The number of Americans filing new claims for jobless benefits hit a 3-1/2 year low last week, bolstering views the economy was gaining momentum, even though third-quarter growth was revised down.

Other data on Thursday underscored the firming tone in the economy, with consumer sentiment scaling a six-month high in December and a barometer of future activity rising for a seventh straight month in November.

While the economy is wrapping up 2011 with a spring in its step, bickering over budget policy in Washington and the debt crisis in Europe have cast a cloud over its prospects next year.

A payroll tax cut and benefits for the long-term unemployed, both of which are due to expire at year end, have become tangled in partisan politics and it is unclear whether they will be renewed.

There were signs on Thursday the impasse had been broken, with House of Representatives Speaker John Boehner informing Senate Majority Leader Harry Reid he will set a vote on a Senate-passed two-month extension of the payroll tax cut, according to a Democratic leadership aide.

The economy is carrying some clear momentum into 2012, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. If Congress doesn't kill that by failing to extend the tax breaks, we can look forward to a better year ahead.

Initial claims for state unemployment benefits dropped 4,000 to 364,000, the Labor Department said. That was the lowest level since April 2008 and just a month after the collapse of Bear Stearns.

The claims data, which covered the survey period for the December nonfarm payrolls report, helped to take the sting out of a separate report showing the economy expanded at only a 1.8 percent annual rate in the third quarter.

Growth, which had previously been reported to have expanded at a 2 percent pace, was held back by a sharp drop in healthcare spending, the Commerce Department said. A month ago, it had said healthcare spending had risen.

The revision to healthcare spending estimates reflected new source data, which showed losses at nonprofit hospitals.

However, spending on long-lasting goods was stronger than previously estimated, indicating consumer demand remained healthy.

Prospects for spending were boosted by the rise in consumer confidence. The Thomson Reuters/University of Michigan's sentiment index rose to 69.9 from 64.1 in November as measures of both current conditions and future expectations increased.


The data helped stocks on Wall Street to post their third straight day of gains. The U.S. government bond market largely ignored the data, while the dollar was flat against a basket of currencies.

Even as much of the rest of the world is slowing down, with a mild recession forecast for Europe next year, the U.S. economy remains resilient.

The labor market is improving, households are spending, home building is picking up and factory output is expanding, putting the economy on course for at least a 3 percent growth pace in the fourth quarter. That would be the fastest pace in 18 months.

An index from the private sector Conference Board that seeks to predict the strength of future economic activity rose for a seven straight month in November, suggesting the economy could pick up even more speed by spring.

While claims for first-time unemployment benefits tend to be volatile this time of the year, they have dropped for three straight weeks. A four-week moving average, a better measure of trends, is now at its lowest level since June 2008.

One unexpectedly low number can easily be a fluke; two are interesting; three are telling us something real is happening in the labor market, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The drop in claims in recent weeks, if sustained, is consistent with private payrolls growth ramping up to about 200,000 per month.

Nonfarm employment growth has grown by an average of 131,636 jobs per month so far this year, but not enough to significantly lower the jobless rate which is currently at 8.6 percent.


Last quarter's growth was still a step up from the April-June period's 1.3 percent pace. Part of the pick-up in output reflected a reversal of factors that held back growth earlier in the year.

The drop in healthcare consumption caused consumer spending growth to fall to a 1.7 percent rate from 2.3 percent. Consumer spending accounts for about 70 percent of economic activity.

Business inventories fell, but not as sharply as previously reported. Restocking by businesses is expected to support growth in the fourth quarter, helping to keep factories busy.

In addition, businesses showed little signs of cutting back on spending and profits continued to grow at a healthy clip.

Excluding inventories, the economy grew at a 3.2 percent rate, revised down from a 3.6 percent pace.

(Additional reporting by Jason Lange in Washington and Leah Schnurr in New York; Editing by Tim Ahmann; Editing by Dan Grebler)