What’s Good for Apple is Not Good for the Country

Apple Economics: Maximizing Profit, Minimizing Employment

by MATT VIDAL

 

Apple Inc. is the largest technology company in the world, in terms of both revenue and profit. Yet, the California-based company has just 47,000 workers on its payroll in the United States.

Apple recently released a report in which it claimed responsibility for “indirectly” creating an additional 257,000 American jobs in industries that are part of its supply chain, a claim that was “disreputable,” in the words of MIT labor economist David Autor – as if Apple’s suppliers did not have any other customers. Or, as Wharton labor economist Peter Cappelli noted, as if the consumers spending their money on an iPad would not have purchased another product in its absence (see a New York Times article on debates over the report here, including comments from Autor and Cappelli).

While Apple’s claim to have created jobs for UPS and FedEx employees is questionable, however, there is some truth to the argument that Apple is responsible for the employment – and working conditions – at its key suppliers, particularly manufacturers for which Apple is the main customer. This may be the case for some Corning employees in the US (supplying glass for iPhones) and is very likely the case for, tens, perhaps hundreds of thousands of employees at Foxconn in China, which presumably has entire lines or buildings dedicated to Apple.

A recent report by political economist and accountant Karel Williams and his research team at the Centre for Research on Socio-Cultural Change at the University of Manchester looked at the Apple Business Model and its employment effects. They cite a study which found that Chinese workers add $6.50 in value to each iPhone 3, just 3.6% of the phone’s shipping price.

In a counter-factual exercise based on the average wage for electronics workers in the US ($21 per hour) and assuming 8 hours labor per phone, the CRESC team shows that Apple could assemble the phone in the US and still make a gross margin of $293 per phone, which is down from its current gross margin of $452, but still an impressive 46.5% margin.

Assembling the phone in the US would have added benefits for the US economy in terms of direct job creation and multiplier effects – in contrast to the current business model, which decreases US employment and increases the US trade deficit. But healthy profits are not enough, so Apple continues to make superprofits to the detriment of the US economy. What is good for Apple is not good for the US.

But what about Chinese workers? The CRESC team analyzes the financial aspects of the Apple supply chain and argues that, unlike in the Japanese and Korean cases, Chinese suppliers under the Apple model do not have good prospects of moving up the supply chain. Japanese and Korean producers originally had competitive advantage in the international market because their domestic supply chains had a low ratio of labor’s share of value-added. In the context of national supply chains, even suppliers were able to continually upgrade to higher-value added locations in the supply chain.

The story for China is different because it remains at the end of a global supply chain dominated by US firms like Apple, which are able to successfully subordinate their Chinese suppliers through contracts that leave little profit for the latter. As a result, funds for reinvestment are limited and corporate strategy may thus remain defensive.

There is a question, which the CRESC team does not consider, of whether the Chinese suppliers will be able to develop their own R&D capabilities from their own manufacturing operations. For now, most electronics R&D remains firmly embedded in the US, Japan and Korea. But there does remain an open question of whether R&D and manufacturing can remain geographically separate, with the former retaining vibrancy and the latter subordinated to the second- or third-tier via contract. Nonetheless, the CRESC report does crystallize some important questions and provide some provocative answers.

Finally, it must be noted that it is somewhat misleading to call this the Apple business model. The business model of maximizing profit and minimizing domestic employment though global subcontracting was pioneered by many corporations in the 1970s and even earlier, among them Nike, which has always been a brand without its own manufacturing capabilities.

But this model has become a normative business logic among manufacturers since then, and it does, as the CRESC team points out, present fundamental employment problems for home countries of corporations, like Apple, Nike and many others, who take it to its extreme. What was good for GM may have been good for the US, but that was another time, when vertical integration was a normative logic of business.

In contemporary globalized capitalism, maximizing profit is often equated with minimizing (domestic) employment. Is it time yet to get over our collective obsession with sanctifying profit?

