By Lucia Mutikani
WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits fell to the lowest level in nearly 8-1/2 years last week, suggesting the labor market recovery was gaining traction.
While another report on Thursday showed a sharp decline in new homes sales in June, economists cautioned against reading too much into the drop, noting that other data have pointed to housing getting back on track after stalling in late 2013.
"The economy is doing better," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "You really cannot put too much (stock) in the ups and downs in new home sales. I don't think it suggests that housing is heading south."
Initial claims for state unemployment benefits declined 19,000 to a seasonally adjusted 284,000 for the week ended July 19, the lowest level since February 2006, the Labor Department said. Economists had expected claims to rise to 308,000.
Though claims are volatile around this time of the month because of summer auto plant shutdowns for retooling, the data provided further evidence that the labor market was tightening. Employment growth has topped 200,000 jobs in each of the last five months, a stretch not seen since the late 1990s.
"This is consistent with another solid payroll reading for July," said Sam Bullard, senior economist with Wells Fargo Securities in Charlotte, North Carolina.
In a separate report, the Commerce Department said new home sales dropped 8.1 percent to a seasonally adjusted annual rate of 406,000 units in June. It was the biggest decline since July of last year.
At the same time, May's sales pace was revised to 442,000 units from the previously reported 504,000 units - the largest downward revision on record.
New home sales, however, are volatile and the decline is at odds with other data this week that showed existing home sales, which represent the lion's share of the market, at an eight-month high in June.
Still, the data and a 23 percent slump in third-quarter profit reported by D.R. Horton Inc , the number one U.S. homebuilder, weighed on housing stocks. The PHLX housing sector index <.HGX> was down more than 2.7 percent in early afternoon trading, while the broad S&P 500 index was flat.
FED WATCHING LABOR MARKET
Economists said the Federal Reserve would look at the claims data favorably as it considers when to raise interest rates.
Fed Chair Janet Yellen cautioned last week that the U.S. central bank could raise rates sooner and more rapidly than currently envisioned if the labor market continued to improve faster than anticipated by policymakers.
Economists currently do not expect the U.S. central bank to start raising interest rates before the second half of 2015. The Fed, which is wrapping up its monthly bond buying program, has kept overnight lending rates near zero since December 2008.
In its report, the Labor Department said the four-week average of claims, considered a better gauge of labor market trends as it irons out week-to-week volatility, fell to the lowest level since May 2007.
The number of people still receiving benefits after an initial week hit the lowest level since June 2007 in the week ended July 12.
The so-called continuing claims data covered the week of the household survey from which the unemployment rate is calculated, and suggested the jobless rate could decline from near a six-year low of 6.1 percent.
(Reporting by Lucia Mutikani; Additional reporting by Richard Leong and Ryan Vlastelica in New York; Editing by Paul Simao)