Jobless claims data brightens U.S. jobs picture

By Lucia Mutikani

WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits dropped for a third straight week last week, the latest indication the labor market recovery was gaining traction.

Other data on Thursday showed a spike in the cost of gasoline pushed up producer prices last month, but a lack of broad price pressures gives the Federal Reserve scope to maintain its very easy monetary policy.

The claims report added to data such as retail sales and manufacturing that have suggested a limited impact on the economy from higher taxes.

"The recent labor market data signal at least steady, and potentially improving, job growth so far in 2013 despite the implementation of various forms of fiscal tightening," said Daniel Silver, an economist at JPMorgan in New York.

Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 332,000, the Labor Department said. Economists polled by Reuters had expected first-time applications for jobless aid to rise to 350,000.

The four-week moving average for new claims, a better measure of labor market trends, fell to a five-year low, suggesting a firming in underlying labor market conditions.

While the signs of strength in the labor market could intensify the debate at the Fed on the future course of monetary policy, economists said the U.S. central was unlikely to shift from its very accommodative monetary policy stance anytime soon.

Although layoffs have significantly dropped, hiring has held steady as businesses worry about sluggish demand. Nonfarm payrolls increased 236,000 in February, with the unemployment rate falling to a four-year low of 7.7 percent.

"The Fed is looking for a broad underlying improvement in the labor market. We need to see the hiring rate accelerate for this labor market recovery to really take hold," said Omair Sharif, an economist at RBS in Stamford, Connecticut.

A government report on Tuesday showed layoffs in January were the fewest on record. However, the hiring rate still has not accelerated.

Investors welcomed the drop in claims and bought U.S. stocks. The Dow Jones industrial average was on track to rise for an 11th straight day. Prices for U.S. Treasury debt fell, while the dollar was flat against a basket of currencies.

BENIGN INFLATION

Concerns over high unemployment prompted the U.S. central bank last year to launch an open-ended bond buying program, but divisions are emerging among policymakers about the program.

The central bank is buying $85 billion in bonds per month and has said it would keep up its asset purchases until it sees a substantial improvement in the labor market outlook.

It hopes the purchases will drive down borrowing costs to spur faster economic growth.

In a second report, the Labor Department said its seasonally adjusted Producer Price Index increased 0.7 percent last month after advancing 0.2 percent in January.

In the 12 months through February, prices received by farms, factories and refineries were up 1.7 percent, the fastest rise since October and followed a 1.4 percent gain the prior month.

However, underlying inflation pressures remained contained, with wholesale prices excluding volatile food and energy costs rising 0.2 percent after a similar advance in January.

In the 12 months through February, core PPI was up 1.7 percent, the smallest rise since January 2011. It had increased 1.8 percent in January.

While gasoline prices pushed up overall PPI last month, they have started to fall from their lofty levels. This should keep inflation pressures tame and boost consumers' purchasing power.

"The underlying picture for inflation remains quiet. Prices for oil and gasoline have fallen back since February, so we expect to see a sharp fall in the headline PPI next month," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Neil Stempleman)