WASHINGTON (Reuters) - New applications for U.S. jobless benefits unexpectedly fell last week and the number of Americans on unemployment rolls tumbled to a 28-1/2-year low, pointing to rapidly shrinking labor market slack.

FILE PHOTO: Job seekers speak with potential employers at a City of Boston Neighborhood Career Fair on May Day in Boston, Massachusetts, U.S., May 1, 2017. REUTERS/Brian Snyder

The economy’s brightening prospects were further boosted by other data on Thursday showing a sharp acceleration in factory activity in the mid-Atlantic region in May as manufacturers reported a jump in goods shipments and more hours for workers. In addition, a gauge of future U.S. economic activity rose again in April.

The raft of upbeat economic data supports an interest rate hike next month, though the Federal Reserve’s decision could also hinge on the state of financial markets, which have been rattled in recent days by President Donald Trump’s scandals.

The cloud over Trump, stemming from his firing last week of the FBI chief and reports that the U.S. leader disclosed national security information to Russian officials, is seen as a threat to an ambitious economic agenda that includes tax cuts.

“Based on ... how the U.S. political system works, President Trump was never going to be able to legislate as boldly, and unilaterally, as some rhetoric suggested,” said James Athey, senior investment manager at Aberdeen Asset Management in London. “Global growth is picking up in the background and everything suggests that the Fed will stick to its hiking plan,”

Initial claims for state unemployment benefits decreased 4,000 to a seasonally adjusted 232,000 for the week ended May 13, declining for three consecutive weeks, the Labor Department said. That pushed claims close to levels last seen in 1973.

Economists had forecast claims rising to 240,000 last week.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 115 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller. The labor market is close to full employment, with the unemployment rate at a 10-year low of 4.4 percent.

The number of people still receiving benefits after an initial week of aid dropped 22,000 to 1.90 million in the week ended May 6, the lowest level since November 1988.

Last week’s claims data covered the survey week for May’s nonfarm payrolls. Claims fell 11,000 between the April and May survey periods suggesting further employment gains this month. The economy created 211,000 jobs in April.

RATE HIKE ODDS FALL

Labor market strength could allow the Fed to raise rates at its June 13-14 policy meeting. The U.S. central bank increased borrowing costs in March and has signaled two more rate hikes for 2017.

Expectations of further monetary policy tightening have also been underpinned by data on inflation, retail sales and industrial production which suggested economic growth picked up early in the second quarter. The economy grew at an anemic 0.7 percent annualized rate in the first quarter.

But a stock market sell-off, if sustained, amid uncertainty over Trump’s political future could jeopardize further rate increases.

Financial markets are pricing in a roughly 69 percent chance of a 25-basis-point hike at the Fed’s June meeting, down from 78.5 percent on Tuesday, according to CME Group’s FedWatch program.

The U.S. dollar was flat against a basket of currencies on Thursday, while prices for longer-maturity U.S. Treasuries were modestly higher. Stocks on Wall Street were slightly higher after Wednesday’s sell-off.

In a separate report, the Philadelphia Fed said its index for current manufacturing activity in the mid-Atlantic region jumped to a reading of 38.8 this month from 22.0 in April, recovering some of the declines of the previous two months.

It was buoyed by a surge in the shipments sub-index. While a gauge of new orders received by factories slipped, unfilled orders increased. Also pointing to further momentum in factory activity in the region, a measure of inventories dropped to a reading of 1.4 from 17.8 in April.

Though the employment index fell three points, factories increased hours for workers.

“The details were ... consistent with the recent pickup in manufacturing output in the industrial production report being sustained,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

In a third report, the Conference Board said its leading economic index rose 0.3 percent in April after a similar gain in March.