By Lucia Mutikani
WASHINGTON (Reuters) - U.S. factory activity held near a 2-1/2-year high in December and the number of Americans filing new claims for jobless benefits fell again last week, suggesting the economy was poised for stronger growth in 2014.
The strengthening fundamentals were underscored by other data on Thursday showing construction spending hit its highest level in nearly five years in November.
"The underlying trends are pointing to the economy accelerating as we move through the year. Conditions seem to be coming together for a very good year," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
The Institute for Supply Management (ISM) said its index of national factory activity stood at 57.0 last month. The index had climbed to 57.3 in November, the highest since April 2011.
A reading above 50 indicates expansion. With a gauge of new orders hitting a 3-1/2-year high and inventories declining, manufacturing activity is set to accelerate early in the year.
While manufacturing accounts for only about 12 percent of the economy, it has been the key driver of recovery from the 2007-09 recession. Its continued show of strength is combining with improving fortunes in other sectors of the economy to set a foundation for sustained strong growth this year.
The brightening economic outlook prompted the Federal Reserve to announce in December that it would reduce its monthly $85 billion bond buying program by $10 billion starting this month.
A separate report from the Labor Department showed initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 339,000 last week. It was the second straight week of declines.
Though claims continue to be plagued by seasonal volatility, economists said last week's decline was consistent with an improvement in labor market conditions and was in line with other indicators showing an acceleration in job growth.
A gauge of factory employment in the ISM survey last month touched its highest level since June 2011. There has also been a significant improvement in households' perceptions of labor market conditions.
"Jobless claims remain at a level consistent with improving labor market conditions. We continue to expect a 215,000 increase in nonfarm payrolls for December," said Laura Rosner, a U.S. economist at BNP Paribas in New York.
Employers added 203,000 new jobs to their payrolls in November and the unemployment rate fell 0.3 percentage point to 7 percent. December nonfarm payrolls data will be released on January 10, with the median of forecasts from analysts polled by Reuters calling for 193,000 new jobs last month.
FIRING ON ALL CYLINDERS
From employment to consumer spending and industrial production, the economy is showing remarkable strength, even as growth is expected to slow considerably in the last three months of 2013 from the third quarter's brisk 4.1 percent annual rate.
Much of the anticipated slowdown reflects a loss of output during a 16-day government shutdown in October and an unwinding of inventories after businesses aggressively accumulated stock in the July-September quarter.
The dollar was trading higher against a basket of currencies, while prices for U.S. Treasuries were up. U.S. stocks fell as investors booked profits after the Standard & Poor's 500 index recorded its best yearly advance since 1997.
A third report from the Commerce Department showed construction spending increased 1 percent in November to its highest level since March 2009. It was the eighth straight month that construction spending increased and reflected solid gains in private construction outlays.
While the outlook for the economy is upbeat, there are some areas of concern. Jobless benefits for more than a million long-term unemployed Americans expired on December 28, which could hurt consumer spending and also artificially lower the jobless rate.
The emergency unemployment compensation program was introduced in 2008 during the depths of recession, and had been extended every year since then.
"The expiration of these benefits will leave 1.3 million workers without benefits, potentially causing ripples through the entire economy," said Jay Morelock, an economist at FTN Financial in New York.
(Reporting by Lucia Mutikani; Additional reporting by Steven C Johnson in New York; Editing by Andrea Ricci)