Updated from 11:10 a.m. EST

Data showing a brightening picture for jobs and manufacturing on Thursday encouraged optimism that the economy will grow in the first quarter and supported stocks.

Jobless claims fell to their lowest level in six months for the week ended Jan. 12, down 14,000, to 384,000. On average, economists were expecting claims to rise to 438,000.

The Labor Department attributed the decrease to seasonal factors. On a seasonally unadjusted basis, weekly claims hit 776,035, their highest level since Jan. 12, 1991. Still, the four-week average declined for a seventh-straight week, falling to 411,000 from the previous week's 411,250.

In addition, the Philadelphia Fed Survey, a regional manufacturing index that covers Pennsylvania, New Jersey and Delaware, gave its first positive reading in over a year. The Philly Fed index hit 14.7 in January, versus negative 12.6 the previous month. "Most indicators of current manufacturing performance showed marked improvement this month, although employment is still reported to be in decline. Expectations for growth over the next six months also improved somewhat," the Philadelphia Fed wrote in its report.

And while construction of new homes declined in December after a warm-weather driven surge in November, the pace was still stronger than in October. Housing starts dropped 3.4% for the month versus November to a seasonally adjusted annual rate of 1.570 million units. October housing starts came in at a 1.521 million rate. Meanwhile, building permits, an indication of future activity, climbed 3.6% from November to a seasonally adjusted annual rate of 1.653 million units, their highest level since May of last year.

Last week, Federal Reserve Chairman Alan Greenspan said that the U.S. economy still faces significant risks, opening the door for the 12th interest rate cut since the beginning of 2001.

In the Rearview

But after a month of positive reports, some economists have begun saying the worst is over. "A number of economic reports have been converging to give us a story of the economy doing a little bit better," said Anthony Karydakis, senior financial economist at Banc One Capital Markets, citing the jobless claims numbers,

more resilient retail sales and a slower decline in industrial production over the past three to four months. "We have clearly entered the bottom-out phase. We have stopped contracting." Karydakis expects gross domestic product to grow by 0.5% to 1% in the first quarter after declining in the fourth quarter.

Based on today's numbers, as well as the December Purchasing Manager's Index and recent business investment and consumer confidence data, Jim O'Sullivan, U.S. economist at Warburg Dillon Read, says it's clear the economy is turning and that the recession is winding down.

"The numbers are coming in a bit better than expected. It's possible we could have a positive first quarter. On a monthly basis, we should be positive before the end of first quarter," he said. There's not enough evidence yet for him to revise his GDP targets into positive territory, however. O'Sullivan is currently expecting a 1% contraction in GDP for the first quarter and 3% growth in the second quarter.

"The weekly

jobless numbers are confusing with the seasonal factors. But by early February, we will have seen more claims and the employment report. That will give us a better sense of whether we have enough momentum to get positive growth in the first quarter."

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Unadjusted claims tend to soar at this time of year, as companies lay off temporary workers they hired for the holidays, and colder weather leads to construction layoffs.

Despite the seasonal aberrations, the jobless claims are telling the most consistent story, said Karydakis. "The pace has clearly slowed after peaking in the first half of October," he said.

Down Here

Meanwhile, a bottoming out in the economy is different from an actual recovery. "The question is, is this the beginning of some momentum that will lead to recovery, or does it just have a better feel because we have stopped contracting? We could get stuck here at the bottom for a while. That's a question that will be answered over the next month," he said.

The economic news came on a day when stocks rebounded from a sharp decline Wednesday. In addition to the employment data, the averages got a lift from positive earnings news from

Advanced Micro Devices

(AMD) - Get Report

,

Yahoo!

(YHOO)

and

Compaq

(CPQ)

, among others.