New U.S. claims for jobless benefits hit a seven-month low last week and permits for future home construction rebounded strongly in October, the latest data to suggest the economy was gaining traction.

The improving economic picture was spoiled somewhat by another report on Thursday showing factory activity in the Mid-Atlantic region slowed this month on weak orders. However, employers hired more workers and increased working hours.

Economic conditions are moving upward at an accelerating pace, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. However, two major roadblocks stand in the way of solid growth: Rising oil prices and European debt issues.

Initial claims for state unemployment benefits fell 5,000 to 388,000, the Labor Department said, pushing a four-week average below the 400,000 mark for the first time since April.

The report covered the survey period for the government's employment count for November and offered hope that hiring accelerated this month after payrolls rose 80,000 in October.

First-time claims dropped 16,000 between the October and November survey weeks. The government will release its job count on December 2.

We believe this decline could be heralding a pickup in the pace of job creation, said John Ryding, chief economist at RDQ Economics in New York. We do expect the report to show a pickup in employment growth along with a continued pattern of upward revisions to the prior two months.

The weak labor market, marked by a 9 percent unemployment rate, has been one of the hurdles to stronger economic growth.

Outside the jobs market, there were signs of stability in housing, with permits for home building soaring 10.9 percent to a seasonally adjusted annual rate of 653,000 last month.

While new construction fell 0.3 percent to annual rate of 628,000 units, economists believe residential building will soon contribute to growth as demand for rentals boosts the construction of apartment buildings. Last month, permits for buildings with five units or more rose to their highest level in three years.

EUROPE CASTS SHADOW OVER RECOVERY

The fairly upbeat data had little impact on Wall Street, where Europe's debt problems continued to dominate sentiment.

U.S. stocks were lower in midday trade. Prices for Treasury debt were down and the dollar was little changed against a basket of currencies.

Recent data such as retail sales and industrial production point to firming growth, further reducing the risk of a new recession.

Economists believe fourth-quarter growth could top an annual pace of 3 percent, stepping up from 2.5 percent in the July-September period.

But the crisis in Europe, which has caused bond market turmoil across the region, could derail the recovery.

St. Louis Federal Reserve Bank President James Bullard said Europe certainly posed a risk, but that he didn't believe it would hit the U.S. economy hard.

If it blows up in a big disorderly way, which is what everyone is worried about, then that could come back to haunt the U.S., he told CNBC. If it just tumbles along for a long period of time, which is the most likely outcome, then I'm not sure that you get much feedback to the U.S.

While the Philadelphia Federal Reserve Bank's business activity index fell to 3.6 this month from 8.7 in October, an employment sub-index rose to a six-month high and the average workweek index more than tripled.

A reading above zero indicates factory activity is expanding in the region, which covers eastern Pennsylvania, southern New Jersey and Delaware. But the survey is not always a good barometer of national manufacturing.

The claims report showed the number of people receiving benefits under regular state programs after an initial week of aid in the week ended November 5 fell to a three-year low, further underscoring the improved labor market tone.

(Additional reporting by Jason Lange and Tim Ahmann; Editing by Andrea Ricci)

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