New U.S. claims for jobless benefits hit a seven-month low last week, while permits for future home construction rebounded strongly last month, bolstering views the economy was gaining traction.

The improving economic picture was spoiled somewhat by other data on Thursday showing factory activity in the Mid-Atlantic region slowed this month on weak orders. However, employers hired more workers and increased working hours.

Economic conditions are moving upward at an accelerating pace, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. However, two major roadblocks stand in the way of solid growth: Rising oil prices and European debt issues.

Initial claims for state unemployment benefits fell 5,000 to 388,000, the Labor Department said. Economists had forecast claims rising to 395,000.

Separately, permits for residential construction rose 10.9 percent to a seasonally adjusted annual rate of 653,000 last month, the Commerce Department said. However, new home construction fell 0.3 percent to annual rate of 628,000 units.

Stocks on Wall Street had a weak tone as investors kept a wary eye on Europe, while prices for Treasury debt fell. The dollar was little changed against a basket of currencies.

LABOUR MARKET CONDITIONS IMPROVING

The Philadelphia Federal Reserve Bank said its business activity index fell to 3.6 this month from 8.7 in October.

A reading above zero indicates factory activity is expanding in the region, which covers eastern Pennsylvania, southern New Jersey and Delaware.

But a measure of factory employment in the region rose to a six-month high, taking some of the sting out of the report, and the average workweek index more than tripled.

The claims data covered the survey period for November's nonfarm payrolls. Claims dropped 16,000 between the October and November survey weeks, implying an improvement in nonfarm employment.

After wobbling in the second quarter, the labour market is regaining momentum, but not enough to cut into a 9 percent unemployment rate and promote faster economic growth.

Recent data such as retail sales and industrial production point to firming growth, further reducing the risk of a new recession.

Economists believe fourth-quarter growth could top an annual pace of 3 percent, stepping up from 2.5 percent in the July-September period.

But the crisis in Europe, which has caused bond market turmoil across the region, could derail the recovery.

St. Louis Federal Reserve Bank President James Bullard said the debt crisis in Europe probably would not hit the U.S. economy hard.

If it blows up in a big disorderly way, which is what everyone is worried about, then that could come back to haunt the U.S., Bullard told CNBC. If it just tumbles along for a long period of time, which is the most likely outcome, then I'm not sure that you get much feedback to the U.S.

Initial claims have now held below the 400,000 mark that is normally associated with some healing in the jobs market for a second straight week.

The four-week moving average of claims, considered a better measure of labour market trends, hit its lowest level since April.

We believe this decline could be heralding a pickup in the pace of job creation and we note that the increase in private payrolls in April was 241,000. said John Ryding, chief economist at RDQ Economics in New York.

While we do not yet expect to see such a strong reading on job creation for November, we do expect the report to show a pickup in employment growth along with a continued pattern of upward revisions to the prior two months.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped to a three-year low in the week ended November 5

(Additional reporting by Jason Lange and Tim Ahmann; Editing by Andrea Ricci)