WASHINGTON — The U.S. economy appears to be shifting into a lower gear, with residential construction falling sharply and manufacturing activity slowing. The big question: Will the slowdown come in time to keep inflation from heating up?

Investors got mixed signals on inflation in a raft of new economic data on Thursday, with a key gauge of wage inflation posting an improved reading while a barometer of manufacturing prices posted a sharp increase.

Wall Street chose to focus on the benign inflation reading and strong May sales gains reported by many retailers. The Dow Jones industrial average rallied for a second session, rising by 91.97 points to close at 11,260.28. On Wednesday, the Dow had gained 74 points after falling by 184 points on Tuesday.

Private analysts cautioned, however, that lingering inflation pressures may prompt the Federal Reserve to push interest rates up one or two more times even as the economy slows to a more sustainable pace.

On the slowdown front, the Commerce Department reported that residential home building dropped by 1.1 percent in April, the biggest decrease since January 2004.

The drop was large enough to pull overall construction spending down by 0.1 percent after the building industry set a string of record highs in recent months, reflecting a boom period fueled by the lowest mortgage rates in more than four decades.

In areas of strength, many nationwide chain stores reported better-than-expected sales results in May as consumers shook off sagging confidence readings to shop with enthusiasm for clothing and other products.

The International Council of Shopping Centers-UBS sales tally of 52 retailers rose 4.1 percent in May, better than the 3.2 percent gain expected. The tally is based on sales at stores opened at least a year, known as same-store sales. Same-store sales are considered the best indicator of a retailer's health.

But even there, the story was mixed, as Wal-Mart, the nation's largest retailer, failed to meet analysts' expectations as its lower-income customers felt squeezed by $3-per-gallon gasoline.

"The economy is strong, but it is throttling back a notch," said Mark Zandi, chief economist at Moody's Economy.com.

He said Fed officials will probably remain undecided about whether to raise rates again at their June 28-29 meeting until they see further data, including today's unemployment report, which is expected to show strong employment growth of around 170,000 workers in May.