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WASHINGTON (Dow Jones)–Economic data Thursday suggest the U.S. economy ended 2007 with a bit more steam than once thought and that labor markets started the new year on a firmer tone, easing some of the worst fears about the state of the economy.

Still, sluggish reports by U.S. retailers for December served as a reminder that even if the U.S. escapes an outright recession, the first half of 2008 will most likely be much weaker than the latter part of 2007.

Initial claims for jobless benefits fell 15,000 to 322,000 after seasonal adjustments in the week ended Jan. 5, the Labor Department said Thursday. Wall Street economists had expected a 4,000 rise.

The four-week average of new claims, which economists use to smooth out weekly volatility, fell 3,000 to 341,000.

In a separate report, the Commerce Department said wholesale inventories rose 0.6% and sales jumped at a two-year high in November. That, in turn, should add another 0.1 percentage point to fourth quarter gross domestic product growth, to 1.7%, said Drew Matus, an economist at Lehman Brothers.

“It’s not huge, but for a quarter that was supposed to be zero, 1.7% is a lot better,” he said.

Indeed, coming on the heels of 4.9% GDP growth in the third quarter, fourth-quarter estimates suggest GDP grew in excess of 3% in the second half of 2007 even as the economy withstood a housing and credit crunch.

The government releases fourth quarter GDP data at the end of this month.

Still, forecasters expect the sluggishness was delayed, not erased. That scenario gained some support from sluggish retailer sales reports for December released Thursday. One exception was Wal-Mart Stores, Inc. (WMT), which reported December sales at the upper end of forecasts.

Joshua Shapiro, economist at MFR Inc., said the retailer data support his forecast of no change in December retail sales, due next week from the Commerce Department. Still, coming on the heels of rapid growth in November, even a flat December would leave overall consumer spending up at a solid clip in the fourth quarter, Shapiro said, leaving GDP growth at 2.5% in the fourth quarter.

Still, the economy “is entering the first quarter with a weak trajectory,” Shapiro said.

Yet, as was the case in the fourth quarter, it might not be as weak as feared. The jobless claims data, though volatile around the holidays, suggest some resilience in labor markets at the start of the year. Nonfarm payrolls rose just 18,000 last month and the jobless rate swelled to 5% from 4.7%. That raised recessionary alarm bells and fueled expectations that the Federal Reserve might lower official interest rates by an aggressive half percentage point when it meets at the end of the month.

The latest claims data “while encouraging, should be treated with caution,” said JPMorgan economist Michael Feroli, in a research note.

Matus of Lehman Brothers said the claims data are consistent with a 60,000 rise in January payrolls and 0.1-percentage-point drop in the jobless rate to 4.9%.

Thursday’s data forced Wall Street to pare back hopes for a half-point rate cut at the end of January. A speech later Thursday by Fed Chairman Ben Bernanke is expected to clarify the near-term rate outlook.

-By Brian Blackstone, Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com

(Jeff Bater contributed to this article)

(END) Dow Jones Newswires

January 10, 2008 11:16 ET (16:16 GMT)

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