The number of Americans filing new applications for unemployment benefits fell more than expected last week, calming fears the labour market was unravelling and reinforcing that a gradual softening remains intact.
Initial claims for state unemployment benefits fell 17,000 to a seasonally adjusted 233,000 for the week ended August 3, the Labor Department said yesterday, the largest drop in about 11 months. Economists polled by Reuters had forecast 240,000 claims for the latest week.
It was a welcome reversal after last week’s surprise sharp jump in jobless claims, and most likely reflects a fading in the impact from temporary motor vehicle plant shutdowns and Hurricane Beryl. The prior week’s tally was revised up slightly to 250,000 from the previously reported 249,000.
It also adds more evidence to the possibility that the severity of last week’s worse-than-expected monthly payrolls report for July was partly an outsized blip due to the record number of people unable to work because of bad weather.
US stocks gained following the release, while benchmark Treasury yields rose back above 4 per cent. The US dollar also strengthened against a basket of currencies.
“The talk of an imminent recession seems wide of the mark,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Investors in interest rate futures contracts pared bets the Federal Reserve will start cutting borrowing costs next month with a bigger-than-usual 50-basis-point reduction to about a 58pc probability from 70pc before the release.
Claims have been on a roughly upward trend since June, with part of the rise blamed on volatility related to the motor vehicle plant shutdowns for retooling and disruptions caused by Hurricane Beryl in Texas. Unadjusted claims dropped 13,589 to 203,054 last week.
Claims fell sharply in Michigan and Missouri, states with a heavy presence of motor vehicle assembly plants which saw claims rise the prior week. Auto makers typically idle assembly lines in July to retool for new models.
Over the past few weeks overall claims have been hovering near the high end of the range this year, but layoffs remain generally low. Government data last week showed the layoffs rate in June was the lowest in more than two years. The slowdown in the labour market is being driven by less aggressive hiring as the Fed’s interest rate hikes in 2022 and 2023 dampen demand.
The Fed also closely monitors how jobless rolls compare to the size of the labour force to gauge the health of the jobs market. Growth in the labour force has largely kept pace with the gradual rise of those claiming jobless relief and is about where it was before the coronavirus pandemic.
The US central bank last week kept its benchmark overnight interest rate in the 5.25pc-5.50pc range, where it has been since last July, but policymakers signalled their intent to reduce borrowing costs at their next policy meeting in September.
However, the government’s monthly nonfarm payrolls report last Friday showed job gains slowed markedly in July and the unemployment rate rose to 4.3pc, alarming markets at that point that the labour market may be deteriorating at a pace that would call for strong action from the Fed.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 6,000 to a seasonally adjusted 1.875 million during the week ending July 27, the claims report showed, continuing an upward trend. That caused some economists to remain wary.
“Investors have to be careful not to read too much into one report like they did recently with the last payroll report,” said Jeffrey Roach, chief economist at LPL Financial. “If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by a half of a per cent.”
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