updated 10/9/2008 9:40:13 AM ET 2008-10-09T13:40:13

New applications for unemployment benefits dropped last week from a seven-year high, the Labor Department said Thursday, though they remain at elevated levels that indicate recession.

Major Market Indices

Initial claims for jobless benefits dropped 20,000 to a seasonally adjusted 478,000, the department said, the same level that Wall Street economists expected.

The department said Hurricanes Ike and Gustav were responsible for adding about 20,000 claims on a seasonally adjusted basis. That's down from approximately 45,000 the previous week.

The four-week average, which smooths out fluctuations, rose to 482,500, the highest since October 2001. The number of Americans continuing to claim unemployment benefits rose to 3.66 million, above analysts' estimates of 3.6 million. That's the highest total in more than five years.

Meanwhile, the financial markets are expected to rise in early trading in response to comments by Treasury Secretary Henry Paulson and other administration officials indicating the government is considering taking ownership stakes in troubled U.S. banks.

The move would be intended to unclog the credit markets that have made all kinds of loans, from interbank lending to consumer loans, harder to get.

Some economists have argued for such a step as a way to more directly provide capital to ailing banks, as opposed to the administration's initial bailout plan of buying bad mortgage-related assets from the banks.

The housing slump and resulting credit crisis has hit the economy hard, causing consumers to cut spending and businesses to eliminate jobs.

In response to what has become a global credit crisis, the Federal Reserve and six other central banks on Wednesday announced a coordinated interest rate cut. The Fed reduced its target interest rate to 1.5 percent from 2 percent.

The Fed's cut means borrowing money becomes cheaper. Home equity loans, credit cards and other floating-rate loans all fluctuate depending on what the Fed does.

Jobless claims have come in above 400,000, a level economists consider a sign of recession, for 12 straight weeks. Claims stood at 316,000 a year ago.

The International Monetary Fund on Wednesday joined a chorus of private economists and predicted the U.S. economy will contract in the final quarter of this year and the first quarter of 2009, meeting one classic definition of a recession.

Many economists expect that consumer spending, which accounts for two-thirds of economic activity, will decline in the July-September quarter. That would be the first quarterly decline in 17 years.

Federal Reserve chairman Ben Bernanke said on Tuesday that economic activity will likely remain "subdued" for the rest of this year and into next year.

The Labor Department said in a separate report last week that the economy lost 159,000 jobs in September, the fastest pace of job cuts in five years. Employers have eliminated 760,000 jobs so far this year.

The unemployment rate remained at 6.1 percent in September, up from 5.7 percent in July and 4.7 percent a year ago.

Several companies announced job cuts in the past week, including eBay Inc., Kraft Foods Inc. and MetLife Inc.

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