WASHINGTON (Reuters) - The number of U.S. workers filing new claims for jobless aid surged last week to the highest since October 2005, and consumer spending softened at the end of last year, according to reports on Thursday that heightened worries about a possible U.S. recession.
Wall Street reacted with surprise to the unexpectedly big jump in jobless claims, but analysts were waiting for a report on January employment due on Friday to get a sense whether the already weak economy had taken a turn for the worse. That report is expected to show a modest gain in new jobs.
U.S. stock markets initially fell on Thursday's data but the Dow Jones Industrial Average closed up more than 200 points, but yields on U.S. Treasury bonds ended the day lower.
The number of U.S. workers filing new claims for state unemployment benefits rose by 69,000 last week to 375,000, the Labor Department said. It was the biggest jump since September 2005 after Hurricane Katrina hit the U.S. Gulf Coast.
However, the department cautioned that the data may have been skewed because of the Martin Luther King Jr. Day holiday, and analysts agreed, even though many thought the underlying trend in jobless claims might be moving higher.
"It is highly unlikely that today's initial claims reading reflects reality," said Omair Sharif, an economist at RBS Greenwich Capital in Greenwich, Connecticut.
Two other reports out on Thursday also painted a weak labor market picture. An index from the Conference Board that measures the number of help-wanted adds in U.S. newspapers rose modestly in December to 22 from 21, but it was down dramatically from a reading of 33 a year ago.
In addition, demand for hiring fell in January, according to the online recruiting firm Monster Worldwide. The firm's employment index fell to 160 in January from 169 in December.
"The lack of stronger job prospects is resulting in very cautious and nervous consumer attitudes and spending patterns," said Ken Goldstein, an economist at the Conference Board.
SPENDING SOFT, BUT INCOME SOLID
A sputtering consumer sector was one factor that led the Federal Reserve on Wednesday to cut benchmark U.S. interest rates by a large half-percentage point, just eight days after lowering them by three-quarters of a point in an emergency move.
Jobless claims had been on a declining path, one of the few hints the economy was not deteriorating sharply.
While a four-week moving average of claims, which helps smooth out fluctuations to expose the underlying layoffs trend, increased to only 325,750 last week from 315,500 the week before, financial markets worried last week's big spike could be the front edge of a worsening trend.
Interest-rate futures prices shifted to imply about a 72 percent chance that the Fed would lower rates by a further half point in March, up from 46 percent late on Wednesday.
Separately, the Commerce Department said consumer spending edged up by 0.2 percent in December after a 1.0 percent gain in November, just enough to keep pace with inflation.
The data on consumer spending was incorporated into a report on Wednesday that showed the economy nearly stalled in the fourth quarter, advancing at just a 0.6 percent annual pace to close out the weakest year of growth since 2002.
Thursday's report also showed that personal income in December rose a solid 0.5 percent. Both the spending and income figures were a touch higher than economists had expected.
"The personal income data do not show anywhere near the deceleration the employment data have, which suggests we could see a rebound in tomorrow's January report," said Mark Vitner, senior economist at Wachovia.
However, a key measure of inflation contained in the report showed prices, both overall and excluding food and energy, marched up 0.2 percent, 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 range most Fed officials are comfortable with.
"Inflation was quite high in December ... Consumers are squeezed by food and energy prices and worries of recession, credit costs are going up and housing prices are going down," said Kurt Karl, chief economist at 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.
(Reporting By Joanne Morrison;)