New claims for jobless aid hit their lowest level in more than two years last week and factory activity in the Midwest grew in December at its fast pace since 1988, evidence the recovery was gaining steam.

Views economic activity accelerated in the fourth quarter were hardened by another report on Thursday showing pending sales of previously owned homes rose more than expected in November, even though the housing market remains in distress.

Initial claims for state unemployment benefits fell 34,000 to a seasonally adjusted 388,000, the lowest reading since early July 2008, the Labor Department said. That was well below economists' expectations for 415,000.

Separately, the Institute for Supply Management-Chicago's business barometer jumped to 68.6 from 62.5 in November, beating economists' expectations for a dip to 61.0. A reading above 50 indicates expansion in the regional economy.

Although analysts said the data could have been distorted by the Christmas holiday season, the reports still backed perceptions the recovery from the worst recession since the 1930s was gaining traction after a pause earlier in the year.

There's a certain seasonal bias in some of these things ... but there's no denying that the economy is improving, said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

Signs the economy was improving helped to push prices for U.S. government debt lower, while the dollar rose to a session high against the yen. Stocks on Wall street were little changed.


In a third report, the National Association of Realtors said its pending home sales index based on signed contracts to buy previously owned houses rose 3.5 percent last month to 92.2. The second straight month of gains beat market expectations for a 2 percent increase.

Analysts have forecast economic growth at an annual pace of between 3 and 3.5 percent in the current quarter after a 2.6 percent expansion rate in the third quarter, and there is optimism that this would encourage more hiring.

Underscoring the nascent labor market strength, the four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell 12,500 to 414,000, also the lowest level since July 2008.

This adds to the idea that the jobs picture is improving ... this is another feather in the cap of the idea of recovery, said Adam Sarhan, chief executive of Sarhan Capital in New York.

Even more encouraging, the Chicago factory report showed the employment gauge rose to 60.2 from 56.3 in November.

That and the steady decline in claims in recent weeks likely indicates the pace of job creation picked up this month, after the Labor Department's non-farm payrolls report showed employers added a paltry 39,000 jobs in November.

The December employment data is due on January 7, and a preliminary Reuters survey shows economists expect non-farm payrolls increased 126,000 this month. However, that is still not enough to significantly reduce the unemployment rate.

The jobless rate is expected to have edged down to 9.7 percent from 9.8 percent in November.

The claims data also showed the number of people still receiving benefits under regular state programs after an initial week of aid rose 57,000 to 4.13 million in the week ended December 18, above market expectations for 4.10 million. The prior week's figure was revised slightly up to 4.07 million.

The so-called continuing claims data covered the survey week for the December employment report's household survey from which the unemployment rate is derived.

The jobless rate is likely to remain elevated as the improving labor market and general economic conditions lure discouraged job seekers back into the labor force.

(Reporting by Lucia Mutikani; additional reporting by Ryan Vlastelica, Chris Reese in New York)