NEW YORK, Jan 5: The number of US workers seeking new jobless benefits fell last week to its lowest in over five years, the government reported on Thursday and a private group said the services sector grew last month, boding well for the economic outlook.

The strong data came one day before the closely watched Labour Department report on employment. Economists expect a solid 200,000 gain in non-farm payrolls in December, with the jobless rate holding steady at 5 per cent.

In other data, major US retailers on Thursday reported that deep discounts lured holiday shoppers last month and pushed sales slightly ahead of modest expectations, but a disappointing profit forecast from Wal-Mart raised concerns.

Wal-Mart, the world’s biggest retailer, said its fourth-quarter profit would likely reach only the low end of its forecast after a disappointing December. Wal-Mart posted just a 2.2 per cent increase in December sales at US stores open at least a year.

The unexpected fall in jobless claims was not the product of a particular special factor, a government analyst said, but cautioned there is often volatility around holidays.

In its weekly report, the Labour Department said 291,000 initial claims for state jobless benefits were filed last week, the lowest since September 2000 and down from a revised 326,000 in the prior week. It was the largest weekly drop since late September.

The decrease in claims outstripped Wall Street’s expectations. Analysts had expected claims to dip slightly to 320,000 last week from the originally reported 322,000.

“The jobless claims drop shows good strength in the labour market at the end of the year,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis. “It shows that the economy has recovered after the hurricanes and is heading into the new year with good momentum and good job prospects.”

But some said the data should be taken with a grain of salt. “It’s Christmas, it’s a difficult week for seasonal adjustments,” said David Sloan, an economist with 4CAST Ltd. in New York.

The larger-than-expected drop brought a four-week moving average of initial claims, which smoothes weekly volatility to provide a better view of underlying labour market trends, down by 9,250 to 316,750, its lowest level since August.

Benchmark 10-year US Treasuries prices were weaker on the day but recouped some of their earlier losses as the weaker home sales data offset some of the negative sentiment sparked by the strong jobless claims figures. The 10-year note price was down 5/32 at midday to yield 4.37 per cent.

A separate report from the Institute for Supply Management showed the US services industry expanded further in December, as inflation within the sector eased, and new orders rose.

The US service sector — which accounts for more than two-thirds of the economy — grew in December, aided by lower energy costs, rising new orders and continued job growth.

ISM reported its non-manufacturing index rose to 59.8, from 58.5 in November, above forecasts for a rise to 59.0.

The number 50 divides growth from decline in the sector, which includes any sort of business from restaurants and travel agencies to banks and beauty parlours.

“All the components are above the break-even point of 50. There is also relief in the prices paid component from lower energy costs along with easing in delivery time,” said Lynn Reaser, chief economist at Banc of America Capital Management in Boston.

“The jobs component remains quite strong versus the November figure. On balance, the bulk of the US economy bodes well for solid growth in 2006,” she said.

The employment component edged up to 57.1 in December from 57.0, while the prices-paid gauge fell to 69.5 from 74.2.—Reuters