The number of Americans filing new claims for unemployment benefits dropped for a third straight week last week, the latest indication the labor market recovery was gaining traction.
Other data on Thursday showed a spike in the cost of gasoline pushed up producer prices last month, but a lack of broad price pressures gives the Federal Reserve scope to maintain its very easy monetary policy.
The claims report added to a range of data - from retail sales to manufacturing and employment - that have suggested a limited impact on the economy from higher taxes.
"The recent labor market data signal at least steady, and potentially improving, job growth so far in 2013 despite the implementation of various forms of fiscal tightening," said Daniel Silver, an economist at JPMorgan in New York.
Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 332,000 last week, the Labor Department said. Economists polled by Reuters had expected first-time applications for jobless aid to rise to 350,000.
The four-week moving average for new claims, a better measure of labor market trends, fell to a five-year low, suggesting a firming in underlying labor market conditions.
While the signs of strength in the jobs market could intensify an already lively debate at the Fed on the future course of monetary policy, economists said the U.S. central bank was unlikely to scale back its monetary stimulus.
Policymakers meet next week to assess the economy and are widely expected to keep purchasing $85 billion in bonds per month in an effort to spur even stronger economic growth. It has said it would keep up asset purchases until it saw a substantial improvement in the labor market outlook.
Employment growth has picked up in recent months, but that is more a reflection of a decrease in layoffs than a pick up in hiring. In February, nonfarm payrolls increase by a healthy 236,000, but economists said that is not enough to satisfy the U.S. central bank.
"The Fed is looking for a broad underlying improvement in the labor market. We need to see the hiring rate accelerate for this labor market recovery to really take hold," said Omair Sharif, an economist at RBS in Stamford, Connecticut.
A government report on Tuesday showed layoffs in January were the fewest on records dating to 2000, while the pace of hiring held steady.
Investors welcomed the drop in claims and bought U.S. stocks. The Dow Jones industrial average extended its winning streak to 10 days in a row. Prices for U.S. Treasury debt fell, while the dollar fell against a basket of currencies.
A second report from the Labor Department offered little reason to worry about a pick up in inflation, with food prices at the wholesale level almost reversing January's increase and the cost of automobiles rising only marginally.
However, gasoline prices jumped 7.2 percent last month, enough to push the Producer Price Index up a relatively steep 0.7 percent after a 0.2 percent advance in January.
In the 12 months through February, prices received by farms, factories and refineries rose 1.7 percent, the fastest rise since October and up from a 1.4 percent gain the prior month.
However, underlying inflation pressures remained contained, with wholesale prices excluding volatile food and energy costs rising 0.2 percent after a similar increase in January.
In the 12 months through February, this so-called core PPI was up 1.7 percent, the smallest rise since January 2011.
While gasoline prices pushed up producer prices last month, they have started to fall from their lofty levels. This should keep inflation under wraps and boost consumer purchasing power.
"The underlying picture for inflation remains quiet. Prices for oil and gasoline have fallen back since February, so we expect to see a sharp fall in the headline PPI next month," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.