REFILE-WRAPUP 3-US data points to strengthening growth, jobs

 (Refiles to delete extraneous third paragraph)
 * Initial jobless claims hit more than 2-1/2 year low
 * Four-week average of claims falls below 400,000
 * Services sector growth gauge at 5-1/2 year high in Feb.
 (Recasts with details, updates markets, adds byline)
 By Lucia Mutikani
 WASHINGTON, March 3 (Reuters) - The number of Americans
filing new claims for jobless aid hit the lowest level in more
than 2-1/2 years last week and service sector hiring picked up
in February, signs the labor market recovery was quickening.
 Another report on Thursday confirmed business productivity
picked up a bit in the fourth quarter, but it also underscored
a slowing trend that suggested employers may have to step-up
hiring even further.
 "There can be no denial that a strengthening in labor
market conditions is under way, as layoffs have dropped sharply
since the beginning of the year," said Jim Baird, a partner at
Plante Moran Financial Advisors in Kalamazoo, Michigan.
 Initial claims for state jobless benefits dropped 20,000 to
368,000, the lowest since May 2008, the Labor Department said.
 Economists had forecast claims rising to 398,000. The
four-week average of claims, a better measure of underlying
trends, fell below 400,000 for first time since July 2008.
 Separately, growth in the huge U.S. services sector touched
a fresh 5-1/2 year high in February.
 The Institute for Supply Management's index of
non-manufacturing activity edged up to 59.7, the highest since
August 2005, from 59.4 in January. Its employment component
rose to 55.6, its highest level since April 2006, from 54.5.
 A reading above 50 shows an expansion in the sector, which
accounts for about 80 percent of the U.S. economy. A services
employment gauge hit its highest level since April 2006.
 U.S. stocks rose sharply after the jobless claims data,
helped also by a drop in oil prices as the Arab League
considered a peace plan for Libya. In the early afternoon, the
Standard and Poor's 500 index was up 1.5 percent. (.SPX: Quote, Profile, Research)
 Prices for safe-haven U.S. government debt tumbled.
INSTANTVIEW-US weekly jobless [ID:nN03169632]
Graphic-US jobless claims:
INSTANTVIEW-ISM service sector PMI [ID:nLDE7221ST]
Graphic-US services sector   
 The jobless claims data fell outside the survey period for
the U.S. government's closely watched jobs report for February
due on Friday. But economists said it was consistent with other
recent signs that the labor market recovery was quickening.
 Total nonfarm payrolls probably increased 185,000 after
snowstorms held growth to a paltry 36,000 jobs in January,
according to a Reuters survey. The survey was conducted before
data on Tuesday that showed strong factory hiring, which
prompted some economists to rethink their forecasts.
 Despite six straight quarters of growth, the economy has
only managed to replace a fraction of the more than 8 million
jobs lost during the recession. But analysts are optimistic job
growth will soon top 150,000 a month on a sustained basis.
 "That amount of payroll growth is sufficient to give the
economy escape velocity -- whereby a self-reinforcing cycle of
increases in production, income, and spending is in place,"
said Tony Crescenzi, a portfolio manager at PIMCO in Newport
Beach in California.
 Fewer layoffs and gains in new jobs should help the economy
weather a rise crude oil prices to over $100 a barrel in the
past month in the wake of unrest in the Middle East.
 Reports from U.S. retailers suggested consumers were
withstanding the jump in gasoline prices. Luxury retailer Saks
Inc (SKS.N: Quote, Profile, Research) and Victoria's Secret parent Limited Brands Inc
(LTD.N: Quote, Profile, Research) were among those reporting the biggest gains in sales.
 However, discounter Target Corp (TGT.N: Quote, Profile, Research) and Gap Inc (GPS.N: Quote, Profile, Research)
missed analysts' forecasts. For details see [ID:nN03203429]
 Federal Reserve Chairman Ben Bernanke said this week that
high oil prices were unlikely to hurt the domestic economy
unless they were sustained. For details see [ID:nN01145792]
 Economists agree and expect the Fed to complete its $600
billion government bond-buying program which aims in part to
lower a jobless rate that stood at 9.0 percent in January.
Economists expect the rate rose to 9.1 percent last month.
 A second report from the Labor Department on Thursday said
nonfarm productivity increased at an unrevised 2.6 percent
annual rate in the fourth quarter, which marks a sharp slowdown
from a peak of 8.9 percent in the second quarter of 2009.
 Unit labor costs, a gauge of potential inflation pressures,
fell at an unrevised 0.6 percent rate.
 The drop in labor costs, which account for about 70 percent
of production costs, showed the economy was facing little
inflation pressure outside of globally driven increases in food
and energy costs.