By Lucia Mutikani

WASHINGTON (Reuters) – U.S. homebuilding fell in January as the construction of multi-family housing projects dropped, but upward revisions to the prior month’s data and a jump in permits to a one-year high suggested the housing recovery remained on track.

Other data on Thursday showed only a modest increase in the number of Americans filing new applications for unemployment benefits last week, a sign that the labor market was continuing to tighten.

Housing starts fell 2.6 percent to a seasonally adjusted annual rate of 1.25 million units last month, the Commerce Department said. December’s starts were revised up to a rate of 1.28 million units from the previously reported 1.23 million pace.

Homebuilding was up 10.5 percent compared to January 2016. Permits for future construction jumped 4.6 percent in January to a rate of 1.29 million units, the highest level since November 2015. Building permits in the South, where most homebuilding occurs, hit their highest level since July 2007.

With overall permits now outpacing starts, homebuilding is likely to rebound in the coming months. Economists polled by Reuters had forecast groundbreaking activity slipping to a rate of 1.22 million units last month and building permits rising to a 1.23 million pace.

Prices of U.S. Treasuries slid and U.S. stock index futures trimmed losses after the data. The dollar <.DXY> pared losses against a basket of currencies.

LABOR MARKET TIGHTENING

The housing recovery is being driven by a strong labor market, which is boosting employment opportunities for young people and supporting household formation.

In a separate report, the Labor Department said initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 239,000 for the week ended Feb. 11.

Claims have been below 300,000, a threshold associated with a strong job market, for 102 consecutive weeks. That is the longest stretch since 1970, when the labor market was much smaller. The labor market is at or close to full employment, with the unemployment rate at 4.8 percent.

Economists had forecast first-time applications for jobless benefits rising to 245,000 in the latest week. While the labor market is expected to continue to underpin the housing market, higher mortgage rates could slow demand for housing.

A survey on Wednesday showed homebuilders’ confidence slipped in February but remained at levels consistent with a growing housing market. Builders anticipated a slowdown in buyer traffic and continued to grapple with shortages of developed lots and skilled labor.

January’s starts were above the fourth-quarter average, suggesting housing will again contribute to gross domestic product in the first three months of this year.

Homebuilding last month surged 55.4 percent in the Northeast region of the country. It jumped 20.0 percent in the South to the highest level since August 2007. Starts fell 41.3 percent in the West, likely due to the impact of unusually wet weather.

Last month, single-family homebuilding, which accounts for the largest share of the residential housing market, climbed 1.9 percent to a pace of 823,000 units.

Starts for the volatile multi-family housing segment tumbled 10.2 percent to a rate of 423,000 units.

Single-family permits slipped 2.7 percent last month after increasing for five consecutive months. Single-family starts in the South rose to their highest level since August 2007.

Building permits for multi-family units soared 19.8 percent.

(Reporting by Lucia Mutikani; Editing by Paul Simao)