Jobless Claims Surge, Spending Softens

WASHINGTON (Reuters) – The number of workers filing new claims forjobless aid surged last week to the highest since October 2005, andconsumer spending softened at the end of last year, according toreports on Thursday that heightened worries about a possible recession.

The Labor Department said initial claims for state unemploymentbenefits jumped by 69,000 last week to 375,000. It was the biggest jumpsince September 2005 and the highest since October of that year, justafter Hurricane Katrina devastated the U.S. Gulf Coast.

Separately, the Commerce Department said consumer spending edged upby 0.2 percent in December after a 1 percent gain in November, justenough to keep pace with inflation.

U.S. stock markets opened down sharply on economic concerns, whilethe value of the dollar dropped and prices for government debt rose astraders concluded the reading on the jobs market made furtheraggressive interest rate cuts from the Federal Reserve more likely.

However, the Labor Department said the Martin Luther King Jr. Dayholiday last Monday may have made it difficult to adjust the data forseasonal variations, and analysts agreed.

"The holiday was a week later than in 2007, and there is aconsistent pattern of seasonal adjustment problems when federalholidays shift in this way," said Ian Shepherdson, chief U.S. economistat High Frequency Economics in Valhalla, New York.

The four-week average of weekly claims, which helps smooth outfluctuations to expose the underlying layoffs trend, increased to325,750 last week from 315,500 the week before.

Jobless claims had been on a declining path, one of the few brightsigns suggesting the U.S. economy was not deteriorating sharply. Whileeconomists took the latest data with a grain of salt, financial marketswere not so certain.

Interest-rate futures prices shifted to show about a 90 percentimplied chance that the Fed, which has cut benchmark borrowing costs by1.25 percent points over the past nine days, would lower them by afurther half point in March.

SPENDING SOFT, BUT INCOME SOLID

The data on consumer spending was incorporated into a report onWednesday that showed the economy nearly stalled in the fourth quarter,advancing at just a 0.6 percent annual pace to close out the weakestyear of growth since 2002.

Thursday’s report also showed that personal income in December rose0.5 percent. Both the spending and income figures were a touch higherthan economists had expected.

However, a key measure of inflation contained in the report showedprices, both overall and excluding food and energy, marched up 0.2percent, leaving consumers treading water.

Last year, the price index for personal spending rose 3.5 percent,while the core index climbed 2.2 percent, a bit outside of the rangemost Fed officials are comfortable with.

"Inflation was quite high in December … Consumers are squeezed byfood and energy prices and worries of recession, credit costs are goingup and housing prices are going down," said Kurt Karl, chief economistat Swiss Re in New York.

For all of 2007, consumer spending grew by 5.5 percent, the weakest growth since a 4.8 percent increase in 2003.

A separate report from the Labor Department showed U.S. employmentcosts rose by 0.8 percent in the fourth quarter, keeping theyear-on-year gain at 3.3 percent.

(Additional reporting by Alister Bull; Editing by James Dalgleish)

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