The number of people seeking unemployment benefits fell sharply last week, a possible encouraging sign that layoffs are easing.

Weekly applications dropped 37,000, to a seasonally adjusted 391,000, the Labor Department said Thursday. That's the lowest level since April 2 and the first time applications have fallen below 400,000 since Aug. 6.

Some of the improvement was due to technical factors related to the seasonal adjustment of the data, a Labor Department spokesman said. The spokesman also said some states reported higher applications in previous weeks due to Hurricane Irene.

As a result, the drop "may not be as encouraging as it looks," said Paul Dales, an economist at Capital Economics. "Further falls will be needed before we can conclude a downward trend is underway."

Applications typically need to fall below 375,000 to signal substantial job growth. They haven't been that low since February. The four-week average, a less volatile measure, fell to 417,000, the first drop in six weeks.

Most recent evidence shows the job market is sluggish and the economy is weak.

The economy expanded only 1.3 percent in the April-June quarter, the Commerce Department said in a separate report Thursday. That's a mild improvement from last month's estimate of 1 percent growth.

Most economists expect growth will pick up a bit in the second half of this year, but not enough to lower the unemployment rate. A forecasting panel for the National Association for Business Economics predicts total growth for 2011 will be just 1.7 percent.

Consumers are reluctant to spend, with unemployment high, wages stagnant, and gas prices at about $3.50 a gallon.

Consumer confidence plunged in August to recessionary levels, after lawmakers battled over raising the government's borrowing limit and Standard & Poor's cut its rating on long-term U.S. debt. That sent the stock market sharply lower, which hurts consumers' ability to spend.

Retail sales were flat in August, a sign the turmoil caused consumers to pull back.

Anemic growth has prompted many businesses to pull back on hiring. Employers added no net jobs in August, the worst showing in almost a year. The unemployment rate was stuck at 9.1 percent for the second straight month.

Investors also worried last week that Europe won't be able to prevent Greece from defaulting and worsening the region's debt crisis. That sent the U.S. stock market down 6.4 percent, its biggest weekly loss since October 2008, in the midst of the financial crisis.

If Greece defaults, that could destabilize other indebted countries, such as Portugal, Ireland and Italy. It could also harm many of Europe's banks, which own Greek debt.

If European banks hoard cash to make up for their losses and stop lending to their U.S. counterparts, that could restrict credit in the United States and slow the economy. And a financial crisis in Europe would reduce U.S. companies' exports and sales to the region.

The slow growth and turmoil have raised fears that the U.S. economy could enter another recession. Some economists put the odds as high as 40 percent.

The latest sign of a weak job market came Wednesday, when the Conference Board said its index of online help-wanted ads fell by 1.1 percent, to 3.95 million. Openings have fallen by about 500,000 in the past six months, the group said, after jumping by more than 750,000 in the first three months of the year.

Instead of hiring, companies are spending on new equipment. A key measure of business investment plans rose 1.1 percent in August, the Commerce Department said Wednesday. Companies ordered more machinery, computers and communications equipment.

That's a good sign, because it shows that businesses are sticking with their investment plans, despite recent signs of economic weakness.

Last week, the Federal Reserve took its latest step to boost the economy. It said it will swap $400 billion of short-term Treasury securities into longer-term notes and bonds. The central bank said it will also reinvest the proceeds from its maturing mortgage-backed securities into new mortgage-backed bonds. Both steps should reduce mortgage rates.