Still, companies are reluctant to hire and economists expect the unemployment rate will tick up to 9.9 percent when October's figure is reported Friday. The jobless rate hit a 26-year high of 9.8 percent in September.
The Labor Department said Thursday that first-time claims for jobless benefits fell by 20,000 to a seasonally adjusted 512,000. That's better than economists' estimates of 523,000.
Economists closely watch initial claims, which are considered a gauge of the pace of layoffs and an indication of employers' willingness to hire new workers.
The four-week average, which smooths fluctuations, dropped to 523,750, its ninth straight decline. That's 135,000 below the peak for the recession, reached in early April.
Despite the improvement, initial claims remain well above the roughly 400,000 that economists say will signal job creation.
The economy grew at a 3.5 percent annual pace in the July-September quarter, the government said last week, ending a record four straight quarters of decline and providing the strongest signal yet that the recession is over.
But economists worry that growth will slow early next year as various government stimulus programs wind down. That uncertainty has made many employers reluctant to hire.
On Wall Street, the better-than-expected jobless claims report gave investors hope that the monthly unemployment report also might beat expectations. The Dow Jones industrial average added more than 130 points in morning trading, and broader indexes also gained.
Many companies also are squeezing more production from their existing work forces. Productivity, the amount of output per hour worked, jumped 9.5 percent in the third quarter, the Labor Department said in a separate report. That's the sharpest increase in six years, and it enables companies to produce more without hiring extra workers.
Some economists were encouraged by the productivity report, saying that eventually companies will have to add jobs, rather than simply push their existing work forces harder.
Economists expect the nation lost a net total of 175,000 jobs last month, adding to the 7.2 million lost since the recession began in December 2007.
The number of people claiming jobless benefits for more than a week fell by 68,000 to 5.75 million, above analysts' estimates but the eighth drop in nine weeks. The continuing claims data lag initial claims by one week.
Another 4.1 million people claimed extended unemployment benefits in the week ended Oct. 17, the latest data available, an increase of about 100,000 from the previous week. Congress has added 53 weeks of emergency aid on top of the 26 weeks typically provided by states.
Still, as roughly 7,000 Americans run out of extended benefits every day, the House is expected to approve legislation that would add another 14 to 20 weeks. The Senate unanimously approved a similar proposal Wednesday.
The National Employment Law Project, an advocacy group, estimates that up to 1.3 million people would exhaust their benefits without the extension.
Many analysts expect the unemployment rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer. The concern is that the recovery and consumer spending, which accounts for 70 percent of economic activity, could falter if households remain squeezed by layoffs, stagnant wages and depleted savings.
The Federal Reserve pledged Wednesday to keep interest rates low for an "extended period," which central bank policymakers can do because wage and general inflation pressures have vanished during the steep downturn.
Some companies are still announcing job cuts. Microsoft said Wednesday that it will eliminate 800 jobs on top of 5,000 layoffs that it announced in January. And Johnson & Johnson said it could cut up to 8,300 jobs as part of a restructuring.
Among the states, California reported the largest increase in claims, with 14,394, which it attributed to layoffs in the construction, services, manufacturing and agriculture industries.