EL EMPLEO (Employment)

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Next Low-Wage Haven: USA

Saturday, August 6, 2011 by Labor Notes
by Jane Slaughter

Jokes about the U.S. becoming “Europe’s Mexico” are commonplace, but now high-priced consultants are pushing the notion in all seriousness.

They’re predicting that within five years certain Southern U.S. states will be among the cheapest manufacturing locations in the developed world—and competitive with China.

For years advisers like the Boston Consulting Group got paid big bucks to tell their clients to produce in China. Now, they say, rising wages there, fueled by worker unrest, and low wages in Mississippi, Alabama, and South Carolina mean that soon it won’t be worth the hassle of locating overseas.

Wages for China’s factory workers certainly aren’t going to rise to U.S. levels soon. BCG estimates they will be 17 percent of the projected U.S. manufacturing average—$26 an hour for wages and benefits—by 2015.

But because American workers have higher productivity, and since rising fuel prices are making it even more expensive to ship goods half way around the world, costs in the two countries are converging fast.

Dan Luria, research director of the Michigan Manufacturing Technology Center, says many of the big-name consultancies, which until a year ago were advising their clients to “Asiafy their footprints,” are now telling companies to think twice.

BCG bluntly praises Mississippi’s “flexible unions/workers, minimal wage growth, and high worker productivity,” estimating that in four years, workers in China’s fast-growing Yangtze River Delta will cost only 31 percent less than Mississippi workers.

That’s before you figure in shipping, duties, and possible quality issues. Add it all up, says BCG, and “China will no longer be the default low-cost manufacturing location.”

ALREADY COMPETITIVE

Actually, employers deciding where to produce the next generation of widgets may not need to look to the South. Plenty of factory jobs in Northern states—even in the former high-wage stronghold of auto—are already “competitive.”

Ford’s flagship Dearborn Truck plant outside Detroit, for example, contracts non-union workers to do inspection and repairs—long the coveted jobs, that workers could get only with many years’ seniority—at $10 an hour with no benefits.

That’s more than the Chinese average now, but less than what’s projected for 2015.

Brad Duncan, who worked at the plant last year, said it seemed like dozens of small companies were involved. Many pay people as “independent contractors,” he said, and are essentially fly-by-night operations.

“I worked for 10 bucks an hour with no overtime for around 66 hours a week,” Duncan said. “Then I’d get laid off for a week or more at a time with no notice.”

At a GM plant in Lake Orion, Michigan, north of Detroit, contractors hire young third-tier workers at $10 an hour or less to gather parts for assemblers, work done very recently by GM employees.

These kids are union members, though they don’t have a contract yet. The United Auto Workers convinced the contractors to let them organize the workforce through card check.

“There are more people there handling parts than building cars,” said Dan Theisen, a plant electrician.

Many of the union assemblers are themselves second-tier workers paid less than the U.S. manufacturing average, with wages of $14.60 and no pensions.

“It makes it hard to do anything for the second tier when the third tier is so bad,” said Theisen, a dissident who’s spoken against lowering GM wages.

ALREADY A TREND?

Among the U.S. companies rethinking their production locations are Ford, Caterpillar, an ATM company building a plant in Georgia, and Wham-O Inc., which returned Frisbee production to California and Michigan.

Master Lock is bringing work back to Milwaukee from China. GE, enticed by federal stimulus money, will be making green refrigerators in Indiana with Electrical Workers (IBEW) members instead of in Mexico.

And Suarez Manufacturing Industries has been lauded for relocating production of a space heater from China to North Canton, Ohio.

After experiencing lengthy transit times from Asia, CEO and North Canton native Ben Suarez painstakingly put together a chain of suppliers from within the U.S. In a former IBEW Hoover vacuum factory, abandoned in 2007 in favor of Mexico, he’s now contracted with two companies to supply the plant with labor.

Wages will run from $7.50 an hour (general labor) to $10 (assemblers) to $16 (programmers). Federal minimum wage is $7.25.

The plant will soon employ 100-150 workers in full-time jobs. As production ramps up, others will be guaranteed seasonal work, October through March. The plant received 3,000 applications, according to the company’s Lauren Capo.

