WASHINGTON (Reuters) - New claims for unemployment benefits fell more than expected last week to a two-month low, while the trade deficit narrowed sharply in July, hopeful signs for the stuttering economic recovery.
Analysts said the reports on Thursday helped to calm fears growth was slowing sharply and implied the economy could soon pull out of a recent soft patch.
"We were expecting that things would slow down in the third quarter and start to pick up in the fourth quarter, but now it seems like the slowdown in the third quarter wasn't as severe as we feared," said David Sloan, an economist at 4CAST in New York.
Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 451,000, the lowest since the week ended July 10, the Labor Department said. That was well below financial market expectations for 470,000.
Separately, the trade deficit shrank 14 percent to $42.8 billion in July, smaller than the $47.3 billion gap that markets had expected.
U.S. stock index futures extended gains after the data, while Treasury debt prices deepened losses and the U.S. dollar pared losses versus the yen.
The reports further reduced the odds of the economy slipping back into recession.
A Labor Department official said given Monday's Labor Day holiday, some states had been unable to submit claims data, resulting in the department making estimates for them.
Some have since submitted their data and the official said the figures were close to the department's estimates, indicating the claims data was unlikely to be revised much.
Claims have pushed further away from a nine-month high of 504,000 touched in mid-August.
Labor market weakness is undermining the economy's recovery from its longest and deepest downturn in 70 years, but a few rays of light are starting to poke through the dark cloud of unemployment.
Private employers added a better-than-expected 67,000 jobs in August and the prior month's numbers were revised to show 36,000 more jobs created than previously reported, government data showed last week.
The ailing labor market, characterized by a 9.6 percent unemployment rate, is fueling anxiety among Americans, forcing President Barack Obama to scramble for ideas to create jobs ahead of November's mid-term congressional elections.
Opinion polls suggest the Democratic Party could take a serious beating and lose control the U.S. House of Representatives to Republicans and perhaps even the Senate.
After slicing nearly 3.4 percentage points off of U.S. economic growth in the second quarter, the narrowing of the trade gap is a relief and reflected an improvement in exports.
In July, exports rose 1.8 percent to $153.3 billion, led by strong overseas demand for U.S. civilian aircraft, machinery, computers and other capital goods.
Imports fell 2.1 percent to $196.1 billion, after a 3 percent rise in June that had caught many analysts by surprise and lowered estimates of second-quarter U.S. growth. The drop in July was the largest since February 2009.
But imports from both China and Germany -- two countries with persistent trade surpluses -- were the highest since October 2008.
The closely watched trade deficit with China fell almost 1 percent in July, but for the first seven months of the year it was nearly 18 percent higher, at $145.4 billion, compared to the same period in 2009.
(Reporting by Lucia Mutikani and Doug Palmer; Editing by Andrea Ricci)