WASHINGTON (Reuters) - New U.S. claims for unemployment benefits last week dropped to their lowest level in more than two years while consumer spending rose in October, pointing to a moderate strengthening in economic activity.
The improving economic picture was also brightened by news that consumer sentiment perked up this month to its highest level since June.
But a surprise drop in new home sales last month was a reminder that growth would remain sluggish, and a gauge of core inflation hit an all-time low, supporting the Federal Reserve's November 3 decision to loosen monetary policy.
"The economic recovery in the U.S. is becoming more sustainable, as the improvement in the labor market is finally supporting consumer spending," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
Initial claims for state unemployment benefits fell 34,000 to a seasonally adjusted 407,000, the Labor Department said on Wednesday, the lowest since mid-July 2008. That was well below economists' expectations for a fall to 435,000.
SPENDING UP, INFLATION SLOWS
Separately, the Commerce Department said consumer spending rose 0.4 percent in October, increasing for a fourth straight month, after a 0.3 percent gain in September. Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to increase 0.5 percent last month.
"My expectation has been that we'll drop below 400,000 (jobless claims) before the end of the year, and this puts us on a good pace to do so," said Michael O'Rourke, chief market strategist at BTIG in New York. "That would mean that we could add 150,000 jobs per month, which is where we need to be in order to bring the unemployment rate down."
U.S. stock indexes rose modestly, while government debt prices were little changed. The dollar slipped slightly against the euro and yen.
The spending report showed the Fed's preferred measure of core consumer inflation -- the personal consumption expenditures price index -- rose 0.9 percent. That was the smallest since records started in 1960 and well below the U.S. central bank's 1.7 percent to 2 percent comfort zone.
A third report showed the Thomson Reuters/University of Michigan's final November consumer sentiment index climbed to 71.6 from 67.7 in October. For details see
Though spending rose last month, it was still not robust. Concerns about low inflation and slow economic growth prompted the Fed this month to pump more money into the economy through additional purchases of $600 billion worth of government debt.
The asset purchasing program, also known as quantitative easing in financial markets, is intended to drive already ultra low interest rates further down and boost domestic demand.
The slow nature of the recovery from the worst recession since the 1930s was underscored by new home sales, which dropped 8.1 percent to a 283,000 unit annual rate in October. Analysts polled by Reuters had forecast new home sales rising to a 310,000 unit pace in October. Compared to October last year, sales were down 28.5 percent.
With unemployment stuck at an uncomfortably high 9.6 percent, homeowners are struggling to hang on to their houses, keeping the foreclosure wave high and stifling the sector's recovery. Data on Tuesday showed a drop in the sales of previously owned homes last month.
October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.
The median sale price for a new home dropped a record 13.9 percent last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4 percent, the largest drop since July 2009.
A report from the Mortgage Bankers Association showed applications for home purchase loans hit the highest level in more than six months last week.
The Commerce Department also reported durable goods orders down 3.3 percent, the largest decline since January 2009, after surging by 5 percent in September. They had been expected to be flat in October.
Even excluding transportation, orders dropped 2.7 percent, the biggest fall since March 2009, after a 1.3 percent increase in September.
The drop in orders last month was almost across the board, with hefty declines in bookings for machinery, computers, communications equipment and defense aircraft.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, dropped 4.5 percent in October after rising by a revised 1.9 percent in September. Markets had expected a 1 percent increase.
(Reporting by Lucia Mutikani and Mark Felsenthal; Editing by Neil Stempleman)
