New U.S. claims for jobless benefits fell last week to their lowest level in two months, offering cautious hope for an economic recovery that had shown signs of fatigue.

The bigger-than-expected decline in jobless claims on Thursday was a relief after a slew of weak reports had left investors fearing the economy could slip back into recession.

Talk of a double-dip may be a little premature. Investors jumped on the double-dip bandwagon, but we don't really see it, said Alan Lancz, president at Alan B. Lancz & Associates in Toledo, Ohio.

Even so, unemployment remains painfully high and other data on Thursday showed that consumers continue to struggle. Retailers resorted to discounting to keep sales aloft in June, and the Federal Reserve reported that U.S. consumer credit dropped more than expected in May.

Initial claims for state unemployment benefits dropped 21,000 to 454,000 last week, and the number of people continuing to receive benefits in the final week of June was the lowest in seven months, the Labor Department said.

Economists had expected first-time claims to decline to just 460,000.

The Federal Reserve said U.S. consumer credit dropped by $9.15 billion in May, the 15th decline in the last 16 months.

With signs that consumers were growing stingier with their hard-earned dollars, U.S. retailers stepped-up promotions last month to spur sales.

Sales at stores open at least a year -- a benchmark of retail performance, -- rose 3.1 percent in June from a year earlier, just shy of the 3.2 percent increase that Wall Street predicted, according to reports on Thursday from 28 retailers tracked by Thomson Reuters.

The data reassured investors the economy was still growing following the longest and deepest recession since the 1930s. The promotional trend that drove much of the gains in June sales was seen likely to continue into July.

The reports drove U.S. stocks to their third straight day of gains, while prices for safe-haven U.S. government debt fell. The U.S. dollar rose against the yen.

Concerns over the recovery were also calmed after the International Monetary Fund upgraded its forecast for U.S. economic growth. The IMF, however, warned about the impact of high unemployment and a distressed housing market, and it acknowledged that data had turned weaker in recent weeks.

The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending, the fund said.


Job growth has lagged the U.S. recovery, which started in the second half of 2009, putting pressure on President Obama and his fellow Democrats. The sluggish economy could cost the Democratic Party control of Congress in November elections.

Speaking at an electric vehicle plant in Kansas City, Missouri, Obama said the economy was moving toward recovery, but warned of more hard days ahead.

What is absolutely clear is that we are headed in the right direction -- and that the surest way out of these storms we've been in is to keep moving forward, not back, he said.

Although layoffs have abated after last year's bloodletting, companies are skeptical of the economy's strength and are reluctant to start hiring workers on a wider scale.

Some economists said a decision by General Motors to limit the number of plants it is shutting down as part of its annual summer retooling may have helped lower claims for jobless benefits last week.

However, a Labor Department official said there was nothing unusual in the report, and other analysts said they expect to see more of an impact in coming weeks.

The number of people still receiving jobless benefits during the final week of June after an initial week of aid dropped 224,000 to 4.41 million, the lowest level since November.

That pulled down the insured unemployment rate, which measures the percentage of the insured labor force that is jobless, to 3.4 percent from 3.6 percent the prior week.

With Congress wrangling over extending aid for the long-term unemployed, the number of people on emergency benefits dropped 367,948 to 4.15 million in the week ended June 19. About 45 percent of the 14.6 million people unemployed in June had been out of work for six months and more.

Analysts worry that if benefits are not extended, consumer spending could be hurt.

(Additional reporting by David Lawder and Alister Bull in Washington)