By Alister Bull and Pedro da Costa
WASHINGTON (Reuters) - Business activity in the U.S. Midwest surged past expectations in October as new orders hit their highest level since 2004, countering recent evidence of soft economic growth.
Weekly unemployment claims also fell, in welcome news for the nation's battered labor market after the impact of a government shutdown on furloughed federal workers diminished.
The Institute for Supply Management-Chicago business barometer jumped to 65.9 from 55.7, the strongest reading since March 2011 and well above the most optimistic forecast in a Reuters poll.
Initial claims for state unemployment benefits dropped by 10,000 to a seasonally adjusted 340,000, the Labor Department said on Thursday.
The U.S. job market has apparently slackened in recent months, with private-sector employers hiring fewer workers in October after uncertainty caused by budget brinkmanship in Washington dented confidence among both consumers and businesses.
Given that backdrop, analysts treated the ISM-Chicago numbers with some skepticism.
"The report may be exaggerating the extent of economic growth momentum," said Millan Mulraine, director of research at TD Securities.
Financial markets showed little reaction to the figures, with stocks lower on investor caution following recent record highs. Treasury bonds were also down modestly.
Other recent data on hiring, factory output and home sales in September have suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.
Anxious to maintain policy support while the economy works through this soft spot, the U.S. Federal Reserve on Wednesday extended its asset purchase campaign at a policy meeting that opted to keep buying bonds at a $85 billon monthly pace.
A 16-day partial shutdown of the federal government had pushed up claims in recent weeks as furloughed workers applied for benefits, but this factor appeared to be diminishing.
Claims filed by federal employees dropped 29,713 in the week ended October 19 to 14,423. The shutdown ended on October 17.
In addition, a Labor Department analyst said California, which had been dealing with a backlog, reported no carryover in claims last week from previous weeks.
Technical problems as California converted to a new computer system have distorted the claims data since September, which had made it hard to get a clear read of labor market conditions.
The four-week moving average for new claims, considered a better measure of labor market trends, increased 8,000 to 356,250.
Federal Reserve officials are closely focused on improvements in the labor market, which they have made a condition for tapering their massive bond buying program, while stressing they will wait a considerable period before beginning to raise interest rates after asset purchases have halted.
Markets have pushed out their expectations for a rate hike to June 2015, when the chance of a move was priced at 60 percent. Earlier this week, the Fed funds futures contract had signaled a 52 percent chance of a hike in April 2015.
The government will publish October's employment report on November 8. Payrolls gained 148,000 in September, with the unemployment rate hitting a near five-year low of 7.2 percent.
But if average monthly jobs growth continues at less than 150,000, where it has been over the last three months, that would make it difficult for the jobless rate to fall further.
Furthermore, the shutdown could have impacted the gathering of responses for the survey that form the basis of the unemployment rate, resulting in a smaller sample that might undermine the accuracy of the report.
(Editing by Krista Hughes and Chizu Nomiyama)