The number of workers filing for jobless benefits unexpectedly rose last week, but another big gain in productivity in the fourth quarter offered hope that companies were getting close to adding to payrolls.

Initial claims for state unemployment benefits increased 8,000 to a seasonally adjusted 480,000 in the week ended January 30, the Labor Department said on Thursday. That was above market expectations for 460,000 and could be sign the improvement seen in the last half of 2009 had stalled.

In another report, the department said non-farm productivity grew at a 6.2 percent rate in the fourth quarter as employers ramped up output at the quickest pace in six years and kept a tight lid on costs.

Analysts had expected productivity, which measures the hourly output per worker, to rise at a 6.0 percent rate after gaining 7.2 percent in the third quarter. Some doubt business will continue to boost productivity with a depleted workforce.

We continue to believe that the reservoir of easy efficiency gains has been exhausted and that companies will soon be forced to add workers, presuming that demand continues to expand, said Michelle Girard, an economist at RBS in Stamford, Connecticut.

Stock indexes fell sharply as investors worried about the setback in the U.S. labor market and the fiscal health of peripheral euro zone countries. Prices for U.S. government debt prices rallied as bonds attracted a flight to quality bid.

Unemployment, which is lagging the broader economic recovery, is one of President Barack Obama's toughest challenges. Unhappiness over unemployment cost Obama's Democrats a crucial Senate seat last month and threatens big losses for the party in the November congressional elections.

Senate Democratic leaders are set to unveil a proposal on Thursday that they hope will help bring down the jobless rate.

Separately, new orders at U.S. factories jumped by an unexpectedly large 1 percent in December despite a drop in transportation equipment orders, while inventories shrank, the Commerce Department said.

The surprise rise in applications for state unemployment insurance last week was an indication that even with the resumption of job growth expected in the coming months, labor market improvement would remain sluggish, analysts said.

STALLED PROGRESS

It is starting to look as though the downward trend in claims, which has been key to the story of payroll gains in the next few months, has stalled, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The four-week moving average for new claims rose 11,750 to 468,750 last week, the Labor Department said. The four-week moving average, considered a better gauge of underlying trends, rose for a third week after falling for 19 weeks.

High unemployment has curtailed consumer spending, but the worst of the retrenchment appears to be done. Major retail chains reported higher January sales compared with a year earlier, when the recession was at its deepest point, and monthly job losses soared to 741,000.

The government will release its closely watched employment report for January 2010 on Friday. A Reuters survey predicted non-farm payrolls grew 5,000 after a surprise 85,000 drop in December. The unemployment rate, however, is expected to edge up to 10.1 percent in January from 10 percent.

Median forecasts from the top 20 forecasters saw payrolls unchanged last month. The mean forecast was for payrolls to have increased by 8,000 in January.

Separately, the productivity report offered a ray of hope. Despite the worst economic downturn since the Great Depression, productivity has grown for five straight quarters as employers slashed costs, mostly by cutting jobs. In 2009, productivity grew 2.9 percent, the biggest increase since 2003.

The economy grew at a 5.7 percent pace in the fourth quarter, its fastest clip in six years.

Most companies have probably finished their aggressive cost cutting measures by now. That means that additional demand should now go hand in hand with an increase in working hours, said Harm Bandholz, an economist at UniCredit Research in new York.

But as there are still 9 million people working part-time for economic reasons, this increase in hours can be reached without a significant pick-up in new hires.

Total non-farm output grew at a 7.2 percent rate in the final three months of 2009, the fastest rate since the third quarter of 2003, accelerating from a 2.2 percent pace in the third quarter.

Hours worked rose at a 1.0 percent rate in the fourth quarter, the first increase since the second quarter of 2007 and the fastest pace since the fourth quarter of 2006.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a steeper than expected 4.4 percent after declining 1.5 percent in the third quarter. Analysts had expected unit labor costs to fall 2.5 percent in the fourth quarter. For a graph comparing the U.S. jobless rate and new unemployment claims, see: http://graphics.thomsonreuters.com/0210/US_JCUE0210.gif For a graph comparing productivity to the changes in payroll employment, see: http://graphics.thomsonreuters.com/0210/US_NFPROD0210.gif

(Additional reporting by Mark Felsenthal; Editing by Andrea Ricci)

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