* Initial jobless benefit claims rise 20,000 last week
* Productivity gains 1.9 pct in the third quarter
* Unit labor costs slip 0.1 pct in third quarter (Updates market to close)
By Lucia Mutikani
WASHINGTON, Nov 4 (Reuters) - New U.S. claims for jobless aid rose last week and a strong rebound in productivity in the third quarter showed employers wringing more output from current workers rather than hiring.
U.S. business productivity rose at a stronger-than-expected 1.9 percent annual rate, the Labor Department said on Thursday, leading to a surprise dip in unit labor costs, a closely watched gauge of inflation pressure.
The data came a day after the Federal Reserve launched a program to buy an additional $600 billion worth of government bonds out of concern over lofty unemployment and the risk slowing inflation could lead to a downward price spiral that could shackle the economy.
"The big picture is that firms are trying to squeeze every ounce out of the workers they have and this is one reason they feel no need to hire," said Cary Leahey, an economist at Decision Economics in New York.
The government's closely watched monthly employment report, to be released on Friday, is expected to show anemic jobs growth in October.
Initial claims for state unemployment benefits increased 20,000 last week to a seasonally adjusted 457,000, reversing the prior week's decline, the department said in a separate report. Economists had expected claims to come in at 443,000.
The report on productivity showed unit labor costs, a gauge of how much it costs for the labor to produce any given unit of output, fell at a 0.1 percent rate in the third quarter after rising 1.3 percent in the second quarter. Economists had expected the measure to rise at a 0.7 percent rate.
For a graphic on U.S. weekly jobless claims, click on:
http://r.reuters.com/zec83q
The data suggested little improvement in the stagnant U.S. labor market and continued downward pressure on inflation.
The Fed on Wednesday expressed disappointment in the economy's performance and launched a second round of asset purchases to push interest rates further down to lift demand and prevent deflation.
MORE MONEY INTO THE ECONOMY
U.S. financial markets ignored the data as traders continued to digest the Fed's decision. Stocks on Wall Street extended a rally that started in September to close at two-year highs, while the dollar skidded to a more than nine-month low against the euro.
Prices for medium-term U.S. government bonds rose. The U.S. central bank will concentrate its new purchases in mid-range maturities.
The Fed bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds during a first round of so-called quantitative easing after it had cut overnight interest rates to near zero in December 2008.
Despite the stimulus, the economy has failed to rebound strongly from its worst recession since the Great Depression, leaving the unemployment rate perched at 9.6 percent. The claims data has little influence on a report on employment for October due on Friday as it falls outside the survey period.
The government is expected to report that nonfarm payrolls increased 60,000 last month, which would be the first expansion since May, after dropping 95,000 in September. Private-sector hiring, however, is expected to remain relatively tepid.
Americans angry over joblessness handed control of the House of Representatives to the Republican Party in elections on Tuesday that were viewed as a vote on President Barack Obama's economic policies.
But the rise in productivity in the third quarter, which exceeded economists expectations for a 1.0 percent growth pace, offered hope that at some point firms will no longer be able to meet demand by making their operations more efficient and will need to increase payrolls.
"We are likely to see firms pick up hiring to meet higher demand because the easy productivity gains have already been wrung out of the economy," said Troy Davig, a senior U.S. economist at Barclays Capital in New York.
The stronger-than-expected productivity performance should help support corporate profits, but they could take a hit once productivity slows, Davig said.
Better-than-expected sales results from U.S. retailers on Thursday suggested some momentum heading into the crucial holiday selling season. [ID:nN04122512]
It was the latest in a number of very recent signs that economic activity could be firming slightly.
But cash-flush company do not appear to be in a hurry to boost their payrolls just yet.
A survey by the National Federation of Independent Business published on Thursday showed that 10 percent of member firms increased average employment by 4.5 employees in October, down from 13 percent in September.
Over the next three months, 13 percent said they would reduce employment and only eight percent said they would create new jobs. [ID:nN04206142] (Additional reporting by Glenn Somerville in Washington and Ellen Freilich in New York; Editing by Andrea Ricci)