Jobless claims, factory data buoy recovery hopes

Case worker Jessica Yon discusses eligibility for unemployed people at a jobs center in San Francisco, California February 4, 2010.

WASHINGTON (Reuters) - Upbeat U.S. data on the jobs market and manufacturing sector Thursday buttressed the view the economy gained momentum as the year ended, setting the stage for a stronger performance in 2011.

New applications for unemployment benefits dropped 34,000 last week to 388,000, the lowest level since July 2008, while factory activity in the Midwest expanded in December at its fastest pace in more than 22 years.

Further brightening the picture, pending sales of previously owned homes rose more than expected in November.

The data was the latest in a series, ranging from retail sales to trade, to suggest the recovery has picked up steam.

"The economy is heading into 2011 with some pretty good momentum and some pretty good wind behind its sails right now," said Omair Sharif, an economist at RBS Securities in Stamford, Connecticut.

The reports had a minimal impact on U.S. financial markets, where volumes were light and investors moved to the sidelines as the year wound down.

Prices for U.S. government debt were mostly marginally down, while the dollar rebounded from a seven-week low against the yen. U.S. stock indexes were flat to slightly lower.

Economists, who had expected initial claims for jobless benefits to dip only to 415,000, said the Christmas holiday-shortened week may have led to data distortions.

However, analysts said that did not change the view that the labor market was gaining strength. A four-week average of new claims -- a better measure of underlying trends -- also touched its lowest level since July 2008.

"There's no denying that the economy is improving," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

BULLISH SIGNAL FROM MANUFACTURING

The Institute for Supply Management-Chicago's business barometer for the Midwest provided an even more bullish signal.

It jumped to 68.6, the highest since July 1988, from 62.5 in November. Economists had expected it to dip. Any reading above 50 indicates the region's economy is expanding.

The gauge, which closely correlates to the Institute for Supply Management's report on national manufacturing due on Monday, mirrored strong gains in measures of factory activity in other regional surveys reported last week.

In a third report, the National Association of Realtors said its pending home sales index, which is based on signed contracts to buy previously owned houses, rose 3.5 percent last month to 92.2. It was the second straight month of gains and beat market expectations for a 2 percent increase.

Analysts have forecast economic growth at an annual pace of between 3 percent and 3.5 percent in the current quarter after a 2.6 percent expansion in the third quarter, and there is optimism that this would boost hiring.

An employment gauge in the Chicago factory report rose to 60.2 -- the highest level in more than five years -- from 56.3 in November.

That jump and the steady decline in jobless claims in recent weeks suggests the pace of job creation picked up this month after a dismal November in which employers added only 39,000 workers to their payrolls.

The December employment data is due on January 7, and a preliminary Reuters survey shows economists expect nonfarm payrolls increased 126,000.

However, that is still not enough to significantly reduce the unemployment rate, which is expected to edge down to 9.7 percent from 9.8 percent in November.

"The downward trend in initial jobless claims has become more pronounced after stalling over the summer and should be an indication that hiring is accelerating," said Ellen Beeson Zentner, a senior U.S. economist at the Bank of Tokyo-Mitsubishi UFJ in New York.

"However, the average level of claims suggests job creation of no more than 150,000 a month. To accelerate beyond that we've got to see the four-week average move convincingly below 400,000."

The report on jobless claims showed the number of people still receiving benefits under regular state programs after an initial week of aid rose 57,000 to 4.13 million in the week ended December 18. This data covered the survey week for the government survey from which the unemployment rate is derived.

The jobless rate is likely to remain elevated as an improving labor market lures discouraged job seekers back into the labor force.

(Additional reporting by Ryan Vlastelica, Chris Reese in New York; Editing by Chizu Nomiyama)