WASHINGTON (Reuters) - U.S. homebuilding rebounded sharply in December as a firming economy boosts demand for rental housing, while an unexpected drop in the number of Americans filing for unemployment benefits last week pointed to a further tightening in the labor market.

A "For Rent" sign is posted outside a residential home in Carlsbad, California, U.S., January 18, 2017. REUTERS/Mike Blake

The economy’s brightening prospects were underscored by other data on Thursday showing factory activity in the mid-Atlantic region accelerating to a two-year high this month, amid jumps in new orders, employment and inventories.

In addition, manufacturers reported paying more for raw materials and asking for higher prices for their goods, mirroring other recent factory surveys. This suggests that a broad increase in inflation could be on the way.

The reports came as Republican Donald Trump prepared to be sworn in as president on Friday, taking over from President Barack Obama, whose administration’s policies have been credited with pulling the economy from the 2007-09 recession.

“The economy is doing great, whichever way you look at it,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. “The labor market is close to full employment and the housing market continues to heal. Trump is inheriting a strong economy.”

Housing starts jumped 11.3 percent to a seasonally adjusted annual rate of 1.23 million units last month, the Commerce Department said. Starts were driven by a 57.3 percent surge in the construction of multi-family housing units, which offset a 4.0 percent drop in single-family starts.

Economists polled by Reuters had forecast housing starts increasing to a 1.20 million-unit rate in December. Housing starts increased 4.9 percent in 2016.

Permits for future home construction slipped 0.2 percent to a 1.21 million-rate last month as approvals for the multi-family segment fell 9.0 percent. However, permits for single-family homes construction rose 4.7 percent.

The housing market remains on solid ground even as mortgage rates have jumped above 4 percent.

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The tightening labor market, marked by an unemployment rate near a nine-year low of 4.7 percent, is fueling demand for housing. Much of the demand, however, has been concentrated in the multi-family housing segment, in part as a shortage of houses on the market drives home prices higher.

That has priced out some first-time homebuyers from the market, boosting rents. A broad measure of rents increased 3.9 percent in the year through December, the biggest rise since April 2007. With the labor market near full employment, demand for housing is likely to remain supported this year.

“Higher mortgage interest rates present downside risk. But today’s data make clear that no slowdown is yet evident with starts likely to remain robust in January,” said Andrew Hollenhorst, an economist at Citigroup in New York.

“This increases our conviction that residential investment will contribute positively to economic growth in 2017.”

LABOR MARKET TIGHTENING

In a separate report, the Labor Department said initial claims for state unemployment benefits fell 15,000 to a seasonally adjusted 234,000 for the week ended Jan. 14. That was just shy of the 233,000 level touched in mid-November, which was the lowest since November 1973.

Economists had forecast first-time applications for jobless benefits rising to 254,000 last week. It was the 98th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

The four-week moving average of claims, considered a better

measure of labor market trends as it irons out week-to-week

volatility, fell 10,250 to 246,750 last week, the lowest level since November 1973. The claims data covered the survey period for January’s nonfarm payrolls.

The four-week average of claims fell 17,000 between the December and January survey periods, suggesting another month of solid job growth. Nonfarm payrolls increased by 156,000 jobs in December.

The dollar rose against a basket of currencies on the data and comments by European Central Bank chief Mario Draghi, suggesting the euro zone still needed support from monetary policy. Prices for U.S. government debt fell. U.S. stocks were little changed.

Homebuilding is expected to make a modest contribution to economic growth in the fourth quarter after being a drag on gross domestic product in the prior two periods.

A survey on Wednesday showed homebuilders’ confidence easing slightly in January, but remaining not far from levels last seen in July 2005. Construction remains constrained by shortages of lots and labor. Builders are hoping that the incoming Trump administration will streamline and reform regulations.

Trump has pledged to reduce regulations, among other policy initiatives. A third report on Thursday from the Philadelphia Federal Reserve showed its index for manufacturing activity in the mid-Atlantic region rose to a reading of 23.6 this month from 19.7 in December.

That was the highest reading since November 2014. Nearly 35 percent of firms in the survey reported paying more for inputs and 31 percent said they had asked for higher prices. The Philadelphia Fed’s prices received sub-index increased 19 points this month to its highest reading since July 2008.

“The report adds to signs of upward momentum in manufacturing, although some of the improvement likely reflects sentiment after the election rather than a fundamental change yet in underlying trends,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.