NOT YET

The Steelworkers union has long agitated for a manufacturing renaissance in the United States, arguing that an economy that doesn’t make things is weak and unsustainable. In 2007 the union initiated the Alliance for American Manufacturing, a partnership with employers.

AAM Executive Director Scott Paul says there’s no hard evidence yet that manufacturers are actually returning from China in enough numbers to constitute a trend.

Rather, various consultants are now telling their clients to consider the U.S. They’re the same consulting class that “popped up around the time of NAFTA with ‘yes you can in Yucatan,’” he said.

Paul cites the factors that could converge to bring more work to these shores:

• Costs of labor and commodities are rising on the Chinese coasts, as workers demand higher pay. If companies move further inland to poorer areas, they hike their logistics costs.

• In most of the world, the dollar is worth 25 percent less than three years ago, and in China 5 percent less.

• Shipping costs are increasing because of rising energy costs.

• Companies fear that in China they’ll lose their intellectual property to spin-off competitors.

• Some consumers prefer an American-made product.

• The U.S. has an abundance of skilled but unemployed workers.

• And U.S. wages are stagnant or even falling.

But, Paul notes, if companies choose to build in the lowest-cost states—as Japanese automakers have done for nearly 30 years—“it quickly becomes a state vs. state competition, a race to the bottom. If South Carolina can offer lower wages, so can Mexico.”

WHAT KIND OF JOBS?

Will factory jobs flood into Michigan and Mississippi at just above minimum wage? Or is that still not cheap enough? The fact remains that the decisions are all made by corporations seeking the greatest profit in a dog-eat-dog world.

As Michael Zinser, one of the co-authors of the BCG report, told Labor Notes, “Location is agnostic. It’s a question of what the market will bear.”

Luria predicts that some manufacturers will indeed leave China, but sees the moves mainly benefiting Mexico and Eastern Europe.

Paul, from the manufacturing alliance, wants to see the government step in and influence those location decisions through government policy, as it did with the domestic content requirements in the 2009 Recovery Act and the high-speed rail bill. The German multinational Siemens located a train factory in Sacramento, California, as a result, he said.

Likewise, clean energy loans, grants, and tax credits led to 18 new advanced battery factories in Michigan (though not at high wages). “None of this would be possible without public investment,” Paul said.

HANDS-OFF

Mostly, of course, the Obama administration has taken a hands-off approach to what business should do, instead providing cash on request in the bank and auto bailouts.

UAW dissidents said the auto bailout was a giant missed opportunity to steer their industry toward clean products built in the U.S. at decent wages. Unions and consumer groups protested because the banks were saved but stiff regulations were not attached to their checks.

Paul notes that government policies to promote industry are the norm elsewhere, in old capitalist countries as well as in new ones like China. He fears the absence of such government help leaves U.S. workers with only one bargaining chip—and that’s not a happy one.

“Low wages won’t be the factor that compels companies to locate in the U.S.,” he said.

“But absent a national economic development strategy where there is a focus on manufacturing, that’s what we’re left with.”

U.S. Underemployment Steady at 18.4% in July (the real rate)

Among those aged 18 to 29, 28.4% are underemployed
by Dennis Jacobe, Chief Economist | August 5, 2010

PRINCETON, NJ -- Underemployment, as measured by Gallup, was 18.4% in July, essentially unchanged from 18.3% at the end of June and in mid-July. Underemployment peaked at 20.4% in April.

Gallup's underemployment measure includes both Americans who are unemployed and those working part time but wanting full-time work. It is based on more than 17,000 phone interviews with U.S. adults aged 18 and older in the workforce, collected over a 30-day period and reporteddaily and weekly. Gallup's results are not seasonally adjusted, and tend to be a precursor of government reports by approximately two weeks.

Changes in Unemployed and Part-Time Employees Wanting Full-Time Work Offset

The unemployment rate component of Gallup's underemployment measure fell to 8.9% at the end of July -- down from 9.2% at the end of June and 9.3% in mid-July. However, this decrease was more than offset by an increase to 9.5% in the percentage of employees working part time but wanting full-time work.

