By Lucia Mutikani WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to sustained momentum in the economy even as home building fell for a second straight month in June. The economy's improving fortunes were underscored by another report on Thursday showing manufacturing activity in the mid-Atlantic region accelerated to its highest level in nearly 3-1/2 years this month. "We should focus on jobless claims data. The labor market is tightening, firms are not cutting workers and people are finding jobs," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania. Initial claims for state unemployment benefits fell 3,000 to a seasonally adjusted 302,000 for the week ended July 12, the Labor Department said. Economists had forecast first-time applications for jobless aid rising to 310,000. The four-weak average of claims, considered a better gauge of labor market trends as it irons out week-to-week volatility, hit its lowest level in seven years. In a separate report the Commerce Department said groundbreaking on new homes declined 9.3 percent to a seasonally adjusted annual 893,000 unit-pace in June, a nine-month low. The drop was led a 29.6 percent plunge in starts in the South, which prompted economists to take the home building slump with a grain of salt, especially against the backdrop of a strengthening labor market. "It would be a mistake to presume what was an uneven June starts report signals a turn to something more nefarious," said Eric Green, chief economist at TD Securities in New York. Economists had expected starts to rise to a 1.02 million-unit rate. Housing is struggling to get back on track since stalling in late 2013 after a rise in mortgage rates. But there are glimmers of hope. While permits fell 4.2 percent in June to a 963,000 unit-pace, single family permits - the largest segment of the market - hit their highest level since November. Permits are now running ahead of starts, which suggests a pick-up in building activity in the months ahead. A survey on Wednesday showed confidence among single-family home builders touched a six-month high in July, amid optimism over sales. Prices for U.S. Treasury debt were trading higher, while the dollar was little changed against a basket of currencies. U.S. stocks were weaker, with the PHLX housing index falling about one percent. MANUFACTURING HUMMING Federal Reserve Chair Janet Yellen said this week that while she was concerned about housing, she did not believe it would hold back the economy's recovery. The economy contracted sharply in the first quarter, but has since rebounded with second-quarter growth estimates topping a 3 percent annual pace. While home building will probably not help the economy, manufacturing should continue to play a leading role. In a third report, the Philadelphia Federal Reserve Bank said its business activity index rose to 23.9 in July, its highest since March 2011, from 17.8 in June. Any reading above zero indicates expansion in the region's manufacturing. New orders scaled a 10-year high, with factory employment also accelerating. The claims data covered the survey week for July nonfarm payrolls. It suggested another month of solid job gains after June's hefty 288,000 increase. Employment has grown by more than 200,000 jobs in each of the last five months, a stretch not seen since the late 1990s. Yellen cautioned this week that the Fed could raise interest 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. (Reporting by Lucia Mutikani; Additional reporting by Richard Leong and Rodrigo Campos in New York; Editing by Andrea Ricci)