WASHINGTON (Reuters) – The number of Americans filing applications for unemployment benefits fell more than expected last week, pointing to underlying labor market strength despite a sharp slowdown in job growth in May.

But the outlook for the economy continues to darken. Other data on Thursday showed factory activity in the mid-Atlantic region stalled in June, likely reflecting a recent escalation in trade tensions between the United States and China.

The trade war has increased uncertainty over the U.S. economic outlook, prompting the Federal Reserve on Wednesday to signal it could cut interest rates by as much as half a percentage point over the rest of this year. The U.S. central bank kept rates unchanged on Wednesday.

Initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 216,000 for the week ended June 15, the Labor Department said. Economists polled by Reuters had forecast claims would decrease to 220,000 in the latest week.

The Labor Department said no states were estimated. The drop in claims followed three straight weekly increases. Claims are being closely watched for signs of a rise in layoffs stemming from the trade fight.

Fed Chairman Jerome Powell acknowledged the meager job gains in May and said “in light of recent developments this bears watching,” but also noted that “many labor market indicators remain strong.”

U.S. stock index futures moved slightly higher after the release of the data while U.S. Treasury yields trimmed their declines. The U.S. dollar held earlier losses.

WEAK MANUFACTURING

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 1,000 to 218,750 last week.

Last week’s claims data covered the survey period for the nonfarm payrolls component of June’s employment report. The four-week average of claims was little changed between the May and June survey period. Still, economists expect payrolls to pick up in June after increasing by 75,000 jobs in May.

Job growth has cooled from the brisk pace in 2018 in line with the economy, which is slowing as the stimulus from last year’s massive tax cuts and increased government spending fades.

The Atlanta Fed is forecasting gross domestic product rising at a 2.0% annualized rate in the second quarter. The economy grew at a 3.1% pace in the January-March quarter, boosted by a temporary burst in exports and an accumulation of inventories.

In a separate report on Thursday, the Philadelphia Fed said its business conditions index dropped to a reading of 0.3 in June from 16.6 in May. But the survey’s six-month business conditions index rose to a reading of 21.4 this month from 19.7 in May. Its six-month capital expenditures index increased to 28.0 from a reading of 23.3 in the prior month.

The sharp braking in manufacturing in the region that covers eastern Pennsylvania, southern New Jersey and Delaware was the latest indication that national factory activity continues to slow. A report from the New York Fed earlier this week showed a record plunge in its Empire State manufacturing index to more than a 2-1/2-year low in June.

Manufacturing, which accounts for about 12% of the economy, is being hobbled by an inventory overhang, especially in the automotive sector, that has left businesses placing fewer orders at factories. The trade tensions between Washington and Beijing are also causing bottlenecks in the supply chain.

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