A trend measure of Americans signing up for new jobless benefits fell close to a four-year low last week, but weakness in a regional factory gauge showed U.S. recovery still faces an uphill climb.

Other data on Thursday gave mixed signals about the strength of an incipient housing recovery, with groundbreaking on new homes falling slightly in July even as building permits rose.

Taken together, the data reinforced the view that economic growth might pick up in the second half of the year but would still be lackluster.

Growth and hiring were disappointing in the spring and expectations that the Federal Reserve could unleash more economic stimulus have grown, although the likelihood of action at its next meeting may be dimming.

"For the Fed, the issue was whether the economy was sliding toward the abyss and it doesn't seem to be. But it's certainly not improving," said Pierre Ellis, an economist at Decision Economics in New York.

The Philadelphia Federal Reserve Bank said its business activity index, which measures activity at factories in the mid-Atlantic region, was at minus 7.1 in August. Any reading below zero indicates a contraction in manufacturing in eastern Pennsylvania, southern New Jersey and Delaware.

The report offers an early sign of the health of U.S. manufacturing. A national reading indicated the sector shrank in June and July.

Still, the Philadelphia Fed's report showed a smaller contraction in August than in July, which economists said took some of the edge off the bad news. Wall Street analysts were expecting a reading of minus 5.

The dollar hit a one-month high against the yen amid cooled expectations for further monetary easing by the Federal Reserve. U.S. stocks rose following comments from German Chancellor Angela Merkel that appeared to back the European Central Bank's efforts to fight the euro zone debt crisis.

The festering crisis in Europe is a menace to U.S. manufacturers and already is weighing on the global economy. China said on Thursday the outlook for its exports has darkened.

Also looming over the economy, the government is on track to raise taxes and cut spending next year - a prospect that is already hurting business sentiment.

Wal-Mart Stores Inc on Thursday took note of a slowing in international markets as it forecast full-year earnings that could fall short of Wall Street expectations. It also said U.S. shoppers still appeared cautious.

In addition, retailer Dollar Tree Inc forecast quarterly sales below analysts' expectations.

CLAIMS TREND HIGHER

After a sharp slowdown in hiring in the second quarter, employers added 163,000 workers to their payrolls in July, although the unemployment rate ticked higher to 8.3 percent.

The Labor Department said initial claims for state unemployment benefits inched higher by 2,000 last week to a seasonally adjusted 366,000, in line with expectations.

Despite the increase, claims data is now giving a clearer picture of modest improvement in the labor market after swinging wildly in July due to shifts in seasonal auto plant shutdowns.

The four-week moving average for new claims, a measure of labor market trends, dropped 5,500 to 363,750. That was the lowest since March - and the second lowest since April 2008.

"Overall, (the data) are consistent with our outlook that growth will be a little bit better in the U.S. but not as upbeat as some people think," said Brian Kim, a currency strategist at RBS Securities in Stamford, Connecticut.

The hiring pickup in July, along with strong gains in retail sales, has dampened expectations the Fed could announce a third round of bond purchases at its September 12-13 meeting, although many economists still view action as likely. Thursday's data did little to sway the debate.

HOUSING STARTS STUTTER

In another downbeat sign, the Commerce Department said housing starts dropped 1.1 percent last month to a seasonally adjusted annual rate of 746,000 units. The government also revised lower its estimates for starts in recent months.

The U.S. housing market, which fell into a deep rut six years ago, has been a relative bright spot in the economy this year. Home prices have shown signs of stabilizing and many economists think housing construction will give a small boost to the economy this year.

There were also some positive signals in Thursday's report. New permits for building homes rose 6.8 percent in July to a 812,000 unit pace, the highest rate since August 2008.

"The trend is still positive," Wells Fargo said in a report.