IMPEACH BUSH

NEW YORK (CNNMoney.com) -- The number of Americans filing for first-time unemployment benefits fell sharply last week, according to a government report released Wednesday, as a year filled with layoffs and income cuts draws to a close.

The Labor Department said initial filings for state jobless benefits fell to 492,000 for the week ended Dec. 27, a decline of 94,000 from the 26-year high of 586,000 claims a week earlier.

Economists were expecting jobless claims to slip to 575,000, according to a consensus survey by Briefing.com.

It's the first time claims were below 500,000 since the week ended Nov. 1, when the government reported 481,000 initial claims. So far this year, job losses have totaled 1.9 million.

The prior week, which ended Dec. 20, saw the highest number of jobless claims since Nov. 27, 1982, when initial filings hit 612,000.

"It's been an end-of-year roller coaster," said Carl Riccadonna, senior U.S. economist at Deutsche Bank.

The data follow two reports released Tuesday that painted a grim picture of the economy. Home prices posted a record year-over-year decline of 18% for the month of October, and consumer confidence hit an all-time low this month.

Economic effects

The unemployment data has ramifications far beyond the jobs numbers, Riccadonna said.

Consumer spending makes up about 70% of the U.S. economy, and as the credit crunch has dried up Americans' borrowing ability, they're relying on income more than ever for buying power, he said.

"This is a very negative omen for consumer spending in 2009," Riccadonna said. "Until the job market stabilizes, it's hard to see buyer spending increasing, and without that 2009 is likely to be a very sluggish year in economic terms."

Riccadonna said seasonal adjustments have become increasingly complicated, a problem compounded by abnormalities like extended auto plant shutdowns.

"All seasonal patterns are out of whack," he said. "We have to look at data over several weeks, and in that case you still see pretty large uptick in the overall trend."

Over the past four weeks, new unemployment claims have risen to an average of 552,250 a week, down 5,750 from the previous week's unrevised average of 558,000.

The four-week moving average is designed to smooth out some of the week-by-week fluctuations in the statistics and provide a wider view of the job market.

This week, the report was released a day early due to the New Year holiday on Thursday. The holidays this week and last week were likely "a huge factor in the data's recent volatility," Riccadonna said.

California saw jobless claims increase the most, by 20,866, the report said, due to layoffs in the trade and service industries. They fell the most in Massachusetts, by 4,016.

The number of people continuing to collect unemployment benefits increased to 4,506,000 in the week ended Dec. 20, the most recent data available. That was a jump of 140,000 from the previous week's revised level.

Over the past four weeks, continuing claims averaged 4.422,500, an increase of 103,750 from the previous week's revised average.

2009 outlook

"We have very little reason to believe the job market will improve anytime soon," Riccadonna said. "Things have deteriorated immensely and they will continue to do so in 2009."

He noted that periods of economic contraction usually occur one or two quarters before a labor downturn. That lag means "the ugly job state we've seen will likely be even more severe next year," Riccadonna said.

He predicted the unemployment rate will continue to rise next year, peaking at 8.6% by the end of 2009.

Riccadonna said he expected the economy "will start to gain traction in the second half of next year, and the job market will follow one or or two quarters later."