U.S. service sector activity growth eased in October to its slowest level in three months, but new orders for good from factories unexpectedly rose, suggesting economic growth remains patchy.

In other U.S. data reported on Thursday, new claims for unemployment benefits fell below 400,000 last week for the first time in five weeks, suggesting a modest improvement in the labor market, but chain store retailers reported disappointing October sales.

Based on the ISM manufacturing and services data, the economy is still crawling at a pace that is so anemic, said Bernard Baumohl, chief global economist, at The Economic Outlook Group LLC, in Princeton, New Jersey.

For most Americans, it makes no difference whether the economy is stuck at this pace or we are in recession. This is very lackluster growth that will not lead to a pick-up in hiring.

US SERVICE SECTOR GROWTH SLIPS

The U.S. Institute for Supply Management said its services index eased to 52.9 last month from 53.0 the month before. The reading fell shy of economists' forecasts for 53.5, according to a Reuters survey, and was the lowest level since July.

A reading above 50 indicates expansion in the sector. A gauge of new orders fell to 52.4 from 56.5, but the employment component improved to its highest level since June at 53.3 from 48.7.

New orders for U.S. factory goods unexpectedly rose in September and capital spending plans by businesses surged, according to a government report on Thursday that showed underlying strength in manufacturing.

The Commerce Department said orders for manufactured goods increased 0.3 percent after a revised 0.1 percent gain in August, previously reported as a 0.2 percent fall. Economists had expected orders to slip 0.1 percent.

Orders excluding transportation rose 1.3 percent in September after edging down 0.1 percent the prior month.

Orders for non-defense capital goods excluding aircraft -- seen as a measure of business confidence and spending plans - jumped 2.9 percent in September after advancing 0.9 percent the prior month. The increase in this category was the largest in six months.

New U.S. claims for unemployment benefits fell below 400,000 last week for the first time in five weeks, suggesting a modest improvement in the still-moribund labor market, but retailers reported disappointing October sales.

Initial claims for state unemployment benefits dropped by 9,000 in the week ending October 29 to a seasonally adjusted 397,000, the Labor Department said on Thursday.

The labor market continues to stabilize in terms of the amount of people losing their jobs but ... the pace of adding new ones still remains underwhelming, said Peter Boockvar, an equity strategist at Miller Tabak and Co. in New York.

The level of weekly claims remains well above pre-recession levels and has dipped below 400,000 only on brief occasions this year, suggesting no fast turnaround is imminent for the jobs market.

The claims data will not impact Friday's report on payroll levels during October, which are expected to show employers added 95,000 new jobs during the month. That is not considered a fast enough pace over time to bring down the unemployment rate much, if at all.

The four-week moving average of claims, considered a better measure of labor market trends, fell 2,000 to 404,500.

In a separate report, the Labor Department said U.S. nonfarm productivity increased during the third quarter while growth in wages and benefits slowed sharply, showing that some inflation pressures were easing even as the economy picked up pace.

Productivity rose at a 3.1 percent annual rate, the biggest increase since the first quarter of 2010. Unit labor costs fell 2.4 percent, a much bigger decline than the 0.8 percent rate forecast by analysts.

This means less inflation, said Robbert Van Batenburg, head of global research at Louis Capital Markets in New York.

He said that could help the U.S. Federal Reserve build a case to do more to help the economy.

Compensation per hour rose 0.6 percent during the period, down from growth of 2.7 percent during the previous quarter and 5.6 percent in the first three months of the year.

Productivity, which measures hourly output per worker, had fallen during the first two quarters of this year.

Economists had expected the government's report would show productivity increased at a 2.8 percent rate. The rebound in productivity was in a line with the return to stronger economic growth during the third quarter following a sharp slowdown early in the year.

US CHAIN STORES REPORT WEAK OCT SALES

Many top U.S. store chains reported disappointing October sales on Thursday.

Major retailers ranging from Macy's Inc and Saks Inc to those catering to more frugal shoppers like Target Corp and J.C. Penney Co Inc all reported lower-than-expected sales at stores open at least a year.

Overall, 23 major U.S.-based retailers that report monthly results were expected to post a composite same-store sales gain of 4.5 percent, according to Thomson Reuters data.

(Reporting by Jason Lange, Leah Schnurr)

Fall