WASHINGTON/NEW YORK (Reuters) - The number of Americans filing new claims for jobless aid dropped by the most in a year last week, easing fears the labor market recovery was stalling.
But separate data on the vast U.S. services sector was less upbeat, with the rate of growth slowing more than expected and a gauge of employment falling to its lowest level in four months.
The bigger-than-expected decline in new claims helped lift some of the dark cloud cast over the labor market by data from payroll processor ADP on Wednesday that showed private employers in April created the fewest jobs in seven months.
Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 365,000, the Labor Department said on Thursday. It was the biggest weekly drop in claims since early May last year
"This offsets the concerns from yesterday's ADP number. You're getting mixed signals ... It might not be as bad as we were thinking after ADP," said Phil Flynn, a senior market analyst at PFG Best in Chicago.
Economists polled by Reuters had forecast claims falling to 380,000 last week. The four-week average of new claims, considered a better of measure of labor market trends, rose 750 to 383,500 - the highest level since December.
Last week's jobless claims data falls outside the survey week for April payrolls and thus has no direct bearing on the closely watched government report on employment to be released on Friday. According to a Reuters survey, that report is expected to show employers added 170,000 new jobs last month, an improvement over March's disappointing 120,000.
However, there is a downside risk to this forecast. Initial claims were elevated for much of April and the ADP survey showed private employers added only 119,000 jobs last month. Analysts said the drop in the service sector employment gauge also added to that risk.
The Institute for Supply Management said its services index fell to 53.5 last month from 56.0 in March, missing economists' forecasts for a modest decline to 55.5.
A reading above 50 indicates expansion in the sector. The services sector accounts for about two-thirds of U.S. economic activity.
The forward-looking new orders index dropped to 53.5 from 58.8, while the employment gauge slipped to the lowest level since December at 54.2 from 56.7.
"We're seeing some softness in the economy after a good start to the year," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis.
"We think it's a temporary cooling off and that the outlook is still favorable this year because of easy money policies around the world and declining inflation."
U.S. stocks turned lower immediately after the services data, while Treasuries prices trimmed losses and the dollar trimmed gains against the yen.
Additional reporting by Ryan Vlastelica in New York; Editing by Andrea Ricci