The number of Americans filing new claims for unemployment benefits fell last week, pointing to resilience in the labor market despite belt-tightening by Washington.
The improving employment picture is helping to prop up housing, with rising home prices keeping domestic consumption supported, limiting the drag from tighter fiscal policy that is dampening factory activity.
"All the eggs are in housing and the consumers' baskets this quarter. Outside that, there is going to be little support to growth," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Initial claims for state unemployment benefits dropped 23,000 to a seasonally adjusted 340,000 last week, the Labor Department said on Thursday. Economists had expected claims to fall to 345,000.
The drop unwound most of the prior week's jump and suggested employers were not laying off workers in response to fiscal austerity, especially the $85 billion in across-the-board government spending cuts.
The labor market is being closely watched by the Federal Reserve as debate heats up over the future of its expansive monetary stimulus.
Fed Chairman Ben Bernanke told lawmakers that a decision to scale back the $85 billion in bonds the U.S. central bank is buying each month could come at one of its "next few meetings" if the economy appeared set to maintain momentum.
Economists believe that decision could come as early as the September meeting. Many say any pulling back will be gradual as both employment and inflation will likely remain below the central bank's mandate.
A separate report from the Commerce Department showed new single family home sales rose 2.3 percent last month to a 454,000-unit pace. The median sales price for a new home jumped 14.9 percent from a year ago to a record $271,600.
"We have seen some momentum in the housing market. The improving sales are a very broad and powerful positive effect for the U.S. economy," said Robert Dye, chief economist at Comerica in Dallas.
Data on Wednesday showed home resales increased in April to their highest level in nearly 3-1/2 years, with the median price for a previously owned house the highest since August 2008.
Relative strength in the housing market is helping to mitigate some of the drag from higher taxes and deep government spending cuts, which has been evident in manufacturing data.
In a separate report, financial data firm Markit said its preliminary Manufacturing Purchasing Managers Index fell to a seven-month low of 51.9 in May from 52.1 in April. A reading above 50 indicates expansion.
"Slower growth could be linked to a combination of fiscal drag hurting demand at home while at the same time many export markets remain in fragile states," said Chris Williamson, chief economist at Markit.
Economic growth is expected to slow to between a 1.5 and 2.0 percent annual rate in the second quarter after expanding at a 2.5 percent pace in the first three months of the year.
U.S. financial markets were little moved by the reports as investors continued to digest Bernanke's comments on Wednesday and weak factory data from China.
Stocks on Wall Street fell, with the Standard & Poor's 500 index on pace for its first back-to-back daily drop in a month. U.S. Treasury debt prices rose, while the dollar fell against a basket of currencies.
Last week's claims data covered the survey period for the government's report on nonfarm payrolls for May.
Claims dropped 15,000 between the April and May survey periods, suggesting steady gains in employment this month. Employers added 165,000 jobs to their payrolls in April.
The four-week moving average for new claims, which irons out week-to-week volatility, slipped 500 to 339,500.
The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid fell by the most in more than a year to below 3 million. That was the first time in five years so-called continuing claims were below the 3 million mark.
"The evidence from jobless claims suggests that layoffs have slowed, which hints at faster net job creation," said John Ryding, chief economist at RDQ Economics in New York.