May 7 (Bloomberg) -- Fewer Americans filed claims for unemployment benefits last week and workers were more productive in the first quarter, signs that the worst of the job cuts may be over.

Applications for jobless benefits unexpectedly dropped by 34,000 to 601,000 in the week ended May 2, the least since late January, figures from the Labor Department showed today in Washington. Productivity rose at a 0.8 percent annual rate from January through March, rebounding from a 0.6 percent decline in the fourth quarter, Labor also reported.

Companies from Cisco Systems Inc. to CSX Corp. have pared payrolls and squeezed more from remaining staff to reduce costs and shore up profits. An improvement in earnings is a necessary step in stemming the worst job slump in the postwar era as economists project a report tomorrow will show unemployment climbed last month to the highest level in 25 years.

“We’re getting more and more confirmation that large-scale termination programs are easing,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. The rebound in productivity “has helped to soften the declines in company profits. It argues for an earlier, rather than later, turn in the economy.”

Stocks fell from a four-month high as declines in financial, telephone and technology shares snuffed out an early rally. The Standard and Poor’s 500 Index closed down 1.3 percent at 907.39 in New York. Treasury securities fell, pushing the yield on the benchmark 10-year note up to 3.33 percent from 3.16 percent late yesterday.

Less Than Forecast

Initial claims were forecast to rise to 635,000, according to the median projection of 37 economists in a Bloomberg News survey. Estimates ranged from 616,000 to 650,000. Labor revised the number of applications for the prior week up to 635,000 from the 631,000 initially reported.

The report also showed the number of people collecting benefits climbed to 6.35 million the prior week, the 14th consecutive record, showing companies are still not hiring even as staff reductions abate.

Employers probably cut about 600,000 workers from payrolls in April and the jobless rate climbed to 8.9 percent, the highest level since 1983, according to the Bloomberg survey median, ahead of tomorrow’s report from Labor. Total job losses since the recession began in December 2007 would reach 5.7 million, the most of any economic slump since the Great Depression.

‘Less Damage’

“We’re looking for much less damage to the economy from here,” Christopher Low, chief economist at FTN Financial in New York, said in a Bloomberg Television interview. While there’s a “very good shot” unemployment will top 10 percent before falling, he said, “the good news is, there’s less chance we’ll go much higher than 10 percent.”

The gain in worker efficiency last quarter helped ease expenses. Labor costs, adjusted for productivity, climbed at a 3.3 percent annual rate in the first three months of the year following a 5.7 percent increase in the prior quarter.

The report showed companies cut hours worked at a 9 percent pace, the biggest drop since 1975, exceeding an 8.2 percent drop in output.

Cisco, the world’s largest maker of networking equipment, is coping with a plunge in orders from corporate customers and phone companies by cutting expenses. The company is close to exceeding its goal of cutting at least $1 billion in costs by July, said Chief Executive Officer John Chambers. That helped the company’s third-quarter profit top analysts’ estimates yesterday.

Business Steadies

Chambers said business is beginning to steady for customers around the world, a “remarkable” shift that could set the stage for an economic recovery. “No one is predicting an upturn yet, but you have to have stabilization, or leveling out, before you can have an upturn,” he said in an interview yesterday.

Jacksonville, Florida-based CSX, the third-largest U.S. railroad company, last month reported its first-quarter net profit fell less than analysts estimated. The company said April 15 it has about 2,300 to 2,400 employees on furlough, an increase from 1,600 workers late last year. It also parked some unused cars and locomotives, helping blunt lower demand.

While the drop in jobless claims is welcome news, economists at JPMorgan are among those warning that applications may again jump in coming weeks, reflecting production cuts at automakers.

Chrysler LLC’s decision last week to idle manufacturing while it reorganizes in bankruptcy put 27,000 hourly employees out of work on May 4, Abiel Reinhart, a JPMorgan Chase economist, said in a note to clients. General Motors Corp. is also planning shutdowns from May through July to trim inventory, meaning many suppliers will also be affected, he said.

“Although we believe the overall economy is slowly moving toward recovery, expect claims to spike in the next report,” Reinhart wrote.

To contact the reporters on this story: Shobhana Chandra in Washington schandra1@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: May 7, 2009 16:33 EDT