By Bob Willis Oct. 2 (Bloomberg) -- First-time applications for U.S. jobless benefits rose to the highest level in seven years as more Americans were thrown out of work in the aftermath of the Gulf Coast hurricanes and employers cut staff to meet slowing demand. Initial jobless claims increased 1,000 to 497,000 in the week that ended Sept. 27, from a revised 496,000 the prior week, the Labor Department said today in Washington. The total number of people collecting benefits was the highest since 2003. Mounting job losses spawned by the biggest housing recession in a generation undermined consumer spending even before the latest financial meltdown threatened to magnify the slump. The government may report tomorrow that the economy lost jobs in September for a ninth consecutive month. ``The financial turmoil and panic of the past several weeks has clearly done substantial economic damage,'' Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania, said in a Bloomberg Radio interview. ``This pretty much leaves little doubt that we're in a recession.'' Initial claims were estimated to decrease to 475,000 from 493,000 initially reported for the prior week, according to the median projection of 39 economists in a Bloomberg News survey. Estimates ranged from 432,000 to 525,000. Claims figures in recent weeks have been distorted by the fallout from Hurricanes Gustav and Ike that hammered the coasts of Texas and Louisiana and forced the evacuation of more than 2 million people from eastern Texas. Hurricane's Effect Job losses following the storms increased the number of claims by about 45,000, the Labor Department said. Excluding the hurricane-related jump, initial claims would have been about 439,000 last week, according to Bloomberg News calculations. The four-week moving average of initial claims, a less volatile measure, climbed to 474,000 from 462,500, today's report showed. The number of people continuing to collect jobless benefits increased to 3.591 million in the week ended Sept. 20, the most since September 2003, when the economy was recovering from a recession two years earlier. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, was unchanged at 2.7 percent. These data are reported with a one-week lag. Seventeen states and territories reported an increase in new claims, while 36 reported a decrease. Claims in Texas jumped by 22,000 and applications in Louisiana rose by 9,700 in the week of Sept. 20, reflecting the hurricanes. Job Losses Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows. So far this year, weekly claims have averaged 388,000 compared with an average 321,000 for all of 2007. The economy has lost 605,000 jobs in the first eight months of 2008. Tomorrow's payrolls report from the Labor Department may show another 105,000 jobs were eliminated in September, the most this year, according to economists surveyed by Bloomberg. The latest chapter in the credit crisis that led to the government's takeover of American Insurance Group Inc. and the bankruptcy of Washington Mutual Inc. and Lehman Brothers Holdings Inc. this month will spur more layoffs. Barclays Plc, the U.K. bank that bought parts of Lehman Brothers U.S. businesses, may cut as many as 5,000 jobs at the bankrupt company, Wall Street recruiters said last week. ``We've seen a lot of job losses already in the banking sector and I think we'll expect to see that continue,'' John Haley, chief executive officer of Watson Wyatt Worldwide Inc., an Arlington, Virginia-based human resources consulting firm, said in a Sept. 30 interview on Bloomberg Television. Carmakers and other manufacturers are also trimming staff. Chrysler LLC, cutting back as its U.S. sales shrink, said it will fire about 250 employees as part of a plan to eliminate 1,000 salaried positions last month. The rest of the reductions will be through buyouts and early retirements, the Auburn Hills, Michigan-based company last week. To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

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