Reports hint U.S. recovery will be long

By Ros Krasny

CHICAGO (Reuters) - Data on Thursday underscored that the U.S. economic recovery, when it arrives, will be a long slog, with a key factory index showing only marginally less weakness and unemployment tipped to hit double-digit levels.

Financial markets were also slammed by suggestions of the unthinkable -- that the United States could lose its coveted triple-A credit rating.

The developments came a day after the Federal Reserve, in minutes released from its April policy meeting, said that a full U.S. recovery could take five or six years.

On Thursday, the Philadelphia Fed reported that its closely watched indicator of factory activity in the Mid-Atlantic region rose by a fraction in May, with the level of contraction more than markets had expected. Separately, an index of leading economic indicators for April managed its first increase in almost a year.

The U.S. Labour Department also reported that initial jobless claims last week fell for the third time in four weeks, while continuing claims hit a 16th consecutive record high.

U.S. stock prices ended with heavy losses. The broad-based S&P 500 index .SPX fell 1.68 percent, bond yields spiked and the dollar tumbled.

Standard & Poor's warning that it could cut its top AAA credit rating on the UK stoked fears that the United States could face a similar fate.

Bill Gross, of top bond firm Pimco, told Reuters that fears the United States is also at risk of losing its AAA credit rating hurt all U.S. assets.