Jobless claims hit 26-year high, exports tumble

WASHINGTON (Reuters) - The number of U.S. workers filing new claims for jobless benefits surged to a 26-year high last week, government data showed on Thursday, as employers tightened their belts to help weather what many fear will be a deep, long recession.

A separate report showed the U.S. trade deficit swelled unexpectedly in October as weak economies around the world imported less from the United States.

Analysts said the export pillar that had helped to support the fragile economy earlier in the year was now crumbling and many said the economy appeared headed for an even deeper contraction in the fourth quarter than they had thought.

"The last bastion of the U.S. economy has collapsed. The U.S. economy will contract by 4.5 percent in the current quarter. The ugly recession accompanies us into the next year," said Harm Bandholz, an economist at UniCredit Markets & Investment Banking in New York.

Initial claims for state unemployment insurance benefits jumped by 58,000 to 573,000, the U.S. Labor Department said.

It was the biggest increase in claims in more than three years and the highest level since November 1982 when the U.S. economy suffered a recession after the Federal Reserve raised interest rates to combat the high inflation of the 1970s.

The grim economic numbers together with fading prospects of a government bailout for the auto firms saw the Dow Jones industrial average closing down 196.33 points at 8,565.09. The U.S. dollar fell to 7-week lows against the euro and the yen.

Economists said the data underpinned the case for the Fed to lower interest rates sharply at a meeting next week.

The U.S. economy has been mired in a recession for a year, and a Reuters survey of 105 economists pointed to a contraction spanning through the second quarter of 2009, with the fourth quarter expected to show the sharpest slide.

Government data earlier this month showed the U.S. economy shed 533,000 jobs in November, the most in 34 years, and the weaker-than-expected jobless claims data indicated the bloodletting was not yet over.

WORST ECONOMIC DOWNTURN

"We are experiencing the absolute worst of the economic downturn right now," said T.J. Marta, fixed-income analyst at RBC Capital Markets in New York. "We're in a period of complete freefall in terms of economic growth."

The Labor Department said the number of Americans still on the jobless benefit rolls after claiming an initial week of aid jumped by 338,000 to a 26-year high of 4.43 million, the biggest increase in 34 years.

"These numbers match the readings seen in the 1980s recessions. The situation is grim, but data need to be adjusted for the growth of the labor force as the population has risen in the last twenty-five years," said Asha Bangalore, an economist at Northern Trust in Chicago.

Further illustrating how the worst financial crisis since the 1930s has hit the economy, retail sales excluding autos posted their biggest monthly drop in five years in November, a private report showed.

Separate data from the Federal Reserve highlighted the pressure the financial crisis has placed on U.S. consumers. The Fed said household net worth dropped 4.7 percent in the third quarter, the fourth consecutive monthly decline, as real estate and financial assets values fell.

While a pullback by U.S. consumers and businesses would normally narrow the nation's trade deficit, a Commerce Department report showed the trade gap widened by 1.1 percent in October as weak economies overseas and a now-resolved strike at U.S. planemaker Boeing Co led to a drop in exports.

While overall imports also fell, imports from China rose 2.8 percent to $34.0 billion, a statistic likely to fuel U.S. criticism that China's yuan currency remains undervalued against the dollar. The U.S. trade deficit with China also set a record at $28.0 billion.

The weakening global economy has cut demand for oil and sent prices plummeting.

The Labor Department said U.S. import prices plunged 6.7 percent in November, the largest decline on records dating to 1988, as petroleum prices dived a record 25.8 percent.

Non-petroleum import prices fell 1.8 percent, the largest monthly drop since 1988 and a further indication of the lack of inflationary pressure in the global economy.

On a slightly better note, U.S. home mortgage foreclosure activity dipped 7 percent in November from October, but jumped 28 percent on an annual basis and would spike without a broad permanent fix for troubled loans, real estate firm RealtyTrac said.

(Additional reporting by Doug Palmer in Washington, Richard Leong and Lynn Adler in New York; Editing by Chris Reese)