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 report on Thursday supported the view the 16 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, 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 reports, coupled with better-than-expected earnings from Dow Chemicals, buoyed U.S. stocks, with the Dow Jones blue chip index rising more than 100 points in morning trade.

Jobless claims show signs of moving toward a sideways pattern and they 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 said the pace of contraction in the economy appeared somewhat slower than several weeks ago.


But the labor market remains very weak and troubles in the auto sector, where Chrysler is facing a potential bankruptcy filing and General Motors is slashing its workforce as it restructures, threaten to worsen the situation.

With demand in the doldrums and companies not 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.

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

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 consumer spending rose at a 2.2 percent annual rate in the first three months of the 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 level since May. The savings rate climbed to 4.2 percent in March from 4 percent in February.

In another report, the Labor Department said employment costs rose by the lowest amount on record in the first quarter. The department's Employment Cost Index, a broad measure of wages and benefits, rose 0.3 percent in the January-March quarter following a 0.6 percent rise in the last quarter of 2008.

(Additional reporting by Alister Bull in Washington and Ros Krasny in Chicago; Editing by Neil Stempleman)