By Jason Lange
WASHINGTON (Reuters) - Contracts to buy previously owned U.S. homes fell for the third straight month in August but fewer Americans filed new claims for jobless benefits last week, giving conflicting signals on the health of the economy.
Another economic report on Thursday showed a worrisome decline in consumer prices during the second quarter.
Together, the data offers a challenge for the Federal Reserve, which wants to see more evidence that the U.S. economy is gaining momentum before it scales back a bond-buying stimulus program.
The Fed last week flagged a rise in interest rates as a threat to the economy, and also said that employment and inflation remain too weak.
The National Association of Realtors said its Pending Homes Sales Index, based on contracts signed last month, decreased 1.6 percent last month.
The decline, which was steeper than economists had expected, was the latest sign that a sharp rise in mortgage rates have put a significant dent in the U.S. housing market recovery.
"The housing market is not rolling over, but it does seem to be losing steam," said Ian Shepherdson, an economist at Pantheon Macroeconomics in White Plains, New York.
Mortgage rates have shot up since May and pushed potential home buyers out of the market, which is still smarting from the 2007-09 recession. Contracts fell across most of the country in August, with gains only in the Northeast.
At the same time, labor market data was more positive.
Initial claims for state unemployment benefits dropped 5,000 last week to a seasonally adjusted 305,000, the Labor Department said.
The drop in claims could bode well for employers adding workers to their payrolls and sooth some of the Fed's concerns.
"Claims are signaling further acceleration in payrolls gains," said Jim O'Sullivan, an economist at High Frequency Economics in Valhalla, New York.
Economists polled by Reuters had expected the number of new claims to rise last week, and the decline fueled gains in stock prices and yields on U.S. government debt.
The reading gives a clearer view of the labor market's health after an update in government computer systems in California and Nevada earlier this month threw claims data into disarray.
The updates created a backlog in unprocessed claims that had been distorting the data, but a Labor Department analyst said both states had reported they had caught up in counting new filings.
The four-week average of new claims, which smoothes out weekly volatility, fell 7,000 to 308,000, the lowest level since June 2007.
Despite these gains, a lot of slack appears to remain in the labor market, a factor that continues to weigh on consumer spending.
The Commerce Department said prices for goods and services purchased by U.S. households fell in the second quarter for the first time in four years.
That is worrisome because it suggests demand in the economy is so weak that businesses have little leverage to raise prices. Bernanke has said the Fed doesn't want to end its bond-buying stimulus program until inflation begins to trend higher.
It was the first decline since the first quarter of 2009, which were some of the darkest days of the 2007-09 recession.
Even stripping out volatile food and energy costs, prices rose at only a 0.6 percent rate, also the weakest reading for this so-called core category since early 2009.
"The (price) data therefore look likely to further dissuade policymakers that the economy is ready to withstand any tapering of the Fed asset purchases program," said Chris Williamson, an economist at Markit.
Gains in corporate profits also appear to have downshifted. After rising 7 percent in 2012, after-tax profits fell in the first quarter and rose a downwardly revised 3.3 percent in the second, the Commerce Department said.
The same report showed the government holding unchanged its estimate for growth in gross domestic product, a measure of all the goods and services produced in the economy, which expanded at a 2.5 percent annual rate between April and June.
(Reporting by Jason Lange and Margaret Chadbourn; Editing by Andrea Ricci and Chizu Nomiyama)