By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new applications for unemployment benefits fell slightly last week as the labor market continued to tread water, but a drop in new COVID-19 cases has raised cautious optimism that momentum could pick up by the spring.

The weekly unemployment claims report from the Labor Department on Thursday, the most timely data on the economy’s health, also highlighted labor market scarring, with at least 20.4 million people on unemployment benefits in late January.

“Claims remain stuck at painfully high levels,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “But we are seeing hopeful signs that claims will begin meaningful declines in the next month or two.”

Initial claims for state unemployment benefits slipped 19,000 to a seasonally adjusted 793,000 for the week ended Feb. 6. Data for the prior week was revised to show 33,000 more claims received than previously reported. Economists polled by Reuters had forecast 757,000 applications for the latest week.

Unadjusted claims decreased 36,534 to 813,145 last week. Including a government-funded program for the self-employed, gig workers and others who do not qualify for the regular state programs, 1.148 million people filed claims last week.

Claims remain above their 665,000 peak during the 2007-2009 Great Recession, though they are below the record 6.867 million reported last March when the pandemic hit the United States.

The labor market recovery has stalled in recent months as the country battled a resurgence in coronavirus infections, which ravaged restaurants and other consumer-facing businesses. The government reported last Friday that the economy created only 49,000 jobs in January after losing 227,000 in December.

U.S. stocks opened higher. The dollar was steady against a basket of currencies. U.S. Treasury prices were mixed.

GLIMMERS OF HOPE

But there are glimmers of hope on the horizon. Reported new coronavirus cases in the United States dropped 25% last week, the biggest fall since the pandemic hit the nation. Infections have now fallen for four consecutive weeks, according to a Reuters analysis of state and county reports.

Should the trend continue and the distribution of vaccines broaden out, that could allow more businesses to reopen.

President Joe Biden’s proposed $1.9 trillion recovery package on top of nearly $900 billion in additional pandemic relief provided by the government in late December could also support the labor market.

For now the slack in the labor market remains immense. The claims report showed that people receiving benefits after an initial week of aid fell 145,000 to 4.545 million in the ended Jan. 30. But the decline in the so-called continuing claims was mostly due to people exhausting their eligibility for benefits, limited to 26 weeks in most states.

At least 4.778 million people were on extended benefits during the week ended Jan. 23. These benefits, which are funded by the government, will expire in mid-March if the U.S. Congress does not pass the Biden administration’s rescue package.

Another 1.653 million were on a state program for those who have exhausted their initial six months of aid. That meant 6.4 million people have been unemployed for more than six months.

“This is by the far the highest we have seen at any point during this crisis,” said AnnElizabeth Konkel an economist at Indeed Hiring Lab. “Long term joblessness is happening right now and is a very real challenge for the recovery.”

About 20.435 million people were receiving benefits under all programs during that period, highlighting the labor market scarring. The economy has recovered 12.3 million of the 22.2 million jobs lost during the pandemic.

The Congressional Budget Office has estimated employment would not return to its pre-pandemic level before 2024.

(Reporting by Lucia Mutikani; Editing by Paul Simao)