The number of U.S. workers filing new claims for unemployment aid fell unexpectedly last week, suggesting the pace of layoffs was easing, even as benefit rolls in mid-April swelled to another record high.

The Labor Department data on Thursday supported the view the nearly 17-month-old recession was easing, although a separate report showed consumer spending slipped in March.

A third report showing business activity in the country's Midwest contracted at a less severe rate in April also offered a hint that the economy was no longer in freefall.

Today's reports reinforced the view that the worst of the economic contraction is behind us, though gross domestic product will continue to trend lower through the second quarter, said Mike Englund, chief economist at Action Economics in Boulder, Colorado.

Initial claims for state unemployment insurance benefits fell by 14,000 to a seasonally adjusted 631,000 last week.

Even more encouraging, the four-week average of new jobless claims, considered a better gauge of underlying labor trends, declined for the third week in a row to 637,250 from 648,000 the week before.

This was the lowest reading since the end of February. The claims data is being monitored for clues when the recession will end.

Christina Romer, chairwoman of the White House Council of Economics Advisers, told reporters the claims data was encouraging, although it was too soon to say if it was strong evidence the labor market was finally starting to heal.

The data and above-forecast earnings from Dow Chemical Co earlier boosted U.S. stocks, but the rally fizzled after auto maker Chrysler filed for Chapter 11 bankruptcy to help it reorganize. The Dow Jones <.DJI> ended down 17.61 points at 8,168.12.

Chrysler will also enter into a deal with Italy's Fiat, which President Barack Obama said will save over 30,000 jobs at the auto maker and hundreds of thousands more at affiliate suppliers and dealers.

SLOWING PACE OF DECLINE

Jobless claims show signs of moving toward a sideways pattern and may have peaked. The steadying signals a slowing in the pace of decline in the economy, said Tony Crescenzi, chief bond analyst at Miller, Tabak & Company in New York.

This is possible because business inventories have been falling very rapidly of late and production levels have in many industries fallen sufficiently relative to demand, reducing the need for further cutbacks and hence the need to shed workers.

On Wednesday, the Federal Reserve -- the U.S. central bank -- said the pace of contraction in the economy appeared to be somewhat slower than it was several weeks ago.

But the labor market remains very weak. With demand in the doldrums and fewer companies hiring, the unemployed are finding it tough to reenter the job market.

The number of people staying on the benefits roll after drawing an initial week of jobless aid rose by 133,000 to 6.271 million in the week ended April 18, the Labor Department said.

It was the 13th consecutive week that continued claims have scaled a record and this pushed the insured unemployment rate up to 4.7 percent, the highest reading since December 1982, from 4.6 percent the prior week.

According to a Reuters survey, U.S. nonfarm payrolls probably declined by about 631,000 in April, with the unemployment rate climbing to 8.8 percent from 8.5 percent.

The Labor Department will release the payrolls data on Friday, May 8.

We are not seeing tremendous demand for new staff, but at the same time we are seeing some hiring, said Joanie Ruge, a senior vice president at staffing firm Adecco.

Companies are starting to look at hiring some temps they had on staff, but couldn't convert to permanent staff. That's a good sign, but it's still very small numbers.

Shrinking payrolls and falling asset prices are also putting a squeeze on incomes and eroding spending.

A separate report from the Commerce Department showed consumer spending fell 0.2 percent in March after a 0.4 percent increase in February.

The data was incorporated in the report for first-quarter U.S. gross domestic product released on Wednesday, which showed spending rose at a 2.2 percent annual rate in the first three months of this year after sinking in the last half of 2008.

Personal income slipped 0.3 percent after declining 0.2 percent in February, the Commerce Department said. Personal income has declined in five of the last six months.

A major slowing in personal income growth on the back of a cut back in wage and salary income means there will be less momentum behind spending in the period ahead, said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

With households becoming more frugal, savings increased to an annual rate of $455.3 billion, the highest since May. The savings rate climbed to 4.2 percent in March from 4 percent.

In another report, the Labor Department said its Employment Cost Index, a broad measure of wages and benefits, rose 0.3 percent in the January-March quarter, the lowest amount on record, after a 0.6 percent gain in the last quarter of 2008.

(Additional reporting by Alister Bull in Washington and Ros Krasny in Chicago; Editing by Chizu Nomiyama)

Barack obama Unemployment Fall