Consumer spending also picked up in October, and new-home sales hit their highest point in more than a year. Together, the reports suggested that the economy should manage to sustain at least a modest recovery. Some economists have worried that the economy was at risk of slipping back into recession.
The number of people filing first-time claims for jobless aid fell by 35,000 to 466,000, the Labor Department said Wednesday. That was the fewest since September of last year. And it was far better than the 500,000 economists had expected.
Still, analysts cautioned that jobless claims would have to drop to near 400,000 for several weeks to signal actual growth in employment.
Economists estimate the economy will lose a net 145,000 jobs this month. It would have to add 125,000 jobs a month just to keep the unemployment rate from rising.
Some economists sounded cautionary notes about Wednesday's positive news. In particular, they say the improvements in jobless claims, new-home sales and consumer spending, which powers 70 percent of the economy, may prove short-lived because of the still-sluggish recovery.
One such sign was that orders for costly manufactured goods fell unexpectedly last month. Much of October's weakness came from a big drop for goods related to defense. Excluding those, orders for other types of manufactured goods rose slightly. Still, the overall performance was weaker than economists had expected.
Many economists think the recovery will remain so weak and job creation so slight that the unemployment rate will keep rising. Many think the rate, which hit a 26-year high of 10.2 percent in October, could top 10.5 percent by mid-2010.
Some analysts also cautioned against reading too much into the sharp drop in unemployment claims. They noted that part of the improvement reflected large seasonal adjustment factors, which smooth out changes that normally occur at certain times of the year.
Excluding seasonal adjustments, claims rose. That's normal at this time of year when many construction workers face layoffs because of worsening weather conditions.
Federal Reserve policymakers expressed concern at their November meeting that the unemployment rate could remain elevated for several years, according to minutes of the discussions released Tuesday.
For now, though, the surprisingly good reports on jobless claims, consumer spending and new-home sales were encouraging. New claims last week dropped below 500,000 for the first time since the first week in January. Weekly claims peaked at 674,000 in March and have since been trending lower.
consumer spending rose a 0.7 percent last month, following 0.6 percent drop in September, the Commerce Department said. It was the best showing since a big 1.3 percent jump in August when the government's now-defunct Cash for Clunkers programs enticed people to buy cars.
Incomes, the fuel for future spending, rose 0.2 percent for the second straight month.
Consumers spent more on costly "durable" manufactured goods - such as cars and appliances - last month. Such spending rose 2.1 percent, compared with a 8.5 percent drop in September. They also boosted spending last month on "nondurables," such as food and clothes, and on services.
Personal income from interest came to an annualized $1.23 trillion in October. It was up 0.5 percent from September. That means people who rely on interest from savings, such as money in certificates of deposit, earned a bit more in October after months of losses. Interest on dividend income dipped slightly to a pace of $525.5 billion, down 0.2 percent from September.
Wednesday's figures seemed to blunt some fears that consumers could clam up, sending the country into a "double dip" recession. Yet concerns remain that consumer spending will slow early next year.
With spending outpacing income growth, Americans' personal savings rate - savings as a percentage of after-tax income - dipped to 4.4 percent in October from 4.6 percent in September.
New-home sales rose 6.2 percent to a seasonally adjusted annual rate of 430,000 from an upwardly revised 405,000 in September. Economists had expected a pace of 410,000.
Home shoppers were acting before lawmakers decided earlier this month to extend a tax credit for first-time buyers and expand it to some existing homeowners. The credit now covers contracts signed by April 30.
Much of October's weakness in durable-goods orders came from an 18.4 percent drop in orders for goods related to defense. Excluding those, orders for other types of manufactured goods rose 0.4 percent in October, after a 1.8 percent rise in September.
Orders for electrical equipment, commercial airplanes and parts, primary metals - including steel - and fabricated metals all rose last month. Orders for cars, machinery, computers and communications equipment fell.
A drop of 190,000 in the number of people continuing to claim jobless aid marked the 10th consecutive decline, leaving it at 5.42 million, the lowest level since the week of Feb. 28. The continuing claims figure, though, does not include millions who have used up the regular 26 weeks of benefits typically provided by states and are receiving extended benefits for up to 73 additional weeks.
AP Real Estate Writer Alan Zibel contributed to this report.