Jobless claims up, underlying trend still down

WASHINGTON (Reuters) - New claims for jobless benefits moved higher last week, but a decline in the four-week average to a nearly 2-1/2-year low suggested the labor market continues to improve.

Initial claims for state unemployment benefits increased 18,000 to a seasonally adjusted 409,000, the Labor Department said on Thursday, above economists' expectations for 400,000.

The data falls outside the survey period for the government's closely watched employment report for December, which on Friday is expected to show nonfarm payrolls jumped 175,000 after November's surprisingly small 39,000 gain.

The spike in claims does little to change perceptions the economy is now on a sustainable growth path, as flagged by sturdy data on consumer spending, trade and manufacturing.

Signs that the labor market was improving were underscored by the four-week moving average of unemployment claims -- a better measure of underlying trends -- which fell 3,500 last week to 410,750, the lowest level since late July 2008.

"It's telling you very clearly that the employment side of the economy is picking up, it paints a pretty definite picture that layoffs are on the way down," said Steve Blitz, a senior economist at ITG Investment Research in New York.

Growing optimism over the economy was tempered somewhat by news that many top retailers missed Wall Street's expectations for December sales, hurt by a post-Christmas blizzard on the East Coast and shoppers returning to their frugal ways after flocking to stores during the holidays.

Analysts were expecting an average rise of 3.4 percent in December sales at stores open at least a year for the 28 major retailers tracked by Thomson Reuters.

LIMITED MARKET IMPACT

The claims data had a limited impact on U.S. financial markets, with investors opting to wait for the employment report. U.S. stocks were mostly flat, while Treasury debt prices eked out modest gains. The dollar was up against a basket of currencies.

The labor market has lagged the recovery, but with the economic outlook strengthening, employers are laying off fewer workers and taking on new employees.

Reports on Wednesday showed the number of planned layoffs at local firms dropped to a 10-1/2 year low in December, while private sector hiring was unexpectedly robust. Seasonal factors, however, could have skewed the data.

"Given continuing evidence that the pace of growth is picking up, we should continue to see improvement in the employment picture in the quarters ahead," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.

"Nonetheless, it is still going to take years to fully restore the jobs market to pre-crisis conditions given the magnitude of job losses during the recession and the persistently high unemployment rate."

The unemployment rate is expected to have edged down to 9.7 percent in December from 9.8 percent in November.

Economists say getting the four-week moving average for new jobless claims below 400,000 is critical to reducing the lofty unemployment rate.

The claims report also showed the number of people still receiving benefits under regular state programs after an initial week of aid fell 47,000 to 4.10 million in the week ended December 25.

The number of people on emergency unemployment benefits fell 133,625 to 3.58 million in the week ended December 18, the latest week for which data is available. A total of 8.77 million people were claiming unemployment benefits during that period under all programs.

(Editing by Neil Stempleman)