U.S. jobless claims fall again, productivity rises

WASHINGTON (Reuters) - Fewer U.S. workers filed new claims for jobless benefits for a third straight week last week and productivity rose faster than expected in the first quarter, data showed on Thursday, supporting budding hopes that the recession is losing force.

The Labor Department said first-time applications for state unemployment insurance benefits fell 4,000 to 621,000 in the week ended May 30. It also said the number of people still on the benefit rolls after an initial filing fell in the prior week for the first time since the start of the year.

"It's still bad, but not as bad as it has been. It's consistent with the story that the economy is turning the corner and we may have passed the worst point (of the recession)," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

U.S. stocks .DJI ended 0.9 percent to 1.3 percent higher on the data. Government bond prices fell sharply and the yield gap between two-year and 10-year notes steepened to 276 basis points, just shy of its record wide 277 basis points set this week.

U.S. mortgage rates jumped to their highest in almost six months in the week to June 4, which could complicate the economy's anticipated recovery from the housing-led downturn if the trend is sustained.

A string of recent data -- from gains in home sales to rising consumer confidence -- has supported growing optimism that economic growth would resume in the second half of the year. But consumers have turned decidedly thrifty and the recovery likely won't be vigorous enough to create many jobs.

Reports from many retailers showed sales fell short of forecasts in May as consumers focused on basics.

Cleveland Federal Reserve Bank President Sandra Pianalto told a conference in Louisville, Kentucky that the economy's extreme weakness was moderating, but recovery would be slow and marked by lingering high unemployment.

NEW CLAIMS CLOSELY WATCHED

Analysts are closely monitoring initial jobless claims for signs of stability in the labor market, which has been hard hit by the recession. They say new filings will have to drop below 600,000 per week to suggest a steadying unemployment rate.

Nonfarm payrolls data for May, due for release on Friday, are expected to show U.S. employers cut 520,000 jobs that month after shedding 539,000 in April. The unemployment rate is forecast to rise to 9.2 percent from 8.9 percent in April.

The report on unemployment insurance claims did offer some rays of hope for the labor market. The number of people staying on the benefit rolls fell 15,000 to 6.74 million in the week ended May 23, the latest week for which data is available.

This was the first time that so-called continued claims have declined since the week of January 3 and was the first time in 17 weeks that they did not set a fresh record high.

The insured unemployment rate, which measures the percentage of the insured labor force who are jobless, has now held at 5 percent for three straight weeks.

Some analysts drew little comfort from the drop in continuing claims.

"Given the long streak of the increases it could be meaningless volatility. It could reflect that some workers who have been receiving standard benefits for a very long time may have exhausted their benefits before finding new employment," said Zach Pandl, economist at Nomura Securities in New York.

The four-week moving average for continuing claims rose 88,750 to a record 6.69 million in the week ended May 23.

Aggressive job cutting by companies seeking to protect profits lifted business productivity more than initially estimated in the first quarter, a second report from the Labor Department showed.

Nonfarm productivity rose at a revised 1.6 percent annual rate, the fastest since the third quarter of 2008. This beat initial estimates of a 0.8 percent increase published last month and the 0.6 percent drop in the fourth quarter.

Hours worked plunged at a 9 percent annual rate in the first quarter, the largest decline since the first quarter of 1975. Hours worked in manufacturing tumbled at an annual rate of 19.5 percent, the biggest quarterly drop on record.

"Employers laid off workers at about the same pace as they were losing sales, so productivity has stayed healthy. It does suggest that as soon as demand turns up they will have to start hiring people," said John Hancock Financial Services' Cheney.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, increased 3.0 percent in the first quarter, below the 3.3 percent previously reported and well off the fourth quarter's 5.1 percent pace.

(Additional reporting by Julie Haviv in New York and Steve Robrahn in Louisville; Editing by James Dalgleish)