Jobs picture dims and overshadows improved GDP

WASHINGTON (Reuters) - Fresh signs of weakness in the U.S. job market on Thursday underlined the strains on a recession-struck U.S. economy that contracted slightly less in the first quarter than previously thought.

The Labor Department said the number of U.S. workers filing new claims for unemployment benefits last week unexpectedly jumped by 15,000 to a higher-than-forecast, seasonally adjusted 627,000. Extended claims -- those lasting more than a week -- also were higher.

That outweighed a separate Commerce Department report showing that gross domestic product, which measures total output within U.S. borders, contracted at a 5.5 percent annual rate in the first quarter instead of the previously reported 5.7 percent.

Although analysts think the worst of the downturn may be past, employers are likely to keep trimming payrolls while the economy stabilizes and that will mean a slow-paced recovery.

The Federal Reserve on Wednesday said "the pace of economic contraction is slowing" but indicated it likely will keep official interest rates near zero for a lengthy period to try to ensure a recovery.

SKIDDING, BUT MORE SLOWLY

There are indications in other data, like housing and factory orders, that the economy is, at a minimum, not skidding downward at the steep pace it was last year.

"Incoming data suggest that economic activity contracted at a much slower rate in the second quarter -- 2-1/2 percent to 3 percent -- and that the trough of the cycle is likely to occur sometime in August or September," said Nariman Behravesh, chief economist for IHS Global Insight.

The first-quarter GDP fall came after declines of 6.3 percent in last year's fourth quarter and 0.5 percent in the third quarter. The first estimate for the second-quarter U.S. economic performance will not be available for another month.

Stock prices posted strong gains despite the data, as investors took heart from the fact that the government seemed to be having no difficulty marketing its debt. Bond prices also climbed strongly in the wake of a successful sale of new seven-year notes, with 30-year U.S. Treasury bond prices ahead more than a full point.

The GDP figure was the final reading for the first quarter. The government initially said it shrank 6.1 percent, then revised that to 5.7 percent and finally to a 5.5 percent fall.

It reflected an economy deep in recession when 2009 began, but the Paris-based Organization for Economic Cooperation and Development this week predicted the U.S. downturn will bottom out this year and be followed by a soft recovery in 2010.

CONSUMERS STILL HURTING

One of the longer-term issues is what will generate recovery. Continuing layoffs and problems in finding new jobs are shrinking incomes while weaker housing and equity markets sap wealth and make it unlikely that consumers will be able to provide much spending power.

Consumer spending, which fuels two-thirds of U.S. economic activity, increased only at a 1.4 percent rate instead of the 1.5 percent previously estimated.

Reflecting the weak pace of global economic activity, exports fell at a 30.6 percent rate in the first quarter instead of the 28.7 percent estimated a month ago. That was the steepest drop in foreign sales in 40 years. Imports dropped at a 36.4 percent rate, the steepest since the summer of 1947.

Overall business investment plunged at a record 37.3 percent rate during the first quarter, while spending on home building fell 38.8 percent for its biggest quarterly tumble since early 1980.

Nonetheless, corporate profits grew at a 1.4 percent rate during the first quarter, slightly better than the 1.1 percent rise estimated a month ago, after falling 10.7 percent in the final three months of last year.

(Additional reporting by Alister Bull; Editing by Neil Stempleman)