Substantially Higher Underemployment Persists Among the Young

Americans aged 18 to 29 had easily the highest underemployment rate in July of any age group, at 28.4%, including 11.8% who were unemployed and 16.6% who were employed part time but wanted full-time work. Among all U.S. adults in the workforce, a higher percentage of women than of men are underemployed.

Less Educated Face High Underemployment

Workers without any college education are more likely than those with more formal education to be underemployed.

Underemployed Are Less Hopeful

The percentage of underemployed Americans who are "hopeful" that they will be able to find a job in the next four weeks fell to 40% in July -- down from the better levels of May (43%) and June (42%).

No Real Improvement in Job Market Conditions

Gallup's modeling suggests that July's U.S. unemployment rate will remain at 9.5% or possibly decline to 9.4% -- below the 9.6% consensus -- when the government reports its figures on Friday. This is consistent with the ADP report of 42,000 private sector jobs being added and the Challenger report that layoffs remain down. Of course, the hiring and firing of census takers and seasonal adjustments make the jobs picture particularly murky right now.

While any decline in unemployment may be cheered on Wall Street, the real focus should be on the lack of improvement in underemployment. The magnitude of the 28.4% underemployment rate among those aged 18 to 29 and 23.0% among those without any college education creates significant social and economic challenges for the U.S.

On Monday, Federal Reserve Chairman Ben Bernanke noted that, "significant time will be required to restore the nearly 8½ million jobs that were lost over 2008 and 2009." That same day, Treasury Secretary Tim Geithner stated that the unemployment rate is likely to increase at some point during the coming months. If this is the case, then the country's leaders need to figure out how the nation deals not only with the long-term unemployed, but also with the long-term underemployment facing younger and less-educated Americans.

Gallup Daily tracking will provide continuous monitoring of the jobs situation in the weeks and months ahead.

How Economic Shifts Will Likely Change Your Job

Are We All Becoming Freelancers?
By Richard Greenwald, In These Times
July 2, 2010

We are living at the dawn of the freelance world, as more and more people find themselves working as consultants, contract workers or freelancers. This change in the way we work is as profound as the shift that occurred during the industrial revolution.

More than 25 percent of all working Americans are, whether they want to be or not, temporary laborers, and that number will surely rise in the coming years. (According to the Freelancers Union, which represents almost 100,000 contract workers in the New York City metro region, freelancers already comprise 30 percent of America’s workforce.) Job security and 9-to-5 jobs are becoming a relic of the past. This year’s college graduates enter a fragile economy offering more risk than guarantees, and far fewer jobs than applicants.

As corporations have prospered and gained labor flexibility, most workers have watched their futures decline. Neoliberalism has unlocked capital, freeing it from national borders; workers are increasingly a temporary, disposable expense. Firms can now hire on a project basis (anywhere), and no longer need to invest in large facilities or workforces.

Many readers of this magazine have tried to understand the complacency of today’s workers, particularly younger ones, who find themselves temping. Some of that complacency has to do with the growing freelance economy.

The larger social impact of freelancing has been well documented, but what is missing is an understanding of those businesses that encourage or are enriched by the new “gig” economy. We know little about the businesses that prop up freelancers, simultaneously nurturing and feeding off them. In fact, we tend not to think of these businesses collectively as an industry. But we should. From consultants to self-help book authors to the rise of “co-workplaces,” which provide freelancers with social interaction, an industry has developed that serves as both freelance cheerleader and parasite. It has defined the new gig culture, and it is time that we begin to understand this industry’s place in our economy.

On Amazon.com, thousands of books cater to the freelancer. Most are memoirs of success, more brands than books. And many are little more than glorified Powerpoint presentations. Daniel Pink’s 2001 book Free Agent Nation: The Future of Working for Yourself, part memoir, part DIY manifesto, is the model. He discusses how he wound up a freelancer and how he overcame his nervousness and embraced freelancing, which led to his great success. The book drives readers to Pink’s website, which in turn sends people to his seminars and other books.

