WASHINGTON (Reuters) - The number of Americans filing for unemployment benefits fell more than expected last week, pointing to tightening labor market conditions that should support the economy this year.

People attend TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

Other data on Thursday showed worker productivity slowing in the fourth quarter, which economists said suggested companies would need to keep hiring to increase output.

Increased demand for workers against the backdrop of weak productivity and a shrinking labor pool is starting to put upward pressure on wages, paving the way for interest rate increases from the Federal Reserve this year.

“It looks like firms will have to keep hiring if they want to expand output, as productivity is barely growing,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “They are going to have to make do with their workforces as the labor market continues to tighten.”

Initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 246,000 for the week ended Jan. 28, the Labor Department said. Claims have now been below 300,000, a threshold associated with a healthy labor market, for 100 straight weeks. That is the longest stretch since 1970, when the labor market was much smaller.

The labor market is at or close to full employment, and the Fed said on Wednesday it expected labor market conditions would strengthen “somewhat further.” A tight labor market is expected to boost wage growth and support the economy through strong consumer spending and the continued recovery of the housing market.

The Fed, which has forecast three rate increases this year, kept its benchmark overnight lending rate unchanged in a range of 0.50 percent to 0.75 percent at the end of its latest two-day policy meeting on Wednesday. The U.S. central bank increased borrowing costs in December.

The dollar was trading marginally lower against a basket of currencies, while prices for U.S. government bonds rose. U.S. stocks were trading slightly higher.

Economists had forecast first-time applications for jobless benefits falling to 250,000 in the latest week. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,250 to 248,000 last week.

Last week’s claims data have no bearing on January’s employment report, which is due to be released on Friday, as they fall outside the survey period.

RETAIL LAYOFFS SURGE

Although claims were low in January, a report on Thursday from global outplacement consultancy Challenger, Gray & Christmas showed U.S. employers announced 45,934 job cuts last month, a 37 percent jump from December and the largest number of cuts since April 2016.

Retailers announced 22,491 layoffs, accounting for 49 percent of all job cuts recorded last month. Department store giant Macy’s, which is closing 68 stores, announced 10,000 job cuts last month. Other retailers announcing layoffs included The Limited, American Apparel, Sears and Abercrombie & Fitch.

Department stores have faced stiff competition from online rivals including Amazon.com.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 175,000 jobs last month, picking up from the 156,000 jobs added in December. The unemployment rate is expected to be unchanged at 4.7 percent in January, near a nine-year low.

There is, however, a possibility that employment gains could beat expectations after reports on Wednesday showed jumps in private sector hiring and manufacturing jobs in January. But retail payrolls pose a downside risk.

In another report, the Labor Department said worker productivity rose at a 1.3 percent annual rate in the fourth quarter, slowing from the prior period’s brisk 3.5 percent pace of increase.

While productivity rebounded in the second half of the year after contracting in the first six months, it only increased 0.2 percent in 2016, the smallest gain since 2011. That followed a 0.9 percent gain in 2015.

Productivity has increased at less than 1.0 percent in each of the last six years. Productivity growth averaged 1.1 percent from 2007 to 2016, well below the long-term rate of 2.1 percent from 1947 to 2016.

“The data illustrate the challenges facing businesses in terms of maintaining profitability as a tight labor market is pushing up wage costs faster than productivity,” said John Ryding, chief economist at RDQ Economics in New York.

Unit labor costs, the price of labor per single unit of output, increased at a 1.7 percent pace in the fourth quarter, accelerating from the prior quarter’s 0.2 percent rate. Unit labor costs rose 2.6 percent in 2016 after increasing 2.0 percent in 2015.

Hourly compensation per hour rose at a 3.0 percent rate in the fourth quarter. While that was slower than the third quarter’s 3.7 percent rate of increase, it continued to suggest that wage growth is picking up. Hourly compensation rose 2.8 percent in 2016 after advancing 2.9 percent in 2015.