U.S. jobless on benefits at record high

WASHINGTON (Reuters) - The number of U.S. workers drawing unemployment aid jumped to a record high in early February, according to data on Thursday that highlighted the deterioration in the labor market as a 13-month recession deepened.

A separate report showed that a rebound in energy costs drove up prices received by U.S. producers last month, breaking a five straight month declining trend.

The number of people remaining on the benefits rolls after drawing an initial week of aid surged 170,000 to 4.99 million in the week ended Feb 7, the Labor Department said.

That was the highest reading on records dating back to 1967 and took the insured unemployment rate to 3.7 percent, the highest since 1983. It also outstripped analysts' estimates for the so-called continued claims, which had been forecast to rise to 4.86 million from 4.82 million the prior week.

"They are consistent with a very quick sharp rise in the unemployment rate and that's going to continue for the next few months because production data are correcting very sharply," said Steven Wieting, economist at Citigroup in New York.

The grim data restrained U.S. stocks, which were last trading largely flat. In the Treasury debt market, worries about looming supply to fund the government's massive efforts to rescue the economy depressed prices.

The U.S. economy, in recession since December 2007, is buckling under a heavy burden of rising unemployment as companies try to slash costs to deal with sagging demand.

The aggressive layoffs and the accompanying insecurity over jobs mean that households, whose net worth has already been eroded by the collapse of the housing and stock markets, will cut spending further and create a vicious cycle.

Washington has put forward an array of measures, including a $787 billion stimulus package, to revive the bleeding economy.

FACTORY ACTIVTY CONTRACT SHARPLY

A separate report showed factory activity in the U.S. Mid-Atlantic region fell sharply in February, with the Philadelphia Federal Reserve Bank's business activity index at minus 41.3 after a reading of negative 24.3 in January. Economists had expected minus 25.0 for the index where any number below zero indicates contraction in the region's manufacturing sector.

The survey of factories in eastern Pennsylvania, southern New Jersey and Delaware is seen as one of the first monthly indicators of the health of the U.S. manufacturing sector.

"We are going through a very severe inventory correction at the moment. It's helpful, it is going to be the way we get past the worst of the employment declines," said Wieting.

In another report, the Department of Labor said the producer price index rose 0.8 percent in January, rising for the first time since July, compared to a 1.9 percent drop in December.

Analysts polled by Reuters had forecast a 0.2 percent rise in the overall index. However, compared to the same period last year, the producer price index fell 1 percent, the largest decline since October 2006.

Core producer prices, excluding food and energy costs, rose 0.4 percent in January, also above market expectations for an increase of 0.1 percent, after rising 0.2 percent in December.

"I wouldn't get excited about core being up 0.4 percent as a sign of stagflation. I think there are some anomalies and that we will be in a deflationary environment for several months," said Kevin Flanagan, fixed income strategist at Morgan Stanley in Purchase, New York.

Compared to the same period a year ago, core producer prices were up 4.2 percent.

Energy prices rose 3.7 percent in January, halting five months of declines. Gasoline prices jumped 15 percent, the biggest increase since November 2007.

There was some cause for optimism, however, with the Conference Board's index of Leading Economic Indicators rising a surprising 0.4 percent in January, the second monthly gain in a row.

"The economy has been in recession for over a year, but the level of intensity may begin to ease over the next few months," said Ken Goldstein, an economist for the research group. "The second half of 2009 may see a period of anemic growth."

(Additional reporting by Mark Felsenthal in Washington and Burton Frierson in New York; Editing by Chizu Nomiyama)