July 31 (Bloomberg) -- The number of Americans filing first-time claims for unemployment benefits unexpectedly rose last week, reaching the highest level in more than five years.

Initial jobless claims increased by 44,000 to 448,000 in the week ended July 26, from a revised 404,000 the prior week, the Labor Department said today in Washington. Economists in a Bloomberg survey had forecast a drop in claims. The total number of people on benefit rolls rose to the most since December 2003.

The figures add to concern that consumer spending will falter as employers slash positions to cope with increased fuel costs, the housing slump and tighter credit. Separate government report showed the U.S. economy shrank at the end of last year and grew less than forecast in the second quarter of 2008. A report tomorrow may show payrolls declined in July for the seventh consecutive month, a Bloomberg News survey showed.

``The labor market is weakening and the backdrop for hiring remains restrictive,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania. ``That just reflects overall weakness in the broader economy.''

Initial claims were forecast to fall to 393,000 from the 406,000 initially reported for the prior week, according to the median projection of 40 economists in a Bloomberg News survey. Estimates ranged from 375,000 to 440,000.

The total number of initial filings last week was the highest since April 2003.

GDP Report

The Commerce Department reported the U.S. economy expanded at a 1.9 percent annual rate from April through June, less than forecast, after a 0.9 percent gain in the first quarter that was smaller than previously estimated. The report also contained annual revisions that lowered the growth rate back to 2005 and showed the economy contracted at a 0.2 percent rate in the last three months of 2007.

After the reports, yields on benchmark 10-year notes fell to 3.97 percent as of 8:41 a.m. in New York, from 4.05 percent late yesterday. Futures on the Standard & Poor's 500 Stock Index declined 0.7 percent to 1,276.20.

A Labor spokesman said the weekly increase in claims was partly attributed to workers who had been in the program until their benefits expired or they found work. Some of those workers who have since lost their new jobs reapplied, and instead of getting extensions were eligible for regular unemployment insurance, the spokesman said.

Extending Claims

Weekly filings may be higher for several weeks as more workers apply for extended unemployment claims and find that they're eligible for regular benefits, the spokesman said.

The Labor Department's July payrolls report tomorrow may show the economy lost 75,000 jobs, and the unemployment rate rose to 5.6 percent, according to the Bloomberg survey median.

The four-week moving average of initial claims, a less volatile measure, gained to 393,000 from 382,000, the report showed.

The number of people continuing to collect jobless benefits increased to 3.282 million in the week ended July 19, from 3.097 million the prior week. The weekly jump in continuing claims was the biggest since June 1998.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 2.5 percent, from 2.3 percent. These data are reported with a one-week lag.

Thirteen states and territories reported an increase in new claims, while 40 reported a decrease.

Jobless Rate

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

Weekly claims have averaged 366,800 so far this year, compared with an average 321,000 in all of 2007.

The government's claims figures have so far not matched the losses seen in previous economic downturns. During the last recession, in 2001, about 415,000 workers a week on average filed new applications for benefits.

``The labor market is likely to remain sluggish for a period of time before returning to better performance,'' according to a mid-year review released earlier this week by the White House, which cut its forecast for economic growth in 2008.

The economic expansion may slow to the weakest pace in six years in the fourth quarter, after the impact of federal tax rebates fades, according to a monthly Bloomberg News survey. The jobless rate will rise to 5.8 percent by the end of 2008, the survey showed.

Royal Caribbean Cruises Ltd., the world's second-largest cruise operator, said it will cut 400 jobs after higher fuel expenses led to a drop in second-quarter profit. ``It is imperative that we find ways to reduce our costs,'' Chief Executive Officer Richard Fain said in a statement on July 21.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: July 31, 2008 09:08 EDT