Alan Weiss’s Getting Started in Consulting is designed to introduce his audience to basic business concepts. Again, the goal is to establish Weiss as a brand, a go-to consultant and public speaker. Simple books like The Wealthy Freelancer offer a “top 12” list of what to do, much like the Rich Dad, Poor Dad personal investing book franchise. Cutesy books like Undress for Success feature bunny slippers on the cover. I could go on and on.

These books and their authors do several things. As cheerleaders for freelancing, they celebrate the freedom, creativity and inevitable success and wealth to be found in this new way to work, which is part profession and part lifestyle. What they do not do is explore the realistic possibilities of failure and the fact that most freelancers struggle. Popular freelance books suggest success is the norm: If you are not a successful freelancer, you are not normal. In other words, the old free-market arguments about social mobility from the original Gilded Age are being applied to the new workplace: If you are not successful, it is your fault.

And how does one become successful as a freelancer? Through self-development, of course. Seduced by an ethos that says we can and should improve ourselves constantly, freelancers read more books and attend more seminars on freelancing in search of success. Often, the only ones succeeding are the authors and seminar leaders.

Another sector of businesses catering to the freelancer are co-work places. Freelancers can work from anywhere, or so it goes. But many prefer some social interaction. Others do not have the space or the peace to work from home. So, they share workspace. At so-called “third spaces,” such as Starbucks, a freelancer can set up shop for a small cost (usually coffee).

But coffee shops are not ideal—many limit space and charge for Wi-Fi. To solve this problem, about 10 years ago freelance offices began popping up in most major urban areas. Some cater to subfields of freelancers, such as artists, graphic designers or those in information technology and writing/journalism. These businesses operate much like gyms. They sell memberships (sometimes peak and off-peak), provide atmosphere (sometimes coffee, meeting rooms), a temporary office (desk, Wi-Fi, phones and faxes) and a social setting. To be successful, they need to keep their membership rates low enough to be competitive, so they sell more memberships than there are seats, with the hope that not everyone comes at once. They offer a sense of professionalism, as they know you feel better going to work at a place that feels like a mix between the university library and Starbucks.

Then there are the online businesses that connect or match freelancers to their gigs: www.elance.com, www.odesk.com and www.sologig.com. These firms match projects to freelancers and usually charge the project poster a small fee. There are other places for certain industries, like Mediabistro for media freelancers.

But in fact most freelance gigs are not found through a website, but rather through references, former employees or freelancers recommended by other freelancers. What these businesses more often do is connect advertisers to freelancers; their business model is based on a small amount of fees and lots of ad revenue.

A new trend is evidenced by www.fiverr.com, which allows freelancers to post any service that you can imagine as long as it is at a flat fee of $5. Anne Kadet, in the June 2010 issue of Smart Money, writes, “This new era of microentrepreneur is a welcome development for the struggling employers, not to mention casual freelancers who are happy to make a little cash off their hobbies.” Some freelancers are clearly moonlighting and have more stable jobs. But most are not hobbyists. They cannot afford to sell their labor for the lowest bidder, but that is happening on many of these websites, which seem to function like eBay in reverse. Lower bids get the gigs.

As the gig economy expands, business models for those catering to it will become ever more sophisticated. We are evolving into a society with an atomized world of work, where we are all rational economic men and women. We are also, as Barbara Ehrenreich writes in her new book Bright-Sided, perpetually seeking silver linings. Those who have found a way to succeed in the freelance culture have found silver. But most are stuck in the mines.

Temporary gigs continue to displace stable jobs that were once the norm, but somehow we’re unable to see the process for what it is: another fundamental transformation of America’s economy, and thus culture. In this time of economic transition, we must ask serious questions about those claiming to aid the workers of the new economy—freelancers. Are they friend or foe?

The new two income trap.

The financial raid against the middle class – 9 of the 10 largest occupations in the U.S. have median wages between $8 per hour and $14per hour. The middle class is inheriting a new serfdom drowning in mountains of debt.

