By Jason Lange
WASHINGTON (Reuters) - Factory activity grew the most in nearly two years in January and the number of new claims for jobless benefits dropped to a five-year low last week, giving surprisingly strong signals on the economy's pulse.
Financial information firm Markit on Thursday said its preliminary Purchasing Managers Index for manufacturing rose to 56.1 this month, its best showing since March 2011. A reading above 50 indicates expansion.
A separate report from the Labor Department showed initial claims for state unemployment benefits fell by 5,000 to 330,000, the lowest since January 2008 when the 2007-2009 recession had just begun.
Together, the data suggest the economy entered the new year with some underlying momentum despite an ongoing political battle in Washington over fiscal policy.
"The economy is structurally doing a little bit better," said Michael Strauss, an economist at Commonfund in Wilton, Connecticut.
Analysts polled by Reuters had expected Markit's "flash" factory gauge to slip and looked for claims to rise to 355,000.
The unexpectedly strong U.S. data helped U.S. stocks to rise, reversing early declines caused by disappointing revenues reported by Apple Inc. Better-than-expected economic news from the euro zone and China also supported stocks.
Economists have cautioned about reading too deeply into this month's figures on jobless claims, which tend to be volatile around this time of the year because of large swings in the model the government uses to iron out seasonal fluctuations.
Still, claims have fallen for two straight weeks, suggesting employers do not yet see tax hikes enacted this month as a big threat to consumer demand.
A four-week moving average for new claims, meant to provide a better sense of underlying trends, fell 8,250 to 351,750, the lowest since March 2008.
The data helped the dollar extend gains versus the yen, while U.S. Treasury debt prices fell.
Claims are now at roughly the same level they were in much of 2006 and 2007. They started trending higher around December 2007, the month the recession began.
However, while employers have pulled back on layoffs, they have only added jobs at a lackluster pace.
Analysts polled by Reuters expect the government's employment report due on February 1 will show 165,000 jobs were added to payrolls this month, up from 155,000 new positions in December. The unemployment rate is expected to hold steady at 7.8 percent.
Like the claims data, Markit's factory report also offered support for the idea that the labor market recovery was gaining traction with new jobs in the sector being created at the fastest pace in nine months.
A Markit subindex showed factory output grew at its fastest pace since March 2012, while new orders also rose. The new orders gauge hit 57.7, its highest level since May 2010.
Improved economic conditions in China and some parts of Europe helped boost orders from abroad, but firms largely tied the growth surge to higher demand from U.S. customers.
"It is the domestic market that is clearly providing the main impetus to the upturn," said Markit chief economist Chris Williamson.
Aggressive monetary stimulus from the Federal Reserve and a last-minute deal by Congress to reduce the size of the tax hike gave a boost to business confidence, Williamson said.
A third gauge of economic health released on Thursday also beat analysts' forecasts. The private Conference Board's Leading Economic Index gained 0.5 percent to 93.9 last month, pointing to an improvement in growth.
(Additional reporting by Steven C. Johnson and Richard Leong in New York; Writing by Jason Lange and Tim Ahmann; Editing by Andrea Ricci)