Jobless claims tumbled to a nearly three-year low last week and signs grew that companies have squeezed every drop of toil out of their workers, offering hope that the pace of hiring will soon improve.
The government said Thursday applications for unemployment benefits fell by 20,000 to a seasonally adjusted 368,000. It was the third decline in the last four weeks. Applications are now at their lowest level since late May 2008.
The four-week average for applications, a less volatile figure, fell last week to 388,500. That's the lowest level since July 2008, the last time the four-week average was below 400,000.
Economists say applications that remain consistently below 375,000 tend to signal declines in the unemployment rate. Applications for benefits peaked during the recession at 651,000.
"As each week goes by that we're seeing claims under 400,000, we get closer to the level where we can start expecting faster job creation," said Mike Gibbs, managing director and chief market strategist at Morgan Keegan in Memphis, Tenn.
The downward trend in applications suggests that companies are easing the pace of layoffs now that the economy is gaining momentum. During the recession, companies slashed work forces, cut or froze workers' pay and took other aggressive steps to reduce costs.
Companies are expected to increase hiring in the month ahead.
"Often at this stage of the recovery, when these signals are in place, we see a surge in hiring," said John Ryding, an economist with RDQ Economics.
Employers probably added 175,000 new jobs in February, economists predict. That would mark an improvement from an anemic 36,000 in January when snowstorms and bad weather hurt job gains. The government releases the employment report for February on Friday.
At the same time, economists think the unemployment rate edged up to 9.1 percent in February. Unemployment could soon rise if an improving economy causes more out-of-work people who aren't looking for jobs to start. People out of work aren't counted as unemployed unless they're looking for a job. During a weak economy, some unemployed people become discouraged and stop looking.
Stronger job creation is needed to steadily reduce unemployment. The economy needs to produce at least 200,000 a month on a consistent basis for that to happen.
Thursday's report also showed the number of people receiving unemployment benefits dropped to 3.77 million, the lowest level since mid-October 2008.
That doesn't include millions of people enrolled in emergency unemployment benefit programs funded by the federal government. Another 4.5 million unemployed workers received benefits under the extended programs during the ending Feb. 12, the latest data available. Altogether, 9.2 million people were on the benefit rolls that week.
In a separate report that bolstered hopes for jobs growth, The National Federation of Independent Business said small firms began creating jobs in February for the first time in years.
"Finally, in February, the number of net new jobs reported went decidedly positive, rising to 0.17 workers per firm, the first 'decent' reading since the second quarter of 2006," said federation president William Dunkelberg.
He said the number of firms reporting hard to fill job openings climbed two percentage points to 15 percent, adding to signs of a slowly strengthening job market.
Meanwhile, nonfarm productivity grew as expected in the fourth quarter, but the pace is slowing. Productivity increased at an unrevised 2.6 percent annual rate, the Labor Department said. The growth pace was in line with economists' expectations.
Productivity, a measure of hourly output per worker, grew at a 2.3 percent pace in the third quarter. For the whole of 2010, productivity expanded 3.9 percent, the fastest pace since 2002.
The upbeat outlook for jobs and the economy has been seeping into consumer sentiment. Retailers reported solid revenue gains for February, extending the strong spending momentum seen during the holiday season as the economy recovery takes hold.
Worries are growing, however, that rising gas prices could sap shoppers' spending. The national average is now at $3.427 per gallon. Prices will reach $3.50 to $3.75 by spring, some analysts say.
"We're seeing a continued roll-off from the holidays," said Laura Gurski, a partner at A. T. Kearney. "There's disposable income out there. But it's going to be a long spring." Low-income shoppers are already feeling pinched by inflation for food and gasoline, she noted, and that's only going to trickle up to middle-income consumers.
Nevertheless, the improving economy is also making shoppers feel better about spending. Consumer confidence in February rose to its highest point in more than three years, according to the Conference Board.
Another sign of the improving recovery: the services sector, which employs about 90 percent of the work force, grew at the fastest pace in five years in February.
The Institute for Supply Management, a private trade group, says its index of service-sector activity rose to 59.7 last month, from 59.4 in January. That's the sixth straight monthly increase and the highest reading since August 2005. Any reading above 50 indicates expansion.
The index covers a broad range of industries including retail, health care and financial services, among others. It plummeted to 37.6 in November 2008, at the height of the financial crisis.
A measure of hiring by service-sector companies rose to its highest level since April 2006.
The fly in the recovery ointment is oil. Prices have jumped recently as tensions in the Middle East have escalated. Oil prices retreated a bit on Thursday as traders priced in the loss of Libyan oil production there amid clashes between leader Moammar Gadhafi and rebels seeking to overthrow his 40-year rule.
Benchmark West Texas Intermediate for April delivery gave up $1.12 to $101.11 a barrel on the Nymex. In London, Brent crude fell $1.55 to $114.80 per barrel.
Oil prices have remained near highs last seen in 2008 as fighting between the two sides intensified amid efforts to reach a mediated resolution to the conflict that has cut crude supplies by more than half from the OPEC nation.
Federal Reserve Board Chairman Ben Bernanke, testifying before Congress earlier this week, warned that a prolonged rise in oils prices could pose a danger to the U.S. recovery. But he said a more likely outcome is a temporary and modest increase in consumer prices, not runaway inflation.