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updated 7/8/2010 2:32:54 PM ET 2010-07-08T18:32:54

New claims for unemployment benefits dropped sharply last week, a sign that layoffs could be slowing. At the same time, hundreds of thousands of Americans are losing jobless aid because Congress has yet to pass an extension of benefits.

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First-time requests for jobless aid dropped by 21,000 to a seasonally adjusted 454,000, the Labor Department said Thursday. The decline takes claims to their lowest level since early May, erasing the increases of the last two months.

President Barack Obama said Thursday the U.S. economy is moving toward recovery, but more “hard days” lie ahead.

“What is absolutely clear is that we are headed in the right direction — and that the surest way out of these storms we’ve been in is to keep moving forward, not back,” Obama said in prepared remarks for delivery at an electric vehicle plant in Kansas City, Missouri.

Obama added that his administration is working to help small businesses.

“Through small business loans, a focus on research and development, and investments in high-tech, fast-growing sectors like clean energy we’re helping to speed our recovery by harnessing the talent and drive and innovative spirit of the American people,” he said. “Our goal has never been to create some government program, but to spur private-sector growth.”

Claims for jobless benefits have fluctuated wildly in the past several weeks and have not dropped below January levels. Elevated unemployment claims, along with last month's weak jobs report and a struggling housing market, have economists worried the recovery is slowing.

"While the report is good news, it would need to be followed up by several more weeks to suggest a pickup in hiring," Julia Coronado, an economist at BNP Paribas, said in a note to clients.

Even as first-time claims fall, the number of unemployed Americans receiving benefits is dropping sharply because their aid is ending.

Readers, is the economy forcing you to be a really long-distance commuter?

About 350,000 people saw their benefits cut off in the week of June 19 because Congress left for a weeklong recess without extending federal jobless aid.

The Labor Department estimates that about 1.7 million have lost benefits as of last week, after extended unemployment insurance expired in late May. Those numbers could reach 3.3 million by the end of the month if Congress doesn't pass an extension when it returns from recess.

During the recession, Congress added up to 73 weeks of extra benefits on top of the 26 weeks typically provided by states. But Senate Republicans have blocked efforts to continue those extra benefits, citing concerns over the deficit.

Jobless claims might have been higher if General Motors had implemented its traditional summer shutdown.

The automaker usually closes its factories for several weeks in July to retool for new car models that it introduces in the fall. Many autoworkers file claims for unemployment during that time. But the company has said this year it will skip the shutdown, potentially lowering claims over the next several weeks.

Still, stock markets rallied on the news. The Dow Jones industrial average rose by 82 points, or 0.8 percent, in morning trading. Broader indexes also moved up.

Separately, the International Monetary Fund said Thursday that the global economy is recovering faster than expected but Europe's debt crisis could stall the rebound.

The IMF raised its 2010 world growth forecast to 4.6 percent from 4.2 percent in April and boosted estimates for the United States and China. But its quarterly World Economic Outlook warned that "risks have risen sharply" and Europe has to quickly resolve debt problems and restore confidence in its banks

Initial jobless claims have been stuck near 450,000 all year, after dropping steadily last year from a peak of 651,000 in March 2009.

The four-week average of claims dropped slightly to 466,000. In a healthy economic recovery with rapid hiring, claims usually fall below 400,000.

The tally of people continuing to claim benefits plunged by 224,000 to 4.4 million, the department said. But that doesn't include another 4.6 million people who received extended benefits paid for by the federal government in the week ended June 19, the latest data available.

Some companies are continuing to cut jobs. Wells Fargo & Co. said Wednesday it's laying off 3,800 employees over the next year as part of a restructuring of its consumer finance unit. The company has more than 278,000 employees.

Retailers, meanwhile, reported sluggish sales in June as cautious consumers looked for deep discounts before buying.

Costco Wholesale Corp. posted a solid revenue gain last month, but it was fueled by its international business. Target Corp. posted a modest gain that was below Wall Street expectations. Many teen merchants including The Buckle Inc., Hot Topic Inc. and The Wet Seal Inc. reported decreases in revenue.

Slow retail sales and stubbornly high jobless claims will likely add to concerns that the economic recovery is slowing in the second half of the year.

Home sales are plunging after a popular homebuyer tax credit ended. Consumer confidence fell sharply last month, and growth in both the manufacturing and service sectors is slowing, a private trade group has found. That's caused many economists to predict slower growth in the second half of this year.

Job creation has slowed too.

Private employers created a net total of only 83,000 jobs in June and 33,000 in May, the Labor Department said last week. That's down from an average of 200,000 net new jobs in both March and April.

The unemployment rate fell to 9.5 percent in June from 9.7 percent the previous month, the government said.

The economy needs to generate at least 100,000 new jobs each month to keep up with population growth, and at least twice that amount to quickly reduce the unemployment rate.

The Associated Press and Reuters contributed to this report.

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