The U.S. economy showed new signs the recovery was gaining traction, with data on Thursday that new claims for jobless aid fell last week and factory activity in the Mid-Atlantic region grew at its quickest pace in more than 5-1/2 years this month.

The reports added to growing evidence of a substantial pick-up in economic growth during the fourth quarter, even though housing data pointed to continued stress in the sector.

The recovery is gaining some momentum. Manufacturing output is strong, layoffs are slowing and we think GDP growth will be somewhere between 3 and 4 percent in the fourth quarter, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Initial claims for state unemployment benefits fell 3,000 to 420,000, the Labor Department said, in line with forecasts and a recent downward trend. The closely watched four-week moving average of claims dropped for a sixth straight week to a fresh two-year low.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rose to 24.3, the highest level since April 2005, from 22.5 in November. Economists had expected a reading of 15.0. Any reading above zero indicates expansion in the region's manufacturing output.

The upbeat data and a bullish forecast from FedEx Corp , the second-largest package delivery company, lifted U.S. stocks. FedEx, however, reported quarterly earnings that missed estimates.

Prices for U.S. government debt ended higher, while the dollar was little changed against the euro and fell slightly against the yen.

But even as many latched onto signs of improvement in the U.S. economy, the head of the International Monetary Fund on Thursday warned of uncertainty in the world's biggest economy.

What's happening in the United States is very uncertain and will have a lot of influence on the global outcome, Dominique Strauss-Kahn, the IMF's managing director, said in an interview at a Thomson Reuters Newsmaker event.

I don't believe in the double-dip story, but a slowdown, that's the most important thing the global economy will have to face in the coming months.


In another report on Thursday, the Commerce Department said housing starts rose 3.9 percent to an annual rate of 555,000 units in November. However, permits for future home construction dropped to a 1-1/2-year low.

The housing sector does not appear to be participating in the recent improvement in economic activity, said Paul Dales, a U.S. economist at Capital Economics in Toronto.

Data over the past few days covering retail sales, trade and industrial production indicate gross domestic product growth this quarter could easily outstrip the modest 2.5 percent rate of the July-September period.

Though growth has been largely driven by the manufacturing sector, consumer spending is picking up as labor market conditions improve somewhat. The major blemish in the data in recent weeks, however, was a jump in the unemployment rate.

The Philadelphia Fed survey, which closely correlates to the Institute for Supply Management's report on national manufacturing due early next month, mirrored similar gains in a gauge of New York state factory activity released on Wednesday.

Economists believe U.S. manufacturing is being driven by growing export demand, which should eventually translate into stronger job creation.

While the jobless claims data did not cover the survey week for December's employment report, economists said it hinted at a larger gain in payrolls after November's paltry 39,000 job increase.

The trend in claims has dropped by about 20,000 between the November and December payroll survey weeks, said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in Valhalla, New York.

Other things equal, that should mean private payrolls are about 50,0000 stronger in December than in November. We think the easing of credit pressures on small firms is bringing claims down, and there are further declines ahead.

(Additional reporting by Pedro Nicolaci da Costa in Washington and Leah Schnurr in New York, Editing by Chizu Nomiyama and Leslie Adler)