updated 1/11/2007 6:24:21 PM ET 2007-01-11T23:24:21

The number of newly laid off workers filing claims for unemployment benefits fell sharply last week to the lowest level in nearly six months.

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The Labor Department reported Thursday that applications for jobless claims dropped by 26,000 to 299,000 last week on a seasonally adjusted basis. It marked the first time jobless claims have fallen below 300,000 since the week of July 22.

The improvement was much better than the decline of 9,000 that analysts had been expecting and provided further evidence that the slowing U.S. economy has not begun to seriously affect the labor market outside of specific industries such as housing and auto manufacturing.

But analysts cautioned against reading too much in the latest decline, saying that jobless claims are notoriously difficult to read during holiday periods.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, in Valhalla, N.Y., predicted a big increase in claims in coming weeks as retail stores lay off temporary workers hired for the holiday shopping season.

On Wall Street, investors took encouragement from the dip in jobless claims, believing it showed that the economy is not slowly too quickly. In late afternoon trading, the Dow Jones industrial average was up more than 90 points.

The four-week moving average for claims, which helps to smooth out week-to-week volatility, edged down to 314,750, the lowest level since early November.

The good news on jobless claims followed a report last week that employers added 167,000 new jobs in December, a better-than-expected showing which helped keep the unemployment rate steady at a 4.5 percent.

Job gains in service industries such as health care and banking offset losses in such areas as construction, which had been hard hit by the slump in the once-booming housing market, and in autos, where domestic automakers are struggling against stiff foreign competition.

While economic growth slowed significantly in the second half of the year, analysts said there are no signs that the economy was threatening to topple into a recession. They believe that the Federal Reserve is close to achieving its hoped-for soft landing in which slowing growth lowers inflation pressures without triggering a severe downturn.

Even with last year’s slowdown, the unemployment rate for the whole year averaged 4.6 percent, down from a 5.1 percent average in 2005 and the best showing in six years. This year the unemployment rate is expected to rise slightly, perhaps hitting 5 percent by midyear. At that point, economists believe the Fed will start cutting interest rates to give the economy a boost.

Analysts cautioned that jobless claims are especially volatile during the holiday season. The latest week was influenced by New Year’s holiday, when state claims offices were closed, and the national day of mourning for former President Gerald Ford.

For the week ending Dec. 30, claims on a seasonally adjusted basis had risen by 6,000 to 325,000. A total of 28 states and territories had an increase in claims while 25 had declines in claims applications.

The biggest increases were recorded in Wisconsin, up 17,462, and Pennsylvania, up 17,428. States with the biggest declines in claims were California, down 9,084, and Kentucky, down 6,110. Unlike the national data, the state claims figures are not adjusted for normal seasonal variations.

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