Americans filed fewer new claims for jobless benefits last week but consumer spending was flat in January for the third straight month after accounting for inflation, casting a pall over the economic outlook.
While an improved jobs market - the unemployment rate has fallen sharply in recent months - appears to be boosting incomes, inflation and taxes gobbled up the gains in January.
Things aren't so rosy in the garden and the consumer is still facing significant headwinds here, said Ray Attrill, head of currency strategy for North America BNP Paribas in New York.
U.S. stock index futures modestly cut gains following the data's publication, while government debt prices fell. The euro extended losses against the dollar.
Graphic on jobless claims: http://link.reuters.com/quk86s
Graphics on personalspending: http://link.reuters.com/suk86s
Consumer spending and a big gain in inventories helped propel the economy to grow at a 3 percent annual rate during the last three months of 2011 - its quickest pace in over a year.
But Thursday's report showed by some measures spending has perhaps begun to flag. Spending rose 0.2 percent in January, just below analysts expectations.
However, the spending reading was flat after adjusting for inflation, as it was in December and November.
That casts a pall over the economic outlook because household purchases of everything from televisions to restaurant meals are major drivers of growth.
The increase in income was just below analysts' forecasts of a 0.4 percent gain. After-tax income fell 0.1 percent when adjusting for higher prices.
Inflation has accelerated recently due to rising rents and gasoline prices. Prices on personal consumption expenditures rose 0.2 percent in January, up from 0.1 percent in December.
Still, the jobless claims data adds to the view that next week's employment report could show companies are hiring at a brisk pace.
It does add to the evidence that the economy's got more momentum than people expect, said Kevin Cummins, an economist at UBS Securities in Stamford, Connecticut.
Initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 351,000, the Labor Department said. The prior week's figure was revised up to 353,000 from the previously reported 351,000.
Claims have been hovering near four-year lows over the last few weeks. Economists polled by Reuters had forecast claims unchanged at 351,000 last week.
The four-week moving average for new claims, considered a better measure of labor market trends, dropped 5,500 to 354,000 - the lowest level since March 2008.
The government will release February's employment report on March 9. While the labor market is gaining momentum, the level of employment is still 5.82 million from its prerecession level.
On Wednesday, Federal Reserve Chairman Ben Bernanke described the labor market as far from normal and further improvement would require stronger growth in final demand and production.
A Labor Department official said there was nothing unusual in the state-level data and no states had been estimated.
The number of people still receiving benefits under regular state programs after an initial week of aid fell 2,000 to 3.40 million in the week ended February 18.
So-called continued claims covered the survey period for the household survey from which the unemployment rate is derived. Continued claims have declined 165,000 between the January and February survey periods.
The number of Americans on emergency unemployment benefits rose 1,347 to 2.90 million in the week ended February 11, the latest week for which data is available.
A total of 7.50 million people were claiming unemployment benefits during that period under all programs, up 11,933 from the prior week.
(Additional reporting by Lucia Mutikani in Washington and Emily Flitter in New York; Editing by Neil Stempleman)