.
Output declined for the first time in more than four years, with the subindex dipping to 49.5 from 55.3. A reading below 50 indicates contraction.
While Markit suggested a 16-day partial federal government shutdown because of a budget impasse in Washington caused the slowdown in factory activity, economists were skeptical.
"I don't think all the businesses tightened their reins during the shutdown. Some of them had expected the shutdown to be temporary and that turned out to be the case," said Jacob Oubina, senior economist at RBC Capital Markets in New York.
The Markit survey has limited usefulness in trying to gauge the health of the U.S. manufacturing sector as it has only a short history, economists said.
Economists estimate the government shutdown shaved as much as 0.6 percentage point off annualized fourth-quarter gross domestic product growth and could delay the U.S. Federal Reserve's plans to ease back on stimulus for the economy.
Though jobless claims have been distorted by the computer troubles in California and the recent government shutdown, they have generally been trending lower, suggesting employers are no longer laying off workers at an aggressive pace.
Hiring, however, is being constrained by anemic domestic demand and uncertainty over fiscal policy. Employers added 148,000 new jobs in September. Payroll growth in the third quarter averaged 129,000 per month, far less than the 200,000 average in the first half of the year.
"The layoff side of the labor market equation continues to improve," said Gennadiy Goldberg, an economist at TD Securities in New York. "With the fiscal uncertainty can kicked to early-2014, layoffs may continue to gradually normalize but businesses could remain reluctant to hire new workers."
The government shutdown pushed up claims in recent weeks as furloughed nonfederal workers applied for benefits. Claims filed by federal employees fell 25,939 in the week ended Oct. 12, the latest week for which more detailed data is available.
Separately, the Commerce Department said the trade gap nudged up 0.4 percent to $38.8 billion in August. When adjusted for inflation, the gap was unchanged at $47.3 billion from July, suggesting trade's contribution to third-quarter growth would be neutral.
The economy grew at a 2.5 percent annual rate in the April-June quarter, stepping up from the first-quarter's 1.1 percent pace. Third-quarter growth estimates are currently around 2 percent.