Jobless Claims, Labor Costs Drop, Productivity Gains..

New U.S. claims for unemployment benefits dropped more than expected last week, a government report showed on Thursday, pointing to continued gradual improvement in the labor market.

Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, the Labor Department said, unwinding most of the previous week's weather-induced
spike.

Economists polled by Reuters had forecast claims dropping to 420,000. The prior week's figure was revised up to 457,000, from the previously reported 454,000.

The claims data falls outside the survey period for the government's closely watched employment report for January, scheduled for Friday. The economy probably created 145,000 jobs after adding 103,000 in December, according to a Reuters poll.

The prior week's claims were distorted by extreme winter weather in large parts of the country and a Labor Department official said the four states that had reported a weather-related jump accounted for the bulk of last week's decline in filings.

The four-week moving average of unemployment claims—a better measure of underlying trends—rose 1,000 to 430,500 last week.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 84,000 to 3.93 million in the week ended Jan. 22 from an upwardly revised
4.0 million the prior week.

Economists had expected so-called continuing claims to fall to 3.92 million from a previously reported 3.99 million.

Productivity Surges

Meanwhile, US nonfarm productivity grew faster than expected in the fourth quarter as employers extracted more output from workers and unit labor costs fell.

Productivity increased at an annual rate of 2.6 percent, the Labor Department said, after rising at an upwardly revised 2.4 percent growth pace.

Analysts surveyed by Reuters had forecast productivity, a measure of hourly output per worker that is viewed as an indicator of the economy's vitality or lack of it, rising at a 2 percent rate in the fourth quarter from a previously reported 2.3 percent pace.

For the whole of 2010, productivity grew 3.6 percent—the fastest pace since 2002—after expanding 3.5 percent in 2009.

Productivity grew rapidly as the economy emerged from the worst recession since the Great Depression of the 1930s, but the pace is slowing, implying that companies may no longer be
able to wring more output from their current pool of workers.

While the recovery is strengthening and broadening out, labor market healing has been unusually slow.

The economy grew at a 3.2 percent annual rate in the fourth quarter, accelerating from a 2.6 percent pace in the prior period and economists believe strengthening domestic demand will translate into increased hiring of new workers and the lengthening of hours for existing employees.

The productivity report showed hours worked in the fourth quarter increased at a 1.8 percent rate after a 1.4 percent increase in the July-September quarter.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.6 percent rate after dipping at a 0.1 percent pace in the third quarter.

Economists had expected unit labor costs to rise at a 0.3 percent rate in the fourth quarter. For the whole of 2010, unit labor costs dropped 1.5 percent after declining 1.6 percent in
2009.

Total nonfarm output grew at a 4.5 percent rate in the last three months of 2010, the Labor Department said, after rising at a revised 3.8 percent rate in the third quarter.