The number of Americans filing for unemployment benefits fell more than expected last week, touching its lowest level in nearly five months, suggesting strong job gains that should continue to underpin economic growth.
While other data on Thursday showed a moderation in factory activity in the mid-Atlantic region in July, manufacturers were upbeat about business conditions over the next six months.
Sustained labor market strength likely keeps the Federal Reserve on track to raise interest rates for a third time this year and announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, despite a recent ebb in inflation pressures.
"The Fed can continue with confidence to gradually remove its accommodative policy," said Chris Rupkey, chief economist at MUFG in New York. "Businesses cannot afford to allow any laborers to slip away with the skills they need to help make their products and sell their services."
Initial claims for state unemployment benefits dropped 15,000 to a seasonally adjusted 233,000 for the week ended July 15, the Labor Department said. That was the lowest level since February, when claims fell to 227,000, which was the best reading since March 1973.
Economists had forecast claims falling to 245,000. Claims have now been below 300,000, a threshold associated with a robust labor market, for 124 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.
The labor market is near full employment, with the jobless rate at 4.4 percent. Last week`s drop in claims unwound the recent increase which economists had attributed to volatility associated with different timings of automobile plant shutdowns for annual retooling.
The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 2,250 to 243,750 last week.
U.S. financial markets were little moved by the data as investors focused on comments by European Central Bank chief Mario Draghi that policymakers would discuss possible changes to the bank`s bond-buying scheme in the autumn.
The dollar fell to a near two-year low against the euro, while prices for U.S. government bonds rose. Stocks on Wall Street were trading lower.TIGHTENING LABOR MARKET
Economists expect the Fed to announce a plan to start reducing its massive bond portfolio in September and hike interest rates in December. The U.S. central bank increased borrowing costs by 25 basis points in June.
Last week`s claims data covered the survey period for July`s nonfarm payrolls. The four-week average of claims fell 1,250 between the June and July survey periods, suggesting strong job gains in July. The economy created 222,000 jobs last month, the second biggest payrolls increase this year.
In a separate report on Thursday, the Philadelphia Fed said its index of current business conditions in the mid-Atlantic region fell to a reading of 19.5 this month, the lowest since last November, from 27.6 in June.
However, a measure of business conditions over the next six months increased to a reading of 36.9 from 31.3 in June. A gauge of future capital spending increased 13 points, with 43 percent of firms indicating they planned to increase spending over the next six months.
"Barring a collapse in general confidence, capital spending plans should start turning into actual expenditure in the coming months," said Steven Blitz, chief U.S. economist at TS Lombard in New York.
The current business conditions index was this month weighed down by new orders, which fell 24 points. Nearly 31 percent of factories reported an increase in new orders, down from 45 percent in June.
The survey also suggested inflation could remain benign for a while as manufacturers reported a decline this month in prices they paid for raw materials and received for their products.