With jobless claims setting highs not seen in years, Americans should brace themselves for more pain to come.

The struggling economy, coupled with tight spending on the part of consumers means retailers won’t be hiring this holiday season. Add the fact that many companies retool their headcount as the end of the year nears, and an already deteriorating labor market is poised to get worse.

“We expect to see further increases in jobless claims and higher unemployment,” said Marc Pado, U.S. market strategist for Cantor Fitzgerald. “We’re expecting unemployment to rise into the first quarter.”

On Thursday the labor market got some more bad news when the Labor Department reported the number of new jobless claims was up 32,000 to 516,000 in the latest week. Economists polled by Thomson Reuters had expected the initial jobless claims to come in at 484,000. The 516,000 number hasn’t been seen since right after the Sept. 11, 2001, terrorist attacks.

While dire predictions call for unemployment rates to reach into the double digit range many economists predict unemployment will top out at between 7% and 8%. They said while the unemployment rate won’t be as bad as the recession in the 1980’s it will be worse than the downturn of 2001.

“I don’t think we are nearing a bottom,” said Robert Strand, a senior economist at American Bankers Association. “The economy is struggling. We expect a couple more quarters of weak growth.”

According to economists, unemployment is a lagging indicator which means the unemployment rate will hit its peak after the economy starts to show signs of improvement. Pado of Cantor Fitzgerald said unemployment isn’t likely to reach its high until somewhere in the second or third quarter of next year.

But what has to be done in order for the jobs market to improve and for new jobs to be created? The economists said it’s a combination of government action and letting the markets work themselves out.

“We’ll see the stimulus help prop things up,” said Jay Bryson, an economist at Wachovia. “Inventory not falling anymore, consumer spending starting to stabilize, that will help.” Not to mention that if President-elect Barack Obama gets his way and gets a stimulus plan through Congress that puts money toward infrastructure improvements, it could go a long way in creating new jobs.

“Hospitals, schools, roads, bridge, levees…these things need to be shored up anyway. Instead of increasing unemployment insurance why not create jobs,” said Pado, noting sending people another stimulus check won’t help in jobs creation.

And while bailing out General Motors (GM) may not be popular choice, the economists believe that a failed GM would have a grave impact on the jobs market, not only with the manufacturer but with all of the businesses that supply and support the auto industry.

“They have to save GM. There will be 250,000 jobs lost on day one -- and that growing to one million in a relatively short period of time,” said Pado. “Maybe if it was a strong economy then it can withstand a hit like that…but in this economic environment, we can’t afford to let a big employer like that go under.”