WASHINGTON (Reuters) – The number of Americans filing new applications for unemployment benefits fell unexpectedly last week, touching a two-month low amid persistent tightness in the labor market and defying the Federal Reserve’s efforts to slow demand.
The second consecutive weekly decline in claims reported by the Labor Department on Thursday sparked cautious optimism that the economy could avoid a fearful recession this year. This came on the heels of recent data showing inflation eased in June. The strength of the labor market is also supporting wage growth, helping consumer spending continue to falter.
“Recession warning clouds have dispersed and corporate layoffs have eased,” said Christopher Rupke, chief economist at FWDBONDS in New York. “If there’s a recession out there, it’s one without a lot of job losses. We don’t know of any recession like that in economic history, so there shouldn’t be a looming recession.”
Initial claims for state unemployment benefits fell by 9,000 to a seasonally adjusted number of 228,000 for the week ending July 15, the lowest level since mid-May. Economists polled by Reuters had expected 242,000 claims in the last week.
Unadjusted claims fell from 326 to 257,976 last week. Claims rose by 5,059 in California and increased by 4,616 in Georgia.
There were also notable hikes in filings in South Carolina and Oregon, which were more than offset by large declines in Michigan, Kentucky, Indiana, New York, New Jersey, Iowa, and Illinois.
The decline in claims last week was likely exaggerated due to difficulties adjusting the data for seasonal patterns.
“This week’s seasonal adjustment factor projected a modest increase, reflecting the fact that initial filings tend to rise in the second full week of July each year,” said Lou Crandall, chief economist at Wrightson ICAP in Brooklyn, New York. However, this trend only applies to the weeks ending between July 8th and July 13th.
Automakers usually take a break in July to retool new models. But these temporary factory closures don’t always happen around the same time, which can throw off the model the government uses to remove seasonal fluctuations from the data.
Claims, relative to the size of the job market, are well below the 280,000 level that economists say indicates a significant slowdown in job growth. The job market remains tight as companies stockpiled workers after struggling to find work during the COVID-19 pandemic, even though the economy has slowed due to huge federal interest rate increases.
The US central bank is expected to resume raising interest rates next Wednesday after skipping an increase in June. The Fed has raised its policy rate by 500 basis points since March 2022, when it began the fastest tightening cycle in more than 40 years.
“Many employers are reluctant to cut staff despite the slowing economy, because the labor market is so tight, which could make hiring difficult if growth rebounds in six or twelve months,” said Bill Adams, chief economist at Comerica Bank in Dallas.
Economists shrugged off a separate report from the Conference Board showing that its Leading Economic Index, a measure of future US economic activity, fell for the 15th straight month in June, the longest such streak since 2007-08, when the economy was in the throes of the Great Recession.
“However, with most of the weakness in some of the sentiment-based indicators, the recession signal is not as strong as it seems,” said Michael Pearce, chief US economist at Oxford Economics in New York.
Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. US Treasury bond prices fell.
LOW LAYOFFS
The claims data covered the week during which the government surveyed businesses for the nonfarm payrolls component of the July employment report. Claims decreased during the survey weeks in June and July. The economy added 209,000 jobs in June.
The claims report showed the number of people receiving benefits after an initial week from Help, an employment agent, rose from 33,000 to 1.754 million during the week ending July 8.
At current levels, so-called continuing claims are low by historical standards, indicating that some laid-off workers are finding work quickly.
While the job market remains resilient, housing and manufacturing continue to struggle. A third report from the National Association of Realtors showed that existing home sales fell 3.3% in June to a seasonally adjusted annual rate of 4.16 million units, the lowest level since January.
The permanent shortage of homes on the market and high mortgage rates are weighing on sales. With supply in short supply, housing prices are rising again on a monthly basis. That combined with the average rate on a popular 30-year fixed mortgage of just under 7%, according to data from mortgage financing agency Freddie Mac, could drive first-time buyers out of the market.
Most homeowners have mortgage rates of less than 5%, which means they have no incentive to sell. The pace of sales last month was the weakest of any June since 2009, during the subprime mortgage crisis.
“Price stability may be enough to convince more owners to put their homes on the market, but the fate of existing home inventories and mortgage rates will likely remain linked for the foreseeable future,” said Eric Johnson, chief economist at BMO Capital Markets in Toronto.
A fourth report from the Federal Reserve Bank of Philadelphia showed that factory activity in the Mid-Atlantic region remained weak in July, but manufacturers were more optimistic about business conditions over the next six months.
“Weak commodity demand and higher borrowing costs continue to be hurdles,” said Rubela Farooqui, chief US economist at High Frequency Economics in New York.
“But restoring supply chains and infrastructure projects and stabilizing rates and demand can provide support for manufacturing activity over time.”
(Reporting by Lucia Mutikani) Additional reporting by Safiye Riddell in New York. Editing by Paul Simao and Andrea Ricci
Our standards: Thomson Reuters Trust Principles.
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