WASHINGTON (Reuters) -U.S. producer prices were unchanged in February for the first time in seven months, while fewer Americans filed claims for unemployment benefits last week, pointing to a stable economy that should allow the Federal Reserve to keep interest rates steady next Wednesday.

But the calm painted by the reports from the Labor Department on Thursday could be upended by radical government spending cuts, which have pushed thousands of federal employees and contractors out of work, and an escalating trade war stemming from broad import tariffs.

The aggressive policies pursued by President Donald Trump's administration have sent business and consumer confidence plummeting, and raised the chances of a recession. U.S. airlines have cut their earnings estimates noting that corporations and consumers were scaling back spending because of mounting economic uncertainty. 

"No factory inflation and no worrisome job layoffs either, so there is nothing to slow the economy's advance for now," said Christopher Rupkey, chief economist at FWDBONDS.

"Nevertheless, the radical, buzz-saw cuts in spending and personnel down in Washington could eventually spread to the rest of the private economy in the months to come and it has already created enough uncertainty for company CEOs to potentially halt the economy's forward progress starting in the second quarter."

  The unchanged reading in the producer price index for final demand last month, the first since July, followed an upwardly revised 0.6% increase in January, the Labor Department's Bureau of Labor Statistics said.

Economists polled by Reuters had forecast the PPI climbing 0.3% after a previously reported 0.4% gain in January. In the 12 months through February, the PPI advanced 3.2% after rising 3.7% in January.

But as in the consumer price index data released on Wednesday, there were unfavorable details in the PPI components that go into the calculation of the Personal Consumption Expenditures (PCE) price indexes, tracked by the U.S. central bank for its 2% inflation target.

Goods prices rose 0.3%, with a 53.6% surge in wholesale egg prices accounting for two-thirds of the increase. Goods prices rose 0.6% in January. A raging bird flu outbreak is driving egg prices higher, boosting the cost of food. Wholesale food prices shot up 1.7% after increasing 1.0% in January.

Energy prices fell 1.2%. Excluding the volatile food and energy components, goods prices jumped 0.4%, the largest rise in two years. The so-called core goods prices gained 0.2% in January. Economists said it was likely that companies were raising prices ahead of tariffs.

President Donald Trump has ignited a trade war, raising tariffs on goods from China to 20%, with Beijing retaliating with duties of its own.

Trump imposed a new 25% duty on Canadian and Mexican imports, before providing a one-month exemption for goods that meet the rules of origin under the U.S.-Mexico-Canada Agreement on trade. Enhanced steel and aluminum tariffs drew swift retaliation from Europe and Canada.

Trump on Thursday threatened a 200% tariff on wine, cognac and other alcohol imports from Europe. Economists expect the deluge of tariffs to impact upcoming inflation data.

Stocks on Wall Street traded lower. The dollar advanced against a basket of currencies. U.S. Treasury yields fell.

SERVICES PRICES FALL

The cost of services fell 0.2% amid a 1.4% decline in margins for machinery and vehicle wholesaling, after rising 0.6% in January. There were also decreases in the margins for food and alcohol, automobiles and automobile parts as well as apparel, footwear, and accessories retailing.

But prices for hospital inpatient care jumped 1.0%, while the cost of outpatient services rebounded 0.3%. Portfolio management fees rose 0.5%, while airline fares were unchanged. Hotel and motel accommodation prices dipped 0.1%.

Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among the components that go into the calculation of the core PCE price index.

Economists estimated the core PCE price index increased 0.3% in February, with high odds of rounding up to 0.4%. Core PCE inflation gained 0.3% in January. It was forecast rising 2.7% year-on-year after advancing 2.6% in January.

The Fed is expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range next Wednesday, having reduced it by 100 basis points since September.

Financial markets expect the Fed to resume cutting borrowing costs in June after it paused its easing cycle in January amid a darkening economic outlook. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

A separate report from the Labor Department showed initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 220,000 for the week ended March 8.

Risks for the labor market are, however, skewed to the downside. Thousands of federal government workers, mostly on probation, have been fired by tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, an entity created by Trump to drastically shrink the government.

Unions representing some of the civil servants have challenged the layoffs, resulting in reinstatements. Agencies have a Thursday deadline to submit plans for large-scale layoffs. The federal government upheaval has not yet significantly filtered through to official labor market data.

A federal judge on Thursday ordered six agencies, including Veterans Affairs, to reinstate thousands of recently hired employees who have been fired.

A separate unemployment compensation for federal employees (UCFE) program, which is reported with a one-week lag, showed applications easing 54 to 1,580.

"With all the gyrations between DOGE, agency cuts, and the courts, the number of federal employees already going without a paycheck is unclear," said Andrew Stettner, a senior fellow at the Century Foundation. "What we know ... is that the cruel way in which Trump is cutting government payrolls is making it hard for laid-off federal employees to get benefits."

Spending cuts have, however, impacted contractors and nonprofits, lifting claims in Washington D.C., Maryland and Virginia.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 27,000 to a seasonally adjusted 1.870 million during the week ending March 1, the claims report showed.

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