In another scary sign for the sluggish U.S. economy, the Labor Department said yesterday that initial jobless claims last week rose 38,000 to 407,000 — the highest figure in three years.

The surging number of first-time unemployment benefit claims is a clear forewarning that the U.S. economy has sunk into a recession and more workers have lost jobs, according to economists.

In its monthly unemployment report today, the Labor Department is expected to announce more U.S. job losses in March for the third month in a row.

"Our view is that the economy has slipped into a recession, and we're going to see very sluggish growth for the first half of this year," says Michelle Meyer, a Lehman Bros. economist who noted that the 407,000 claims were the most since September 2005, just after Hurricane Katrina.

Economist Ian Shepherdson at High Frequency Economics called the jobless claims "a grim surprise" in a note to clients. He wrote that claims higher than 400,000 "clearly signal recession, though one week is not a trend."

The news — coupled with Federal Reserve Chairman Ben Bernanke's congressional testimony earlier this week that the U.S. economy might stall — spooked Wall Street and sent stock indexes falling in early trading. By the end of the day, though, the Standard & Poor's 500, the Dow Jones industrial average and Nasdaq all had recovered, finishing the day slightly higher.

Meyer and Andrew Gledhill, an economist at Moody's Econo my.com, believe that the March unemployment rate will rise to 5 percent, up from 4.8 percent in February. "Businesses are scaling back hiring plans, and layoffs are rising," Gledhill says.

The unemployment rate should peak at about 6 percent by the end of the year, as the U.S. economy starts to bounce back from the downturn, Meyer predicts.

Post-World War II recessions have lasted an average of six quarters, Meyer says. In recessions from the 1970s energy crisis through the 2001 dot-com bust, unemployment rates have ranged from 6 percent to 11 percent. Many economists believe that the Fed's recent rate cuts are warding off a worse recession. Meyer predicts that the Fed will continue to trim rates through early 2009.

In a separate economic indicator released yesterday, the Institute for Supply Management's Non-Manufacturing Index rose in March by 0.3 points to 49.6 percent.

A reading below 50 percent means the value of services in the United States contracted slightly during the month. The number reflects turmoil in the financial markets and construction that have rippled through the economy, Steven Wood of Insight Economics told clients.