* Jobless claims rise 46,000 to 388,000 in latest week
* Official: seasonal adjustments distorted start of quarter
* Data still points to slow improvement in labor market
* Philadelphia Fed factory index, leading economic index up
By Jason Lange
WASHINGTON, Oct 18 (Reuters) - The number of Americans filing new claims for jobless benefits spiked last week, reversing a sharp decline in the prior week but still pointing to a labor market that is slowly healing.
Other data on Thursday showed factory activity increased in the U.S. mid-Atlantic region during October, although not enough to suggest an end to broader weakness in U.S. factory output.
Initial claims for state unemployment benefits rose a greater-than-expected 46,000 last week to a seasonally adjusted 388,000, the Labor Department said.
But the department cautioned that data over the past two weeks appeared distorted by a shift in the way one state was reporting its claims figures. A four-week moving average that smoothes weekly volatility fell from a month earlier, suggesting the lackluster recovery in the job market was on track.
"Things are getting better in the labor market, but only slowly," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
The U.S. economy remains hobbled by a persistently high jobless rate. Incomes have stagnated and many families are awash in debts taken on during a housing bubble in the last decade.
Recently, however, the economy has shown a few positive signals, with the unemployment rate falling to 7.8 percent and retail sales picking up. Consumer spirits have also brightened.
Those signs of improvement appear to have done little to bolster President Barack Obama's bid for a second term, and there is only one more reading on U.S. unemployment before voters go to the polls on Nov. 6.
U.S. stock prices were roughly flat following the jobless claims data, while yields on U.S. Treasury debt fell.
Government statisticians have struggled to adjust the jobless claims data for seasonal patterns over the last two weeks.
Last week, the Labor Department reported claims fell an unusually large 30,000 in the Oct. 6 week, reaching the lowest level in more than four years. But a department analyst said it appeared state-level administrative issues were distorting the data.
Claims usually increase at the start of a quarter, but one state appeared to be following a different reporting pattern than usual, leading to the wild fluctuations, the analyst said.
The data nonetheless points to modest strides in the labor market. While the four-week average of new claims rose 750 last week to 365,500, a month ago that figure stood at 378,500.
Last week was the period used by the Labor Department to survey employers and calculate how many workers were added to payrolls in October. The drop in the four-week average from a month ago suggests hiring picked up.
"It does look like the labor market is improving at least in that respect," said Pierre Ellis, an economist at Decision Economics in New York.
The private Conference Board said on Thursday that its gauge of future economic activity rebounded in September to post its largest gain in seven months.
Separately, the Philadelphia Federal Reserve Bank's business activity index rose to 5.7 in October from minus 1.9 the month before, snapping five months of negative readings that pointed to contraction.
The reading topped the expectations of analysts polled by Reuters, but details within the report gave some worrisome signals about U.S. manufacturing, which has suffered from sagging exports. Europe's debt crisis has cooled global growth, cutting into export demand.
The Philadelphia Fed report pointed to a contraction in employment at the region's factories.
It also suggested the region's factories were cutting plans for capital investments.
Paul Dales, an economist at Capital Economics in London, said that could be a sign factories are worried the U.S. government could raise taxes and cut spending next year, which would hit economic growth.