* Weekly unemployment benefits claims rise 18,000
* Four-week moving average lowest in more than two years
* Continuing claims drop 47,000 (Adds details, updates markets)
By Lucia Mutikani
WASHINGTON, Jan 6 (Reuters) - New U.S. claims for jobless benefits moved higher last week, but a decline in the four-week average to a nearly 2-1/2-year low suggested the trend toward a better labor market remains intact.
Initial claims for state unemployment benefits increased 18,000 to a seasonally adjusted 409,000, the Labor Department said on Thursday, above economists' expectations for 400,000.
The data falls outside the survey period for the government's closely watched employment report for December, which on Friday is expected to show nonfarm payrolls jumped 175,000 after November's surprisingly small 39,000 gain.
The spike in claims did little to change perceptions the economy is now on a sustainable growth path, as flagged by sturdy data on consumer spending, trade and manufacturing.
Signs that the labor market was improving were underscored by the four-week moving average of new benefit applications -- a better measure of underlying trends -- which fell 3,500 last week to 410,750, the lowest level since late July 2008.
"It's telling you very clearly that the employment side of the economy is picking up, it paints a pretty definite picture that layoffs are on the way down," said Steve Blitz, a senior economist at ITG Investment Research in New York.
Growing optimism over the economy was tempered somewhat by news of below-forecast December sales at top retailers as consumers who splurged right after Thanksgiving turned into bargain-hunters. A post-Christmas blizzard also hurt sales.
Sales at stores open at least a year for the 28 major retailers tracked by Thomson Reuters rose 3.1 percent, below Wall Street's forecast of a 3.4 percent increase. [ID:nN06271949] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Retail stocks track sales; r.reuters.com/saz94r
ADP vs. the Labor Department: r.reuters.com/sev94r
Jobless claims: r.reuters.com/sev94r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
STRENGTHENING ECONOMIC OUTLOOK
Investors, disappointed with the retail results, sold U.S. stocks, but losses were limited in anticipation of a bullish payrolls number. Prices for U.S. government debt rose, while concerns about high debt levels in peripheral euro zone nations lifted the dollar to a five-week high against the euro.
The labor market has lagged the recovery in the overall economy but should draw support as the benefits of a $858 billion tax package kick in. Economists expect the package, announced last month, to add up to a full percentage point to gross domestic product growth this year.
But Republicans, who wrested control of the U.S. House of Representatives from Democrats, are going to try to cut government spending this year, perhaps to the tune of $50 billion. This would take away some of the stimulus offered by the tax package. For details see [ID:N06125306]
The decline in the four-week average of new jobless claims corroborated trends seen in independent data.
Reports this week showed the number of planned layoffs at local firms dropped to a 10-1/2 year low in December, while private sector hiring was unexpectedly robust. Seasonal factors, however, could have skewed the data.
"Given continuing evidence that the pace of growth is picking up, we should continue to see improvement in the employment picture in the quarters ahead," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.
"Nonetheless, it is still going to take years to fully restore the jobs market to pre-crisis conditions given the magnitude of job losses during the recession and the persistently high unemployment rate."
The unemployment rate is expected to have edged down to 9.7 percent in December from 9.8 percent in November.
Economists say getting the four-week average for new jobless claims below 400,000 would be an important signal the lofty unemployment rate was set to come down. (Editing by Kenneth Barry)