U.S. housing starts rose far less than expected in March and factory activity in the mid-Atlantic region grew modestly this month, suggesting the economy could struggle to rebound from a soft patch hit in the first quarter.

The economy stumbled at the start of the year under the weight of a harsh winter, a resurgent dollar, weaker global growth and a now-resolved labor dispute at the West Coast ports.

There are expectations growth will rebound in the second quarter, but Thursday's lukewarm data suggest the momentum will probably not be strong enough for the Federal Reserve to start raising interest rates before September.

"The economy's tepid recovery in March makes it very unlikely the Fed signals a June rate hike at the April meeting," said Steve Blitz, chief economist at ITG Investment Research in New York. "If housing doesn't recover enough this spring, a September rate hike likely becomes equally improbable."

Groundbreaking increased 2.0 percent to a seasonally adjusted annual pace of 926,000 units, the Commerce Department said. That left the bulk of February's decline, which had been blamed on bad weather, intact.

While starts for single-family homes rose, the gains made only a small dent into the prior two months' losses. Groundbreaking for the multifamily segment fell.

Economists had forecast groundbreaking rising to a 1.04 million-unit pace in March.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rose to 7.5 this month from 5.0 in March. A measure of orders for manufactured goods fell to its lowest level since May 2013, while shipments remained in contraction territory despite some improvement.

A report on Wednesday showed soft factory activity in New York state in April.

"Combined, the April reports are not signaling that manufacturing activity is picking up significantly following the weak first quarter," said Daniel Silver, an economist at JPMorgan in New York.

Manufacturing has been slammed by the dollar's 13 percent appreciation against the currencies of the United States' main trading partners since last June, as well as the softer overseas demand.

U.S. stocks were slightly lower as corporate results showed little organic growth even as they largely beat profit expectations. Prices for U.S. government debt fell and the dollar was a bit weaker against a basket of currencies.

FAVORABLE OUTLOOK

Despite the recent weakness, the outlook for housing remains favorable against the backdrop of a strengthening labor market.

While a separate report from the Labor Department showed a rise in the number of people seeking unemployment aid last week, the underlying trend continued to suggest the jobs market is tightening as more long-term unemployed find work.

Initial claims for state unemployment benefits rose 12,000 to a seasonally adjusted 294,000 for the week ended April 11.

But claims tend to be volatile around this time of the year because moving holidays like Easter and the school spring break can throw off the model that the government uses to smooth the data for seasonal fluctuations.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose only marginally and remained well below the 300,000 threshold that is associated with a strengthening labor market for a third straight week.

The number of people still receiving unemployment benefits after an initial week was the lowest since December 2000.

"We continue to view claims data as reflective of overall improvement in labor markets," said Jesse Hurwitz, an economist at Barclays in New York.

With more people receiving a pay check and lending standards eased a bit to attract first-time home buyers, gains in housing are expected this year. Banking giants Bank of America (BAC.N) and JPMorgan (JPM.N) this week reported a surge in mortgage lending in the first quarter.

Though permits for future home construction declined 5.7 percent to a 1.04 million-unit pace, March was the eighth straight month that they remained above the 1 million-unit pace.

Last month, groundbreaking rebounded sharply in the Northeast and Midwest, which had been affected by snowy and cold weather in February. Starts, however, fell in the West and the South, where most of the home building takes place.