U.S. corporate profits plunged a record $120.1 billion in the fourth quarter as the economy shrank at its fastest pace since 1982, depressed by a slump in consumer spending and exports, government data showed on Thursday.

In another snapshot of the distressed economy, the number of workers collecting state jobless benefits rose to a record 5.56 million earlier this month, while new claims climbed to 652,000 last week, according to a separate government report.

It is indicative of the sharp decline in overall economic activity experienced in the fourth quarter, said Joseph Brusuelas, an economist at Moody's Economy.com in West Chester, Pennsylvania, speaking of the drop in corporate profits.

The Commerce Department said after-tax corporate profits dropped 10.7 percent in the fourth quarter, the largest decline since the first quarter of 1994. Profits fell $5.2 billion in the third quarter.

Domestic profits of financial firms skidded $178.7 billion, compared with a $75.5 billion decline in the third quarter. Non-financial corporations' domestic profits tumbled $89.1 billion in the fourth quarter after increasing $52.1 in the prior period.

Shrinking profits came as gross domestic product, which measures the total output of goods and services within U.S. borders, fell at an annual rate of 6.3 percent in the October-December quarter, the steepest decline since the first quarter of 1982.

But analysts said the October-to-December quarter was probably the worst of the 15-month recession and they expect the economy to start stabilizing, although first-quarter output would still show another deep fall.

We think that the decline in GDP reached its trough in the fourth quarter. GDP will not decline again as fast as it did in the fourth quarter, said Zach Pandl, an economist at Nomura Securities International in New York.

The government last month estimated the drop in fourth-quarter GDP at 6.2 percent and the modest revisions to the output estimates reflect adjustments to business inventories and investment figures.

U.S. stocks rose on relief that the decline in GDP was not worse than market expectations of a 6.5 percent contraction. The Dow Jones industrial ended up 174.75 points at 7,924.56, while the S&P 500 closed 18.98 points higher at 832.86.

Government bond prices firmed, breaking a five-session losing streak, ahead of the Federal Reserve's purchases of long-dated U.S. Treasuries on Friday. These are part of a broader plan to halt the downward economic spiral triggered by the collapse of the housing market.

WORST MIGHT BE OVER

The economy expanded 1.1 percent in 2008, the smallest advance since 2001, after growing 2.0 percent in the prior year, the Commerce Department said.

Recent data, such as housing and retail sales, have been surprisingly upbeat, raising cautious optimism that the recession is probably close to reaching a bottom. The economy is widely expected to start growing in the fourth quarter as the government's $787 billion stimulus filters through.

The worst might be behind us in terms of the contraction in economic output, said Moody's Economy.com's Brusuelas.

We are starting to see a slight uptick in some of the high frequency data. That suggests we are approaching a level where the economy could stabilize. We are still going to see another three quarters of contraction in output.

During the fourth quarter, private business inventories fell $25.8 billion as business responded to the slump in demand by cutting output.

Business investment, typically made when companies are planning production increases, fell at a 21.7 percent rate, the biggest fall since the first quarter of 1975.

Residential investment fell 22.8 percent in the fourth quarter. Consumer spending, which accounts for more than two-thirds of domestic economic activity, dropped at a 4.3 percent rate. Exports were down 23.6 percent.

We are still of the belief that the first quarter will be the last awful quarter and the second quarter could be the last significantly negative quarter, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

A separate report from the Labor Department showed the number of workers on state unemployment benefits surged 122,000 in the week ended March 14, from 5.44 million the prior week.

That pushed the insured unemployment rate to 4.2 percent from 4.1 percent the prior week, the highest since May 1983.

The duration of unemployment is extending along with the increase in the incidence of unemployment. Workers are finding the labor market much more difficult to re-enter after they have been laid off from their previous employment, said Nomura's Pandl.

(Additional reporting by Doug Palmer, Editing by Diane Craft)

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