The number of Americans claiming new unemployment benefits fell to a five-month low last week, while the economy grew slightly more than previously reported in the second quarter, the latest suggestion a recession was not in the cards.

Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 391,000, the Labor Department said on Thursday, well below economists' expectations for 420,000.

Separately, gross domestic product grew at annual rate of 1.3 percent in the second quarter, the Commerce Department said in its third and final estimate for the quarter, up from the previously estimated 1.0 percent.

That reflected consumer spending and export growth that was stronger than earlier estimated.

The GDP data suggests the U.S. economy entered the third quarter on a slightly better footing. That encouraging news was reinforced by the larger-than-expected decline in jobless claims, which again cast doubt on the likelihood of the economy tipping back into recession, said Joe Manimbo, a senior market analyst at Travelex Global Payments in Washington.

Political haggling in Washington over budget policy and a deepening debt crisis in Europe have eroded confidence, leaving the U.S. economy on the brink of a new recession.

Faced with a weak recovery, the Federal Reserve last week announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet.

In speech on Wednesday, Fed Chairman Ben Bernanke said the U.S. central bank might need to ease monetary policy further if inflation or inflation expectations fell significantly.

The revision to GDP was a touch above economists' expectations for a 1.2 percent pace and took GDP growth back to the government's original estimate of 1.3 percent.

The economy expanded at a 0.4 percent rate in the first three months of the year.

While the expenditure side of the economy showed severe weakness in the first half, economic activity as measured by income fared a little better.

Gross domestic income rose at a 1.3 percent rate in the second quarter after increasing 2.4 percent in the first quarter.

Another report from the Labor Department showed the U.S. economy likely created 192,000 more jobs in the year through March than previously estimated.

The GDP report also showed after-tax corporate profits rising at a 4.3 percent rate in the second quarter, the largest increase in a year, instead of 4.1 percent. Profit ticked up 0.1 percent in the first quarter.

CAUTIOUS OPTIMISM

There is cautious optimism the economy will skirt another downturn as factory output continues to expand, although at a slower pace than earlier in the recovery, and businesses maintain their appetite for spending on capital goods.

Details of the GDP revisions also were consistent with an economy that is on a slow growth track rather than sliding back into recession.

Consumer spending growth was revised up to a 0.7 percent rate from 0.4 percent. The increase in spending, which accounts for more than two-thirds of U.S. economic activity, was still the smallest since the fourth quarter of 2009.

Export growth was stronger than previously estimated, rising at a 3.6 percent rate instead of 3.1 percent. Imports increased at a 1.4 percent rate rather than 1.9 percent.

That left a smaller trade deficit, and trade contributed 0.24 percentage point to GDP growth.

Businesses accumulated less stock than previously estimated in the quarter, which should support growth in the July-September quarter. Business inventories increased $39.1 billion instead of $40.6 billion, cutting 0.28 percentage point from GDP growth during the quarter.

Excluding inventories, the economy grew at a 1.6 percent pace instead of 1.2 percent.

Business spending was revised to a 10.3 percent rate from 9.9 percent rate as investment in nonresidential structures offset a slight slowdown in outlays in equipment and software. Spending on nonresidential structures was the fastest since the third quarter of 2007.

The GDP report also showed inflation pressures remaining elevated during the quarter, with the personal consumption expenditures price index rising at a revised 3.3 percent rate. That compared to 3.9 percent in the first quarter.

The core PCE index closely watched by the Federal Reserve advanced at a 2.3 percent rate, the largest increase since the second quarter of 2008. It was revised up from 2.2 percent.

(Reporting by Lucia Mutikani and Jason Lange, Editing by Andrea Ricci)

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