The chances of the U.S. economy averting a new recession got a boost on Thursday with claims for jobless benefits falling to a five-month low last week and growth a touch stronger in the second quarter than previously estimated.

Initial claims for state unemployment benefits fell 37,000 to 391,000, the Labor Department said, well below economists' expectations for 420,000. But the department cautioned that the way it adjusts the data for seasonal fluctuations may have overstated the strength.

Separately, the Commerce Department said U.S. gross domestic product grew at an annual rate of 1.3 percent in the second quarter, up from the previously reported 1.0 percent. Consumer spending and export growth both were stronger than earlier estimated.

When you connect these data points together, they indicate a very tepid recovery. We are still experiencing positive growth, which is better than we feared a few months ago, said Paul Ballew, chief economist at Nationwide in Columbus, Ohio.

The cautious optimism generated by the data was tempered somewhat by a report showing the housing sector remained on the rocks last month.

Investors on Wall Street welcomed the claims and growth data and increasing confidence in Europe's response to its debt crisis. U.S. stocks ended mostly higher, with the Standard & Poor's 500 index gaining 0.81 percent.

Prices for the 30-year U.S. Treasury bond rose, while the dollar rose marginally against a basket of other major currencies.

FED READY TO ACT AGAIN

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

A survey of U.S. chief executives released by the Business Roundtable on Thursday showed their views of the economy's prospects deteriorated in the third quarter, with the number who expect to cut jobs roughly doubling.

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 to longer maturities.

In a 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 drop in initial claims for unemployment benefits took them below 400,000 for the first time since early August. The department, however, said the weakness in the labor market in recent years may have led the model it uses to seasonally adjust the data to overstate last week's drop.

The decline also reflected the fading impact of Hurricane Irene, which had caused claims to spike in the September 10 week.

Still, the total number of unemployed continuing to claim benefits after an initial week of aid fell to 3.73 million in the week ended September 17 from 3.75 million a week earlier.

The September 17 week corresponds with the survey period for the department's household employment measure, which is used to construct the national unemployment rate.

RECESSION FEARS EASE

In August, the jobless rate remained stuck at 9.1 percent, with a separate survey of employers showing hiring ground to a halt, which ratcheted up recession fears.

Those worries are beginning to fade. Factory output continues to expand and businesses have maintained their appetite for spending on capital goods.

Indications are that the third quarter is doing better than previously thought. We now anticipate third-quarter real GDP growth of just above 2 percent, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Housing, however, remains a weak spot.

The National Association of Realtors said its index of pending home sales, based on contracts signed in August, fell 1.2 percent to 88.6, its lowest since April.

NAR said contract signings, which usually precede actual closings by a month or two, were held back by tight credit and, in the Northeast, by Hurricane Irene.

With millions of Americans locked into mortgages worth more than their homes, historically low interest rates are failing to lift sales. Freddie Mac said on Thursday that the average rate on U.S. 30-year fixed rate mortgages fell to a record low 4.01 percent this week.

(Additional reporting by Jason Lange; Editing by Andrea Ricci and James Dalgleish)

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