Jobless Claims Plunge; Home Starts Slump; CPI Flat

Weekly jobless claims moved sharply lower, while inflation remained tame and housing starts unexpectedly weakened in December, according to a set of data painting a mixed picture of the economic recovery.

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Weekly unemployment benefit applications dropped to 352,000, the fewest in nearly four years.

Housing starts fell in December as groundbreaking on rental property posted a big decline, splashing some cold water on hopes the still-weak housing sector could boost economic growth this year.

The Commerce Department said starts fell 4.1 percent to a seasonally adjusted annual rate of 657,000 units.

Economists polled by Reuters had forecast housing starts edging down to a 680,000-unit rate in December.

Starts of buildings with five or more units dropped 27.8 percent to a 164,000-unit rate, the biggest drop since February.

Tempering the overall decline, groundbreaking on single-family buildings rose 4.5 percent to a 470,000-unit rate.

Permits fell 0.1 percent to an annual rate of 679,000 units.

"Housing continues to bounce along at the bottom, suggesting that housing is not going to recover for several years to come. If we are relying on housing to drive this recovery it seems we will continue on this tepid path for a very long time," said Lindsey Piegza, an economist at FTN Financial in New York.

Job Market Rebounds

The number of people seeking unemployment benefits plummeted last week to 352,000, the fewest since April 2008. The decline added to evidence that the job market is strengthening.

The Labor Department says weekly applications fell 50,000, the biggest drop in the seasonally adjusted figure in more than six years. The four-week average, which smooths out fluctuations, dropped to 379,000. That's the second-lowest such figure in more than three years.

A Labor Department spokesman cautioned that volatility at this time of year is common. Applications had jumped two weeks ago, largely because companies laid off thousands of temporary workers hired for the holidays.

When weekly applications fall consistently below 375,000, it usually signals that hiring is strong enough to push down the unemployment rate.

"We have to see if there are some seasonality issues involved here, but on the surface this number looks to be very positive and is pretty much consistent with other data we've seen recently that suggest improvement in underlying fundamentals in the U.S.," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

Food and Gas Prices Mixed

Consumer prices were flat for a second straight month in December as gasoline fell and food rose moderately, government data showed on Thursday, suggesting scope for further monetary easing should economic growth falter.

The Labor Department said its Consumer Price Index was unchanged. Economists polled by Reuters had expected prices to edge up 0.1 percent.

Core CPI — excluding food and energy — inched up 0.1 percent after rising up 0.2 percent in November. That was in line with economists' expectations.

Although growth gained pace in the fourth-quarter, the recovery is expected to lose a step in the first half of this year mostly due to the debt crisis in Europe, which is already impacting on exports.

The Federal Reserve , which has cut overnight interest rates to near zero and bought $2.3 trillion in bonds, has pledged to keep borrowing costs exceptionally low until at least mid-2013.

But with unemployment remaining high, the housing market weak and inflation generally muted, some economists believe the U.S. central bank will launch a third round of asset purchases this year.

Last month, overall inflation was held back by gasoline prices, which fell 2.0 percent - declining for a third straight month. Food prices rose a modest 0.2 percent after nudging up 0.1 percent in November.

Overall consumer prices rose 3.0 percent year-on-year after increasing 3.4 percent in November. That was in line with economists' expectations.

Core consumer prices were last month dampened by new motor vehicle costs, which fell 0.2 percent — the third straight month of declines. Prices for used cars and trucks dropped 0.9 percent, falling a fourth month in a row.

Apparel prices slipped 0.1 percent, indicating discounting by retailers to attract holiday shoppers. Apparel prices rose 0.6 percent in November.

But housing costs held up, with owners' equivalent rent rising 0.2 percent last month, reflecting the rising demand for rental apartments as the weak housing market pushes Americans away from home ownership. This category rose 0.1 percent in November.

In the 12 months to December, core CPI increased 2.2 percent after rising by the same margin in November. This measure has rebounded from a record low of 0.6 percent in October and the Fed would like to see that closer to 2 percent.

—The Associated Press contributed to this report.