By Lucia Mutikani

WASHINGTON (Reuters) - The number of Americans filing new applications for unemployment benefits increased to an 11-month high last week, suggesting some softening in the labor market, though claims tend to be volatile around this time of the year.

The report from the Labor Department on Thursday also showed the number of people on jobless rolls swelling in mid-July to the highest level since late 2021. It could fan fears of a rapid labor market deterioration, which surfaced last month when data showed the unemployment rate rose to a 2-1/2-year high of 4.1% in June.

The report was supportive of a September interest rate cut, though most economists cautioned against reading too much into the rise in claims, arguing that adjusting the data for seasonal fluctuations was a challenge in summer because of temporary automobile plant closures for retooling.

Federal Reserve Chair Jerome Powell told reporters on Wednesday that while he viewed the changes in the labor market as "broadly consistent with a normalization process," policymakers were "closely monitoring to see whether it starts to show signs that it's more than that."

"Widespread temporary layoffs in the vehicle industry for retooling have greatly varied in the last three Julys following the complete shutdown in 2020 for COVID," said Stuart Hoffman, senior economic advisor at PNC Financial. "The labor market is still historically strong, but not quite as strong as it was in 2022 and 2023."

Initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 249,000 for the week ended July 27, the highest level since August last year. Economists polled by Reuters had forecast 236,000 claims for the latest week.

Claims broke above the upper end of their 194,000-245,000 range for this year. The four-week moving average of claims, which strips out seasonal fluctuations from the data, rose 2,500 to 238,000 last week.

Filings have been on an upward trend since June, with part of the rise blamed on the temporary motor vehicle plant shutdowns and disruptions caused by Hurricane Beryl in Texas.

Unadjusted claims dropped 10,012 to 215,827 last week. That was less than half of the 21,901 decline that the seasonal factors, the model used by the government to iron out seasonal fluctuations from the data, had expected.

Claims surged 4,033 in Michigan and shot up 3,352 in Missouri, states with a heavy presence of motor vehicle assembly plants. Auto makers typically idle assembly lines in July to retool for new models, but the schedules are different for every manufacturer.

Claims also increased in Massachusetts. Applications in Texas dropped 6,232 after surging in the prior two weeks. They remained above their pre-hurricane level. Filings also decreased in New York, Ohio, Florida, Tennessee and South Carolina.

Claims rose in July last year through the first half of August, before fully reversing course by early September. Government data on Tuesday showed the layoffs rate in June was the lowest in more than two years.

"We suspect that some of the recent uptick will turn out to be a function of seasonal adjustment issues that will be smoothed out in future revisions, but the trend is still higher than we anticipated this summer," said Lou Crandall, chief economist at Wrightson ICAP.

Aside from the seasonal volatility, anecdotal evidence still points to a loss of labor market momentum. An Institute for Supply Management (ISM) survey on Thursday showed a measure of factory employment dropping to a four-year low in July. Its manufacturing PMI dropped to an eight-month low.

Comments from companies were downbeat, with some describing business as "slowing," markets showing "weakness" and demand continuing to "soften."

The Fed on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July, but opened the door to reducing borrowing costs as soon as its next meeting in September.

Stocks on Wall Street were trading lower. The dollar advanced against a basket of currencies amid rising geopolitical tensions. The yield on the benchmark 10-year U.S. Treasury note fell to the lowest level since early February.

STRONG WORKER PRODUCTIVITY

The slowdown in the labor market is being driven by low hiring as the U.S. central bank's rate hikes in 2022 and 2023 dampen demand. A third report on Thursday from global outplacement firm Challenger, Gray & Christmas showed planned job cuts by U.S.-based companies dropped 47% to 25,885 in July. They, however, planned to hire only 3,676 workers in July.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 33,000 to a seasonally adjusted 1.877 million during the week ending July 20, the highest level since November 2021, the claims report showed. The claims data has no bearing on July's employment report as it falls outside the survey period.

The government is expected to report on Friday that nonfarm payrolls increased by 175,000 jobs last month after rising by 206,000 in June. The unemployment rate is forecast unchanged at 4.1%, having risen for three consecutive months.

The flow of upbeat news on inflation continued. A fourth report from the Labor Department's Bureau of Labor Statistics on Thursday showed nonfarm productivity, which measures hourly output per worker, increased at a 2.3% annualized rate in the second quarter after rising at a 0.4% pace in the January-March period. Productivity advanced at a 2.7% pace from a year ago.

Unit labor costs - the price of labor per single unit of output - rose at a 0.9% rate in the April-June quarter after advancing at a 3.8% rate in the first quarter. The government reported on Wednesday that annual labor costs recorded their smallest rise in 2-1/2 years in the second quarter.

"The revival in productivity growth is encouraging for the broader inflation and economic outlook," said Gregory Daco, chief economist at EY-Parthenon. "If firms can generate strong productivity growth, they will be able to control costs and protect margins without sacrificing talent in an environment of still-elevated wages and fading pricing power."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)