The war against the  middle class is silent and has grown since the recession started.  We don’t hear much about this because in large part, those falling out of the middle class don’t have the funds to purchase airtime with the media who is wedded to Wall Street.  40 million Americans now receive food assistance.  How often do we hear about this?  Each month we add tens of thousands to this number yet we are somehow in a recovery?  A recovery for which group of people is the question we should be asking.  Clearly the middle class isn’t feeling this recovery.  Nearly 17 percent of our population is underemployed.  But then we add 20 percent of those who are employed who are part of the working poor.  If we look at the top 10 occupational sectors in the U.S. we start to realize that many in the middle class are giving up higher paying jobs to service the needs of a tiny elite class.

Take a look at the top 10 occupational sectors in the U.S.:

Source:  BLS

Keep in mind this group is part of the “fully employed” class.  When we think of those who are employed we tend to think that most work in sectors that offer them a decent wage.  That is not the case at all.  In fact, when we look at the median household income of $52,000 we realize that most people are working in the service sector with lower wages and only boost the stat higher because of the two income trap.  9 out of 10 of the above jobs from cashiers to janitors make median wages from $8 to $14.

“To even reach the middle class median income, someone would need to make $25 an hour.  So even looking at the higher end of the above pay scale for these jobs, you would need to have two people making the top $14 to squeak out the necessary $25 per hour to make the $52,000 median income figure.  Keep in mind the above is the top employment sectors in our economy.  In the past where we had a bulk of our population working in manufacturing making the median income wage with one job, now we have given that up for two jobs in service sector work.  I’m not sure many in the middle class wanted to make that trade off.”

Wall Street wouldn’t mind if most Americans were part of the working poor so long as they can keep their exploiting ways going.  In fact, these banks want to sink these people even further by creating this large class of middle class debt serfdom.  Enormous mortgages, student loan debt, and credit cards are the new chains to keep the working and middle class stuck in financial purgatory.  Keep in mind the money the banking industry funnels out is largely taxpayer dollars so the prison we are creating is largely with our own money.  Wall Street investment banks and the too big to fail financial sector is broke.  They would be nonexistent if it weren’t for the complete and generous handout from the U.S. Treasury and Federal Reserve.  How do they repay the people for this?  They begin by squeezing every ounce of productivity of those still working:

Now this is a fascinating chart.  Even in the worst economic crisis since the Great Depression somehow, we are able to become more productive.  Interestingly enough labor costs have fallen at the same time.  Of course the above translates to middle class workers having to put up with stagnant or falling wages while the bottom line keeps getting better.  But better for who?  The banking industry is juicing this game by gambling on Wall Street and not lending money out to the public.  This money was given to them under the pretense of keeping the loan channels alive for American workers.  So we have record foreclosures and bankruptcies while banks keep making billion dollar profits.  The raid on the middle class is like pirates taking the loot in broad daylight.

Yet the spin is out in full force.  Last month the rise in employment was largely from the government sector:

In fact, we can say that the entire rise in employment last month came because of temporary government work.  These Census jobs fall into the trend that we are seeing.  The middle class has to deal with transient work with no security and in order to have access to any semblance of a middle class lifestyle, must enter into a deal of debt serfdom with the banking elite.  We can see that we have hit an absolute structural tipping point in our society with the amount of long-term unemployed:

This is the largest percent of long-term unemployed in modern record keeping history.  What has happened is essentially the last hit against the middle class.  Without any security whatsoever, many are now unable to find work in a highly service oriented world.  The playing field is not level.  The banking sector fills the air with propaganda of the “free market” yet received trillions of dollars in handouts.  The hypocrisy is incredible and many Americans realize this.  This is why satisfaction with both Democrats and Republicans are at all time lows.  Both parties are beholden to the banking and Wall Street elite that work as a leech and are siphoning off every ounce of productivity from the American working and middle class.

