updated 7/8/2004 9:23:05 AM ET 2004-07-08T13:23:05

The number of new people signing up for jobless benefits dropped last week to the lowest level in more than three years, a potentially encouraging sign for a labor market experiencing a bumpy recovery.

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The Labor Department reported Thursday that new applications for unemployment insurance plunged by a seasonally adjusted 39,000 to 310,000 for the week ending July 3. That marked the best showing since Oct. 8, 2000. The latest snapshot of the layoffs climate was better than economists were expecting. They were forecasting claims to decline to around 345,000.

Still, last week’s decline was probably exaggerated by seasonal adjustment difficulties related to temporary closings of auto plants for annual retooling for new model cars, a Labor Department analyst cautioned. The figures ended up being adjusted for auto plant closings, which take place each summer. Although some closings took place last week, bigger companies weren’t expected to start their temporary shutdowns until the following week, the analyst explained.

In other economic news, Wal-Mart Stores Inc. reported a disappointing sales performance in June, falling short of the solid business enjoyed by many other big retail chains. J.C. Penney Co. Inc. and Limited Brands were among the merchants whose sales reports met or beat analyst expectations.

Wal-Mart, the world’s largest retailer, said unseasonably cool weather held sales back, but it is also still struggling with the effects of rising gasoline prices.

On the layoffs front, jobless claims figures are notoriously volatile — meaning they can swing widely from week to week — especially during this time of year, when temporary shutdowns occur at auto plants, impacting jobs in related industries.

As a result, economists tend to look more closely at another barometer contained in the report: the more stable four-week moving average of claims, which smooths out week-to-week fluctuations.

The four-week moving average of new claims dropped last week by a seasonally adjusted 10,250 to 336,000. That marked the lowest level since May 22.

The number of people continuing to draw unemployment benefits fell by 85,000 to 2.87 million for the week ending June 26, the most recent period for which this information is available. A year ago, the number of people continuing to collect benefits stood at 3.70 million.

Compared with a year ago, the labor market is clearly in better shape. But job growth slowed in June as the economy added only about 112,000 jobs, less than half the number that economists had forecast. That report, released by the government last week, raised new questions about how vigorous the labor market recovery will turn out to be. Payrolls for April and May — while still solid — were revised to show smaller gains.

Two days before the report came out, the Federal Reserve raised short-term interest rates for the first time in four years. The Fed, wanting to keep inflation at bay, boosted a key rate to 1.25 percent, from a 46-year low of 1 percent.

In the wake of the Fed’s action and the disheartening employment report for June, economists said they’ll be keeping a close eye on the behavior of consumers, whose spending plays a major role in economic activity.

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