U.S. jobless claims and economic activity keep economy on track for gradual slowdown

By Lindsay Dunsmuir

(Reuters) – The number of Americans filing new claims for unemployment benefits rose last week but appeared to be stabilizing at a level close to a gradual cooling in the labor market that should pave the way for an interest rate cut by the Federal Reserve next month.

A slowdown in overall U.S. economic activity this month, as businesses struggle with a reduced ability to cope with price increases, added to evidence that the economy is slowing and inflation is falling to a degree that should allow Fed officials to focus more attention on the labor market.

While a rate cut is now widely expected next month, mortgage rates have already started to fall, helping fuel a bigger-than-expected rebound in existing home sales last month.

Initial jobless claims rose 4,000 to a seasonally adjusted 232,000 in the week ended Aug. 17, the Labor Department said on Thursday. Economists polled by Reuters had forecast 230,000 claims last week.

The latest data should continue to ease fears of a rapid deterioration in the labor market, first raised after a sharper-than-expected slowdown in employment growth in July, which also saw the unemployment rate hit a post-pandemic high of 4.3%.

Indeed, the latest jobless claims data covers the survey week for this month's Labor Department jobs report, and the stabilization of new claims indicates “a modest decline in the unemployment rate in August,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, said in a client note.

“Claims are stabilizing on a trend basis, which is consistent with our view that while the labor market is weakening, it is not weak enough to warrant a rate cut of more than 25 basis points at the Fed's September meeting,” she said.

Fed officials have said they are watching the labor market closely, aware that waiting too long to cut interest rates could do serious damage.

Layoffs, however, remain historically low, with much of the labor market slowdown coming from companies cutting back on hiring, driven by an immigration-driven increase in labor supply.

The Fed's planned 525 basis point rate hikes in 2022 and 2023 are dampening demand.

The U.S. central bank has kept its overnight interest rate at the current range of 5.25% to 5.50% for more than a year. With a first rate cut now widely expected at its September 17-18 policy meeting, market attention is turning to the size of that cut – a quarter or half a percentage point.

The story continues

The number of people receiving benefits after an initial week of aid, a proxy for employment, rose by 4,000 to a seasonally adjusted 1.863 million in the week ending Aug. 10, according to the claims report.

GROWTH STILL SOLID

The business activity report also underscored an orderly slowdown in the economy. S&P Global said Thursday that its U.S. composite production PMI, which tracks manufacturing and services, edged down to 54.1 this month, a four-month low but still a healthy level among the highest measured in the past two years. That follows a final reading of 54.3 in July.

An index above 50 indicates expansion in the private sector. The slight recovery observed in the services sector was overtaken by a slowdown in manufacturing.

Average prices charged for goods and services rose at the slowest pace since January, echoing reports from businesses that customers are resisting high prices by bargain-hunting, cutting back on purchases and opting for cheaper substitutes.

The virtually unchanged composite PMI suggests that economic activity remains strong in the third quarter. Gross domestic product expanded at an annualized pace of 2.8 percent in the second quarter, up from 1.4 percent in the January-March quarter.

“The strong growth in August suggests robust GDP growth above 2% annualized in the third quarter, which should help ease near-term recession concerns,” said Chris Williamson, chief economist at S&P Global Market Intelligence. “Similarly, the decline in sales price inflation to near the pre-pandemic average signals a ‘normalization’ of inflation and strengthens the case for lower interest rates.”

The index of new orders received by private businesses rose to 52.3 from 52.2 in July. The index of prices paid by businesses for inputs remained unchanged at 58.0, but the index of prices invoiced fell to 52.8 from 53.1 in July.

At the same time, U.S. existing home sales rose more than expected in July, reversing four consecutive monthly declines, as improving supply and falling mortgage rates raised hopes of a rebound in activity in the coming months.

Home sales rose 1.3 percent last month, to a seasonally adjusted annual pace of 3.95 million units, the National Association of Realtors said on Thursday. Economists polled by Reuters had forecast home resales would edge up to a pace of 3.93 million units.

Home resales, which account for a large portion of U.S. home sales, fell 2.5% year over year in July. The median price of existing homes jumped 4.2% from a year earlier to $422,600. Inventory rose 0.8% to 1.33 million units last month, while supply jumped 19.8% from a year earlier.

(Reporting by Lindsay Dunsmuir and Dan Burns; Editing by Chizu Nomiyama and Paul Simao)

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