US factory activity slowed in January amid a fall in new orders, but an unexpected drop in the number of Americans filing for unemployment benefits last week pointed to sustained labour market strength that should underpin domestic demand.

The economy's healthy fundamentals were also underscored by other data on Thursday showing a solid increase in construction spending in December. A drop in worker productivity in the fourth quarter, however, suggested it may be hard to maintain the strong pace of economic growth.

The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of59.1 last month from 59.3 in December. A reading above 50 in the ISM index indicates growth in manufacturing, which accounts for about 12 percent of the US economy.

The survey's production subindex slipped 0.7 points to a reading of 64.5 in January and a measure of factory employment fell 3.9 points to 54.2. A gauge of new orders declined to 65.4 last month from 67.4 in December.

The moderation in orders is likely to be temporary against the back-drop of strong domestic and global demand. Manufacturers reported an increase in export orders.

Domestic demand increased at its fastest pace in more than three years in the fourth quarter. A weak dollar, which fell 7 percent against the currencies of the United States' main trading partners last year, is making US-made goods more competitive on the international market.

Prices of US Treasuries were mixed after the data while US stock indexes were largely flat. The dollar dipped against a basket of currencies.

In a separate report the Labour Department said initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 230,000 for the week ended Jan. 27. Economists polled by Reuters had forecast claims rising to 238,000 in the latest week.

Last week marked the 152nd straight week that claims remained below the 300,000 threshold, which is associated with a strong labour market. That is the longest such stretch since 1970, when the labour market was much smaller.

'The untapped reservoir of unemployed or underemployed skilled

workers that existed in the aftermath of the recession has largely disappeared," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. "Employers are finding it more difficult to find potential workers."

The labour market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. A tightening of labour market conditions has raised optimism among Federal Reserve officials that inflation will rise towards the US central bank's 2 percent target this year.

The Fed on Wednesday left its benchmark overnight interest rate unchanged and described the job market as having "continued to strengthen." US financial markets expect a rate increase in March. The Fed has forecast three rate increases for this year after lifting borrowing costs three times in 2017.

The claims data has no bearing on January's employment report, which is scheduled to be released on Friday, as it falls outside the survey period. According to a Reuters survey of economists, nonfarm payrolls probably rose by 180,000 jobs in January after increasing by 148,000 in December.