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WRAPUP 1-U.S. trade deficit rises to near 9-1/2-year high; jobs market tightens

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* Trade deficit increases 1.6 percent in February

Exports, imports rise to record high

* Weekly jobless claims increase 24,000 to 242,000

By Lucia Mutikani

WASHINGTON, April 5 (Reuters) - The U.S. trade deficit increased to a near 9-1/2-year high in February, with both exports and imports rising to record highs, but the shortfall with China narrowed sharply.

News of the worsening trade deficit comes as the United States and China are embroiled in tit-for-tat tariffs which have rattled global financial markets. It also underscores the challenges confronting President Donald Trump's "America First" trade policies aimed at eradicating the deficit.

The Commerce Department said on Thursday the trade gap rose 1.6 percent to $57.6 billion, the highest level since October 2008. The deficit has now risen for six straight months. The goods trade deficit was the highest since July 2008 and the surplus on services was the lowest since December 2012.

Economists polled by Reuters had forecast the trade gap widening to $56.8 billion in February. Part of the rise in the trade deficit in February reflected commodity price increases.

The politically sensitive goods trade deficit with China fell 18.6 percent to $29.3 billion. The deficit with Mexico surged 46.6 percent in February.

The Trump administration on Tuesday targeted 25 percent tariffs on some 1,300 Chinese industrial technology, transport and medical products, to force changes in Beijing's intellectual property practices. China swiftly retaliated on Wednesday with a list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals

Trump, who claims the United States is being taken advantage of by its trading partners, has already imposed broad tariffs on imported solar panels and large washing machines. He has also slapped 25 percent import duties on steel and 10 percent on aluminum.

While these actions may prove politically popular with Trump's working class political base, especially in states hard-hit by factory closures and import competition, analysts warn they could undercut economic growth and raise prices for both consumers and producers.

Strong economic growth, which is drawing in imports, and the Trump administration's $1.5 trillion income tax cut package will worsen the trade deficit, economists say.

"By our calculations, the tax legislation and two-year budget deal will add $205 billion to the federal budget deficit this year, which increases the nominal trade deficit by $75 billion," said Ryan Sweet, an economist at Moody's Analytics in West Chester, Pennsylvania.

"In 2019, the tax legislation and budget deal will boost the federal deficit by $480 billion, boosting the trade deficit by $161 billion. Therefore, we expect trade to be a drag on U.S. GDP growth this year and next."

U.S. financial markets were little moved by data.

DRAG ON GROWTH

When adjusted for inflation, the trade deficit slipped to $69.11 billion from $69.96 billion in January. Still, the so-called real trade deficit is above the fourth-quarter average of $66.81 billion.

This suggests trade would subtract from first-quarter gross domestic product. Trade sliced 1.16 percentage points from fourth-quarter GDP growth. The economy grew at a 2.9 percent annualized rate during that period.

In February, exports of goods increased 2.3 percent to $137.2 billion, boosted by shipments of industrial materials and supplies as well as sales of motor vehicles and engines. There were also increases in exports of capital goods such as civilian aircraft and drilling and oilfield equipment.

Exports to China were unchanged in February.

Goods imports jumped 1.6 percent to $214.2 billion in February, lifted by imports of food, industrial materials and supplies, and capital goods.

Imports of services rose to a record $47.8 billion from $46.8 billion in January, likely boosted by royalties and broadcast license fees related to the Winter Olympics.

Imports from China declined 14.7 percent in February.

In a separate report on Thursday the Labor Department said initial claims for state unemployment benefits rose 24,000 to a seasonally adjusted 242,000 for the week ended March 31.

Economists polled by Reuters had forecast claims rising to 225,000 in the latest week. Last week's increase likely reflected difficulties adjusting the data around moving holidays like Easter and school spring breaks.

The labor market is considered to be near or at full employment. The jobless rate is at a 17-year low of 4.1 percent, not too far from the Federal Reserve's forecast of 3.8 percent by the end of this year.

The claims data has no bearing on March's employment report, which is scheduled for release on Friday. According to a Reuters survey of economists, nonfarm payrolls probably increased by 193,000 jobs in March. The unemployment rate is forecast falling one-tenth of a percentage point to 4.0 percent.

The claims report also showed the number of people receiving benefits after an initial week of aid fell 64,000 to 1.81 million in the week ended March 24, the lowest level since December 1973. That points to tightening labor market conditions. (Reporting by Lucia Mutikani Editing by Andrea Ricci)