Another report on Thursday showed consumer spending was slightly stronger than expected in the April-June period, causing the government to revise its second-quarter growth estimate up to a 1.7 percent annualized pace from 1.6 percent.

Although the reports further diminished fears of a new economic downturn, analysts said they were not enough to prevent the Federal Reserve from embarking on a new round of monetary easing as early as November.

William Larkin, portfolio manager at Cabot Money Management in Salem, Massachusetts, said the US central bank would need to see greater stability in both the jobs and housing markets to stay on the sidelines. When that happens, he said, "You can't say you are worried about deflation."

Stocks on Wall Street rose on the reports, with the Dow Jones industrial average and the Standard & Poor's 500 Index briefly rising more than 1 percent before turning negative as investors locked in profits from September's strong rally.

Prices for safe-haven government debt fell, while the dollar cut losses against the euro and the yen.

Initial claims for state unemployment benefits fell 16,000 last week to 453,000, the Labor Department said, exceeding market expectations for a decline to 460,000.

Separately, the Institute for Supply Management-Chicago's business barometer rose to 60.4 this month from 56.7 in August, showing manufacturing in the Midwest perking up.

Markets had expected a reading of 55.9 for the index, which is seen as closely correlated with national trends. A reading above 50 indicates expansion in the regional economy.

The employment component of the index sank to its lowest since May, but new orders rose strongly.

"It's encouraging to see that jobless claims are trending lower now. And also it looks like the US economy entered the third quarter with a little bit more momentum than previously expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The economy slowed down in the second quarter after a 3.7 percent growth pace in the first three months of the year, leaving the recovery from the longest and deepest downturn since the Great Depression with little strength to chip away at a 9.6 percent unemployment rate.

Worried about the slow growth pace and low inflation, the Fed last week signaled it was ready to inject more money into the economy.

The Fed's preferred measure of inflation — the personal consumption expenditures price index, excluding food and energy — rose at a slow 1.0 percent in the second quarter, a slight downward revision from the 1.1 percent increase the government had estimated last month.

But there were some encouraging signs on consumer spending, which accounts for over two-thirds of US economic activity.

Second-quarter spending was revised up to a 2.2 percent growth rate, the largest increase in three years, from the previously reported 2.0 percent rise. Spending grew at a 1.9 percent rate in the January-March period.

Growth was also supported by a bigger accumulation in business inventories than previously thought.

But a 33.5 percent jump in imports, which was previously reported as a 32.4 percent increase, kept growth on a weak trajectory. Analysts believe the surge in imports was likely the result of Chinese exporters rushing to push through goods before the expiration of value added tax rebates.

The import surge, the biggest in 26 years, handily eclipsed a 9.1 percent rise in exports, creating a trade deficit that chopped 3.5 percentage points from GDP growth.

Analysts do not expect the robust import growth pace to continue, which means trade will be less of a drag on the economy in the third quarter.

Business investment was revised a touch lower, to reflect weak spending on structures, but remained the largest advance since the first quarter of 2006.

The GDP report also showed after tax corporate profits rose 3.9 percent in the second quarter, revised up from 2.9 percent. Profits had increased 5.8 percent in the first quarter.