Feb. 23 (Bloomberg) -- First-time claims for unemployment benefits unexpectedly fell last week and the total number of Americans collecting jobless benefits stayed close to a five- year low, signs the labor market is gathering strength as the economy accelerates.

Initial jobless claims dropped by 20,000 last week to 278,000, the Labor Department said today in Washington. Continuing claims, which measure how many people remain on benefit rolls, rose to 2.495 million from 2.454 million, which was the lowest since February 2001.

Treasury securities fell on signs companies may have to offer higher pay to attract employees as the pool of available workers begins to shrink. Gains in wages, which account for two- thirds of business costs, pose a risk of higher inflation and make it likely Federal Reserve policy makers will keep raising interest rates, economists said.

``These weekly reports now tell a rather convincing story of improving job market conditions, brightening the prospects that job and income growth will be sufficient to sustain healthy growth in consumer spending,'' said David Resler, chief economist at Nomura Securities International Inc. in New York.

Companies such as Office Depot Inc. and Burlington Northern Santa Fe Corp. are hiring workers as they expand. Job growth and rising wages are prompting consumers to spend more, helping the economy rebound from last quarter's slowdown.

The decline in claims last week, which matches the week the Labor Department surveys for its monthly employment report, prompted economists at Deutsche Bank Securities to raise their February payroll estimate to a 200,000 increase from 175,000.

Wage Pressures

The benchmark U.S. Treasury 10-year note fell, pushing the yield up 3 basis points to 4.56 percent at 5 p.m. in New York. A basis point is 0.01 percentage point.

Last week's decline in claims is ``certainly consistent with what we're looking for in terms of a more robust labor market,'' said John Shin, an economist at Lehman Brothers Inc. ``It would make the Fed a lot more concerned about potential wage pressures in the economy.''

Jobless claims were forecast to rise to 300,000 from a previously reported 297,000 a week earlier, according to the median forecast of 36 economists surveyed by Bloomberg News.

Weekly claims of 300,000 suggest that monthly payrolls will grow by about 200,000, according to Zoltan Pozsar, economist at Moody's Economy.com in West Chester, Pennsylvania. The unemployment rate fell to a four-year low of 4.7 percent last month, and employers added 193,000 new jobs.

Hiring Plans

Chief executives plan to step up hiring, according to a survey released Feb. 16 by the Business Council. Twenty-six percent of executives said they expect to hire more people this year, twice the proportion in the previous survey in October. Corporate leaders also indicated greater difficulty attracting qualified workers, and 26 percent expect compensation to increase, up from 21 percent a year ago.

The economy created 2 million jobs in 2005 after 2.1 million a year earlier. The Labor Department will issue on March 10 its report on February employment. Employers added 193,000 jobs in January.

``We did open about 100 stores in 2005 and we intend to open another 100 stores or more in 2006,'' Office Depot's chief financial officer, Patricia McKay, said in an interview in Boca Raton, Florida, on Feb. 16. ``It's not inconsequential.''

The four-week average of continuing claims fell to 2.5 million, a five-year low, from 2.519 million. The figures are reported with a one-week lag. The four-week moving average of initial claims, a less volatile measure, dropped to 281,750 last week from 283,250.

Retail Sales

The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, was unchanged at 1.9 percent in the week ended Feb. 11.

Thirty-nine states and territories reported fewer filings while 14 reported more.

The warmest January on record pushed jobless claims during the month to their lowest since early 2000 as builders began construction projects early, propelling housing starts to their highest in almost 33 years.

Retail sales jumped 2.3 percent in January, the biggest increase since May 2004, reflecting bigger paychecks and lower unemployment, the Commerce Department said Feb. 14. Hourly pay rose 3.3 percent in January from a year earlier, the most since February 2003.

Economists at Lehman Brothers raised their forecast for first-quarter economic growth to an annual rate of 5.5 percent from 4.8 percent after the retail sales report. The economy expanded at a 1.1 percent pace in the fourth quarter of last year, the slowest in three years, according to a preliminary government report on Jan. 27.

Factory Capacity

A tightening labor market, along with higher energy prices and factories that are running closer to full capacity, may encourage the Fed to extend the longest cycle of interest-rate increases in a quarter century.

The Fed on Jan. 31 boosted its overnight lending rate by a quarter point to 4.5 percent, the 14th consecutive increase. Economists surveyed by Bloomberg predict at least one more quarter-point rate increase this year.

Fed Chairman Ben S. Bernanke, in his first report to Congress on Feb. 16, said the economy is in a sustained expansion.

``I believe as the labor market continues to strengthen now, that we'll see real wages rising as well,'' Bernanke said.

Burlington Northern Santa Fe plans to increase its 47,000- person workforce by 1,500 this year, according to Chief Executive Matthew Rose.

``We're hiring net adds, not just replacement people, but we're actually growing our workforce,'' said Rose, who heads the second-largest U.S. railroad, in an interview in Boca Raton.

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

Last Updated: February 23, 2006 19:09 EST