Jobless claims at two-month low

Although the reports on Thursday confirmed the economy remained on a slow growth path, they further reduced the odds of a double-dip recession and deflation feared by financial markets.

"The economy will not run away, but at least it's not shriveling," said Pierre Ellis, senior economist at Decision Economics in New York.

Initial claims for state unemployment benefits slipped 3,000 to a seasonally adjusted 450,000, the lowest since the week ended July 10, the Labor Department said on Thursday. Financial markets had expected a rise to 460,000.

In a second report, the department said its seasonally adjusted index for prices paid at the farm and factory gate increased 0.4 percent after gaining 0.2 percent in July. Markets had expected a 0.3 percent increase last month.

U.S. stock index futures cut losses on the data, while Treasury debt prices trimmed gains. The U.S. dollar slipped against the yen.

A Labor Department official said data for only two states had been estimated for last week's jobless claims report. The four-week average of new claims, considered a better measure of underlying labor market trends, dropped 13,500 to 464,750.

The second straight week of declines pulled claims for unemployment benefits further away from a nine-month high of 504,000 touched in mid-August and claims are now in the upper end of a 400,000-450,000 range that analysts say is associated with sustainable job growth.

The impaired labor market, characterized by a 9.6 percent unemployment rate, is hobbling the economy's recovery from its most painful recession since the 1930s.

The Federal Reserve is closely watching the jobs market, but is not expected to announce any news steps to ease monetary policy at a regular meeting next Tuesday. Many analysts, however, believe it will resume purchases of government debt by year-end to keep interest rates low and shore up the economy.

"These (PPI) numbers should reduce concerns about deflation a bit, but it probably won't take the discussion about further easing off the table," said Gary Thayer, chief macrostrategist at Wells Fargo Advisors in St. Louis.

Frustration over a lack of jobs is eroding President Barack Obama's popularity among Americans and could see the Democratic Party severely punished in November 2 congressional elections.

Many analysts predict Republicans could take control of the House of Representatives from Democrats.

With the economy sluggish, price pressures remain muted, but the rise in producer inflation in August took some of the edge off deflation worries.

Producer prices last month were bumped up by a 2.2 percent jump in energy costs. Gasoline prices surged 7.5 percent, the largest increase since January, after falling 2.2 percent in July. Food prices fell 0.3 percent after rising 0.7 percent in July.

Stripping out volatile food and energy costs, core producer prices edged up 0.1 percent last month, matching market expectations. Core PPI increased 0.3 percent in July.

Core PPI was held back by a 0.4 percent decline in passenger car prices, which offset a 0.2 percent increase in the cost of light motor trucks, the Labor Department data showed.

In the 12 months to August, the core producer price index rose 1.3 percent after increasing 1.5 percent in July. The year-on-year increase was in line with market expectations.

(Reporting by Lucia Mutikani, additional reporting by Ellen Freilich in New York; Editing by Andrea Ricci)