The number of Americans claiming unemployment aid fell last week and factory employment in the U.S. Midwest hit a 27-year high in March, more signs that an improvement in the labor market is under way.

The decline in layoffs and pick-up in hiring should take the sting out of the slowdown in economic growth early in the year and underscore that the moderation in activity is temporary. Bad weather and rising energy prices held back growth in the early months 2011 after a brisk fourth quarter.

Everything that we have seen is pointing to an acceleration in the pace of job growth, at least a sustaining of the pace that we saw last month, said Millan Mulraine, a senior macro strategist at TD Securities in New York.

Initial claims for state jobless benefits slipped 6,000 to a seasonally adjusted 388,000 the Labor Department said on Thursday, a day before the release of the government's closely watched U.S. employment report.

Separately, the Institute for Supply Management-Chicago's employment index hit the highest level since December 1983, jumping to 65.6 in March from just under 60 the month before.

Its overall business barometer dipped to 70.6 from 71.2 in February but remained in expansion mode.

Though annual revisions to the claims series back to 2006 showed slightly higher readings for recent prior weeks than previously estimated, the downward shift remained intact.

There is every reason to expect that to continue as the return of bank credit to small businesses allows them to hold onto people who might otherwise have been laid off, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The drop in claims has already been reflected in a clear acceleration in private payrolls in recent months, and we think there is more to come.


The claims data falls outside the survey period for March's employment report, to be released on Friday.

Nonfarm payrolls are expected to have increased a solid 190,000 after rising 192,000 in February, according to a Reuters survey, with the unemployment rate seen holding steady at a near two-year low of 8.9 percent.

Data on Wednesday showed private employers added 201,000 jobs in March, a further sign of momentum in the labor market.

While job creation is on an upward trajectory, the economy took a step back in the early months of 2011. That was highlighted by the easing in Midwest manufacturing activity this month and a dip in orders at U.S. factories in February.

A report from the Commerce Department showed new orders for manufactured goods fell 0.1 percent after rising 3.3 percent in January.

Stocks on Wall Street were little changed, awaiting Friday's jobs report, while government debt prices rose. The U.S. dollar fell broadly.

Although the four-week moving average of unemployment claims -- a better measure of underlying trends - rose 3,250 to 394,250, it held beneath the key 400,000 level for a fifth consecutive week. Overall claims have been below the level that is associated with steady job growth for three weeks in a row.

The important metric for claims is the level and it's below the 400,000 mark, which is generally deemed as the point that is consistent with the economy providing between 150,000 and 200,000 jobs (a month). This report certainly points to that, said TD Securities' Mulraine.

The improving labor market could escalate debate among Federal Reserve officials on whether the U.S. central bank should trim its $600 billion government bond buying program.

Economists see little chance of this happening and expect the program, which ends in June, to be implemented in full, pointing to still considerable slack in the jobs market.

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid dropped in the week ended March 19 to its lowest level since October 2008.

About 3.59 million Americans were on emergency unemployment benefits in the week ended March 12, the latest week for which data is available. A total of 8.77 million people were claiming unemployment benefits during that period under all programs.

(Additional reporting by Leah Schnurr and Emily Kaiser; Editing by Neil Stempleman)