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NEW YORK (Reuters) – The U.S. government will release the findings on bank stress tests this week, and data expected to show another month of crushing job losses will also test emerging optimism on global economic prospects.

World stock markets have been surging for two months, a rally predicated on the notion that the pace of U.S. economic contraction may be easing, presaging a possible recovery from the first synchronous global recession since World War Two.

The gains also presume that the U.S. banking sector, hit hard by losses in real estate and consumer loans since the credit crisis began, is on its way to receiving enough public and private capital to sustain corporate lending.

Both these assumptions will come under scrutiny in coming days.

While employment is generally seen as a lagging indicator, another bout of severe job cuts could put renewed pressure on housing and consumer spending.

“The pace of decline is slowing down, but we’re not turning up,” said David Wyss, chief economist at Standard & Poor’s. “We’ve gone from the black diamond onto the blue slope, but it’s still down hill.”

The U.S. employment picture, which will become clearer on Friday with the release of the April jobs report, will be a key determinant of whether the export-based economies of Europe and Asia can rebound. Germany, a bellwether for Europe more broadly, will publish data on retail sales and industrial output, offering some hints as to the continent’s own troubles.

Part of getting the economy back into shape is sorting out the mess in the financial sector, and the Treasury has come under some fire for using what some observers see as overly optimistic worst-case scenarios for its stress tests.

Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, said the Fed and Treasury’s assumptions are “disturbingly close to where we are now.”

Their benchmarks foresee 10.3 percent as a ceiling for the unemployment rate, to be reached sometime next year. However, many economists polled by Reuters believe the jobless rate will reach 10 percent by the first quarter of next year, and some even see it climbing to 11 percent.

CONFUSION REIGNS

Another prevalent criticism of the government’s handling of the banking sector crisis is the ongoing confusion about when and in what form the stress tests will be released. The Treasury has flip-flopped on the issue, first saying it would unveil the results on Monday, only to backtrack, and then hinting they will now come out late next week.

A government source said on Friday the results would be unveiled late in the U.S. trading session on Thursday.

The real issue is determining how much more money taxpayers will have to shell out to bolster capital in those institutions seen as lacking adequate reserves.

A balance will likely be struck between an amount of capital that is large enough to make the tests credible, but not so large as to make it look like the government could be short on resources to grapple with the banks’ problems.

The emerging consensus is somewhere in the vicinity of $200 billion.

“Unless the test results show, in the aggregate, the need for at least $100 billion of capital, a lot of people aren’t going to think the results are credible,” said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution. “I can’t imagine officials wanting it to be $300 billion, and it’s not clear they could get the money from Congress.”

The Treasury has said any new capital injections would come from the $700 billion financial rescue fund approved by Congress in October. Officials estimate they have about $134.5 billion they could still tap.

In Europe, investors will also be focused on a European Central Bank policy meeting on Thursday. Some believe policy-makers might follow the U.S. Federal Reserve’s lead and deploy unconventional emergency measures aimed at adding even more liquidity to impaired credit markets, such as direct asset purchases.

Federal Reserve Chairman Ben Bernanke, for his part, will testify before Congress on Tuesday, and could reinforce the Fed’s message that things are getting a bit better.

UNEMPLOYMENT SWELLS

One major stress on the global economy is the mounting toll of a withering U.S. job market, which has cut into export-reliant European and Asian economies and is unlikely to abate any time soon.

The Labor Department’s official jobs report for April is expected to show another 630,000 jobs were lost last month, modestly less than recent readings but still a huge figure. Such an outcome would bring total job losses for this recession to a staggering 5.7 million.

“The employment report will likely be terrible again,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.

He also noted that any eventual recovery in gross domestic product, which shrank an annualized 6.1 percent in the first quarter, will likely be meek.

Economists believe over 2 million additional jobs will disappear in coming months, even if there is a second-half rebound. That means that for the broader population, it will still feel like a recession.

“Merely getting growth above the number zero is not enough,” said Crandall.

WASHINGTON – U.S. manufacturing activity contracted at a slower-than-expected pace in April, raising hopes that a steep plunge that began last fall may be moderating. The performance was driven by a rise in new orders reflecting higher business and consumer spending.

The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index rose to 40.1 in April from 36.3 in March. A reading below 50 indicates a contraction. Wall Street economists had expected the index to rise to 38 in April, according to survey by Thomson Reuters.

As new orders rose sharply, company inventories shrank for a 36th straight month — suggesting that future production will need to ramp up and eventually help stimulate the economy.

More orders signal that higher consumer spending — which accounts for about 70 percent of economic activity — is causing businesses to boost demand. Such spending is crucial to an economic recovery.

“Manufacturing remained in intensive care in April, but the pain has begun to ease,” said Joel Naroff, chief economist at Naroff Economic Advisers. “Though the reading is well below the magical 50 level which points to growth, it is the highest mark since September 2008, which is when the sky fell in.”

The index, based on a survey of members of the Tempe, Ariz.-based group, had fallen steadily as the economy deteriorated late last year, hitting a 28-year low in December. The index covers indicators such as new orders, production, employment, inventories, prices, and export and import orders.

In a separate report, though, the Commerce Department said factory orders fell 0.9 percent in March, worse than the 0.6 percent drop that economists had been expecting. Many companies have been battered by the prolonged recession in the United States and by spreading weakness overseas that has sharply reduced their foreign sales.

For March, orders for durable goods dropped 0.8 percent as strength in demand for commercial jetliners and military aircraft offset weakness in other areas. Orders for nondurable goods, products such as petroleum, chemicals and paper, dropped 1 percent after a 0.2 percent fall in February.

Ford Motor Co., meanwhile, grabbed a bigger slice of the U.S. car market in April, even as its overall sales dropped 32 percent. Ford said sales of light trucks and vehicles fell 32 percent compared with sales in April 2008.

On Wall Street, investors wavered on the first trading day of May with the Dow Jones industrial average up slightly in afternoon trading.

The ISM report for April showed that manufacturing inventories contracted for the 36th straight month, though at a slower pace than before. Smaller inventories are an important signpost because they indicate that companies will eventually need to restock goods and boost production to meet new orders. That would help revive the economy.

The new-orders index reached 47.2, up 6 percentage points from March.

“The decline in the manufacturing sector continues to moderate,” said Norbert J. Ore, chairman of ISM’s manufacturing business survey committee. “While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again.”

The government reported Wednesday that the overall economy, as measured by the gross domestic product, contracted at an annual rate of 6.1 percent in the first quarter following a 6.3 percent plunge in the fourth quarter of last year. That was the sharpest GDP setback over consecutive quarters in more than a half-century.

Auto companies have been particularly hammered. Chrysler LLC filed for bankruptcy protection Thursday, announcing that it would temporarily halt most of its vehicle production while completing a deal with Italian carmaker Fiat.

Other manufacturing companies also are enduring hard times.

Dow Chemical, based in Midland, Mich., on Thursday reported a 97 percent drop in its first-quarter profit as its big commercial customers cut back on purchases, though the results beat Wall Street’s expectations. Because Dow’s chemicals are used in everything from toys to automobiles, the global economic downturn has hit the company especially hard.

Consumer goods manufacturer Colgate-Palmolive Co. said this week that higher prices and cost-cutting helped its first-quarter profit jump 9 percent despite being buffeted by a stronger dollar and a drop in European sales.