Drop in jobless claims raises hopes for hiring

WASHINGTON -- The job market suddenly looks brighter.

The number of people filing for unemployment benefits sank last week to its lowest point in nearly three years, and retailers and other service companies posted strong results Thursday for last month.

On the eve of the government's February jobs report, the news suggests the economy may be about to take off despite growing concerns about inflation.

The stock market had its best day in three months. The Dow Jones industrial average rose more than 190 points, or 1.6 percent, erasing most of its losses since the unrest in Libya began.

And some analysts raised their forecasts for how many jobs the economy created last month. The consensus is 175,000, but many economists are now estimating 200,000 or more, and they expect the pace to hold for the rest of the year.

General manager Paul Samuels delivers Grand Slam breakfasts Feb. 9, 2010, at a Denny's restaurant in Tempe, Ariz. The service sector, which employs about 90 percent of the work force, expanded in February at the fastest pace in more than five years, offering the latest sign that hiring could accelerate this year. (Associated Press file)

That would almost certainly bring the unemployment rate, now 9 percent, down steadily.

"This is a good harbinger of a healthier job market to come," said economist Sung Won Sohn at California State University.

Applications for unemployment benefits fell by 20,000 to 368,000, the Labor Department said, the third decline in four weeks and the lowest level since May 2008. The figures are adjusted to account for seasonal differences.

The four-week average, which smooths out volatility to give a broader perspective, fell below 400,000 for the first time since July 2008.

When unemployment claims remain consistently below 375,000, that tends to signal steady declines in the unemployment rate. The figure peaked at 651,000 during the recession.

"The evidence is just stacking up that the labor market is picking up decisively," said economist Jim O'Sullivan at MF Global.

Americans appear more confident about spending money, which could convince businesses that the time is right to start hiring more workers.

And the U.S. service sector, which employs about 90 percent of American workers in fields from health care to construction, is expanding at the fastest pace in more than five years, according to the Institute for Supply Management.

Productivity did rise in the final three months of last year. When workers are producing at a higher level, it makes it easier for businesses to hold off on hiring.

And there's a big wild card for the economy -- rising prices. Food around the world is at its most expensive in 20 years, and gas prices have been rising for weeks, with the average for a gallon nearing $3.50.

For now, though, the economy is flashing mostly positive signs, and economists are optimistic about today's jobs report.

"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.

A few economists are expecting the government to report that employers added 300,000 jobs last month, although that's on the high end of forecasts.

January's figures were anemic -- just 36,000 jobs added -- partly because of severe winter storms that kept businesses closed. As much as a quarter of February's job gains could come from people returning to payrolls after the bad weather.

But most people pay more attention to the unemployment rate, which fell from 9.8 percent in November to 9 percent in January, the quickest decline in more than half a century.

Economists believe the rate edged up to 9.1 percent in February. Unemployment rates often rise when the economy improves and people who haven't been looking for jobs start hunting again. People who aren't looking are not counted as unemployed.

Economists say it would take up to 300,000 new jobs a month to reduce the unemployment rate significantly.