New jobless claims rise unexpectedly

WASHINGTON - Jobless claims rose unexpectedly last week, the government said yesterday, while companies responded to the slowing economy by producing more with fewer workers.

It was not great news for American workers, who have seen jobs decline and wages erode, but it may signal less inflation worry for the Federal Reserve.

The Labor Department reported that new applications for unemployment insurance rose to a seasonally adjusted 444,000, up 15,000 from the previous week. Economists had expected claims to drop to 420,000.

That news, plus disappointing sales reports from retailers, sent financial markets down as investors lost hope for an end of the year recovery.

Many economists expect unemployment will continue to rise for the rest of the year. A separate report yesterday indicated that hiring by companies in the service sector has declined.

"Across the board, we're seeing evidence that labor conditions are worsening," said Carl Riccadonna, senior economist at Deutsche Bank Securities.

A tougher job market can crimp consumer spending as laid off workers and those who fear for their jobs cut back on their purchases. That can further weaken the economy.

The four-week moving average of claims fell slightly to 438,000, down 3,250 from the previous week. Initial claims stood at 320,000 in the same week last year.

While yesterday's figure is below the six-year high of 457,000 reached in late July, economists attributed some of the earlier increase to an outreach program by the Labor Department to notify individuals about the availability of extended benefits.

The distortions from that program have likely faded, several economists said, meaning that the sluggish economy is increasingly to blame.

In another sign of labor market weakness, the number of people continuing to receive unemployment benefits rose 6,000 to 3.44 million for the week ending Aug. 23, a five-year high.

That number doesn't include people who have exhausted their regular benefits and have requested extended assistance under an emergency program approved by Congress in June.

The ongoing housing slump and credit crunch caused the economy to shrink late last year and grow only slightly in the first quarter.

The economy grew by a robust 3.3 percent in the spring, thanks to a surge in exports and the government's tax rebates.

Companies are responding to the downturn by doing more with less, which led to a jump in productivity this spring, the Labor Department said yesterday.

Productivity, or the amount of output for every hour of work, rose at a 4.3 percent annual rate in the April-June quarter, a full percentage point higher than economists expected.