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The economic outlook was brightened further by other data on Thursday showing builders breaking more ground on new residential projects in January, pointing to signs of life in the distressed housing market.
The reports added to a raft of solid data that now has analysts expecting only a mild slowdown in growth in the first quarter. Economists also have dialed down their expectations for another round of bond-buying or quantitative easing by the Federal Reserve.
"The numbers add to the belief that the economy is shifting gears. There is just no number that is giving us a whole lot of trouble, except for consumer spending," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Initial claims for state unemployment benefits dropped 13,000 to a seasonally adjusted 348,000, the lowest level since March 2008, the Labor Department said.
Economists polled by Reuters had forecast claims rising to 365,000. The four-week average of new claims, seen as a better measure of labor market trends, fell 1,750 to 365,250 - the lowest since April 2008.
In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rose to 10.2 this month from 7.3 in January as orders and shipments jumped. Though factories in the region hired fewer workers this month, they increased hours for existing employees, which bodes well for wage growth.
"Everything is stronger than expected. Barring any unforeseen problems from Europe it appears we're in a self-sustaining cycle of growth. We're better than where we were but not as good as we'd hope," said Jim Awad, managing director at Zephyr Management in New York.
The run of fairly solid data was extended, with the Commerce Department reporting that housing starts rose 1.5 percent to an annual rate of 699,000 units last month, beating economists' expectations for a 675,000-unit pace.
Starts were boosted by multi-unit buildings, reflecting growing demand for rental apartments as Americans move away from homeownership. Permits for future home construction rose 0.7 percent to a 676,000-unit pace in January.
U.S. stocks rose and prices for U.S. Treasury debt fell on the data, while the dollar rallied against the yen.
FIRMER DATA
The data on employment, manufacturing and retail sales also have raised doubts on whether the U.S. central bank will keep its pledge to hold interest rates at ultra low levels until at least through 2014. The Fed made its low rate commitment before January's employment report was released.
Minutes of the Fed's January 24-25 meeting released on Wednesday showed a few policymakers believed a third round of quantitative easing would be needed this year to support the U.S. economy.
Last week's drop in new unemployment claims pushed them below the 350,000 level that economists normally associate with sustained strength in the labor market. Claims have declined for three straight weeks.
Job gains have exceeded 200,000 for two straight months and the unemployment rate dropped to a three-year low of 8.3 percent in January.
But considerable slack still remains, with 23.8 million Americans either out of work or underemployed. There are no job openings for nearly three out of every four unemployed.
The number of people still receiving benefits under regular state programs after an initial week of aid tumbled to its lowest level since August 2008.
In a second report, the Labor Department said prices received by farms, factories and refineries edged up just 0.1 percent in January as food and energy costs fell. Wholesale prices dipped 0.1 percent in December.
But producer prices excluding food and energy rose 0.4 percent last month, the largest gain since July, after increasing 0.3 percent in December.
"While I am bullish on the economy I don't see growth getting away from us enough to the point where it becomes inflationary any time soon," said David Coard, head of fixed income sales and trading at the Williams Capital Group in New York.
Wholesale prices outside of food and energy were pushed up by drugs costs, which accounted for about 40 percent of the increase. Higher prices for light motor trucks and household appliances also contributed.