The youth of our country are feeling this deeply:

The above chart would seem positive.  More students are taking summer school as opposed to working.  Yet this trend isn’t happening by choice.  It is happening by force.  There are little jobs for teens since they are competing with adults for low pay service sector jobs!  This is the idea of recovery in the new America.  A banking sector that is swimming in gold coins like Scrooge McDuck while middle class Americans find themselves competing with their own children for lower paying service sector jobs.

So what is the solution then?  How the argument is framed is completely false and the Federal Reserve is merely a protector of the banks.  They want to force austerity on the majority of Americans while banks and their predator executives still manage to keep their taxpayer subsidized yachts.  There is money but it went to the banking sector.  The game is fixed for most in the  middle class.  Until we break up the too big to fail banks and have a government that truly represents the people’s best interest, there is little reason to believe that the overall trend will reverse.  The fact that 9 out of our top 10 job sectors are from the low paying service sector is not good news.

The Mass Exodus From The Workforce

The Other Scary Jobs Chart
Joe Weisenthal | Jun. 5, 2010

Friday's jobs report was pretty rough, but actually the unemployment rate dipped to 9.7%. That's because, despite the lack of private sector hiring, a large swath of jobseekers decided to, for whatever reason, quit the workforce.

As Annaly Capital Management (via PragCap) notes, the civilian labor force fell by 322,000 May.
The spike up in the total flow from those "unemployed" to "not in the labor force" follow what looked like a couple of months worth of the reverse: people moving on net from not in the labor force to the unemployed, looking segment.

What it looks like is that a lot of frustrated workers were sold on the idea that there was some kind of recovery underway, and then realized they'd been lied to.

Jobless Claims, Inflation Jump as Economy Wobbles

Jobless Claims, Inflation Jump as Economy Wobbles

Reuters

18 Feb 2010 | 08:39 AM ET

The number of U.S. workers filing new applications for unemployment insurance unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economic recovery.

Initial claims for state unemployment benefits increased 31,000 to 473,000, the Labor Department said on Thursday. That compared to market expectations for 430,000.

Another report from the department showed prices paid at the farm and factory gate rose a faster than expected 1.4 percent from December after a 0.4 percent gain in December, as higher gasoline prices and unusually cold temperatures helped boost energy costs.

"When you have PPI moving up and still no progress in the jobs situation, that doesn't bode well for continued improvement in equity prices," said Alan Lancz, president at Alan B. Lancz & Associates in Toledo, Ohio.

Last week was the survey week for the employment report for February, which is scheduled for release in early March.

The labor market, hardest hit by the worst recession in seven decades, has lagged the economic recovery that started in the second half of 2009. The economy has lost 8.4 million jobs since the start of the downturn in December 2007.

The PPI report may give investors, who keeping a wary eye on inflation following massive efforts by the Federal Reserve to pull the economy out of its worst slump since the Great Depression of the 1930s, something to worry about.

"The bottom line is that the Fed is going to have some decisions to make at its next meeting, since it seems inflation is now back on the table," said Lancz.

Fed officials, keeping an eye on how quickly the recovering economy absorbs the excess slack that built up during the recession, have said they are likely to keep interest rates extraordinarily low for "an extended period."

About three-fourths of the increase in PPI last month was due to a 5.1 percent jump in prices for energy goods, the department said. Energy costs were pushed up by a spike in prices for gasoline, liquefied petroleum and home heating oil.

Strong energy prices overshadowed a slowdown in the food prices, which rose 0.4 percent after increasing 1.3 percent in December.

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index had been forecast to rise 0.1 percent in January.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

"It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline," said Millan Mulraine, an economics strategist at TD Securities in Toronto.

In the claims report, the four-week moving average of new claims, which irons out week-to-week volatility, fell 1,500 to 467,500, the Labor Department said. The number of people still receiving for benefits after an initial week of aid was unchanged at 4.56 million in the week ended Feb. 6.

This measure has held below the 5 million mark for eight straight weeks and analysts believe it is starting to reflect an improvement in the labor market rather than people merely dropping off rolls because they have exhausted their benefits.