By Peter Bergman (MoneyAmped.com)
The amount of Americans submitting fresh requests for unemployment benefits dropped beyond initial predictions last week, alleviating concerns that the job market was deteriorating and reaffirming that a gradual weakening is still in place.
The Labor Department reported that there was a significant decrease in initial claims for state unemployment benefits. The number fell by 17,000 to a seasonally adjusted 233,000 for the week ended Aug. 3. This drop is the largest in approximately 11 months. According to a survey conducted by Reuters, economists had predicted that there would be 240,000 claims for the most recent week.
This was a positive change following the unexpected increase in unemployment claims last week. It is probably due to the diminishing effects of temporary closures in motor vehicle plants and Hurricane Beryl. The previous week’s count was adjusted slightly to 250,000, up from the previously stated 249,000.
Furthermore, it provides further support to the notion that the seriousness of last week’s monthly payroll report for July, which was worse than anticipated, was partially influenced by a substantial disruption caused by inclement weather, resulting in a significant number of individuals being unable to work.
After the release, U.S. stocks increased, while benchmark Treasury yields climbed back over 4%. The U.S. dollar also gained strength against various currencies.
“The speculation about a forthcoming economic downturn appears to be inaccurate,” commented Marc Chandler, the primary market strategist at Bannockburn Global Forex.
Traders involved in interest rate futures contracts have reduced their expectations of the Federal Reserve initiating a decrease in borrowing costs next month. Following the recent update, the likelihood of a 50-basis-point reduction has dropped from 70% to approximately 58%.
The number of claims has been steadily increasing since June, partly due to the fluctuations caused by the temporary closure of motor vehicle plants for retooling and the disruptions caused by Hurricane Beryl in Texas. The number of unadjusted claims decreased by 13,589, reaching a total of 203,054 for the previous week.
There was a significant decline in claims reported in Michigan and Missouri, both states known for their prominent motor vehicle assembly plants. It is worth noting that these same states experienced an increase in claims during the previous week. Car manufacturers usually pause production in July to make adjustments for upcoming models.
In recent weeks, the number of claims has consistently remained towards the upper end of this year’s range. However, the number of layoffs continues to stay relatively low. The latest government data revealed that the rate of job cuts in June reached its lowest point in over two years. A more restrained approach to recruitment is fueling the deceleration in the labor market, as the Federal Reserve’s increases in interest rates throughout 2022 and 2023 diminish the level of demand.
The Federal Reserve also closely tracks the relationship between the number of unemployed individuals and the overall labor force to assess the strength of the employment market. The expansion of the workforce has largely matched the gradual increase in the number of individuals receiving unemployment benefits, which is approximately at the same level as it was prior to the outbreak of the coronavirus.
Last week, the U.S. central bank decided to maintain its benchmark overnight interest rate within the 5.25%-5.50% range, which has remained unchanged since last July. However, policymakers indicated their intention to lower borrowing costs at their upcoming policy meeting in September.
Nevertheless, the latest nonfarm payrolls report released by the government last Friday revealed a significant deceleration in job gains during July. This, coupled with a rise in the unemployment rate to 4.3%, has raised concerns in the market about the potential deterioration of the labor market. As a result, there is growing speculation that the Federal Reserve may need to take decisive measures to address this situation.
The number of individuals obtaining benefits following the first week of assistance, which serves as an indicator for employment, rose by 6,000 to reach a seasonally adjusted 1.875 million during the week ending July 27, as indicated by the claims report. This demonstrates a continued upward trajectory, which made certain economists hesitant.
“Investors should exercise caution and avoid placing excessive importance on a single report, as they have done in the recent past with the previous payroll report,” advised Jeffrey Roach, the chief economist at LPL Financial (NASDAQ:LPLA). “Should the data decline rapidly from this point, the Federal Reserve may opt for more decisive measures in September and reduce rates by 0.5%.”
Wholesale Inventories Experience an Increase
On Thursday, there was some positive news for the housing market, which has been facing challenges due to high interest rates. The median rate on the well-liked U.S.
30-year mortgage rate dropped 26 basis points to 6.47% this week, reaching its lowest point since May of last year, as per data from mortgage finance agency Freddie Mac.
The Commerce Department’s Census Bureau reported a rise in U.S. wholesale inventories in June, contributing to overall economic growth in the second quarter. Wholesale inventories increased by 0.2% in June, which is in line with the previous estimate. Wholesale stocks experienced a modest increase of 0.5% during May.
According to economists surveyed by Reuters, it was anticipated that inventories, which play a crucial role in gross domestic product, would increase by an unchanged 0.2%. In June, inventories saw a slight increase of 0.1% compared to the same period last year.
The economy expanded by 2.8% during the second quarter, a twofold increase from the initial quarter. During the April-June period, private inventory investment made a positive contribution of 0.82 percentage points to GDP growth. This was a significant turnaround from the previous two quarters when it had a negative impact. The positive contribution from private inventory investment more than compensated for the 0.72 percentage point decrease caused by a larger trade gap.
In June, wholesale motor vehicle inventories increased by 0.8%. Wholesale inventories, excluding autos, increased by 0.1%. This element is factored into the computation of GDP.
Wholesale sales declined slightly by 0.6% in June, following a modest increase of 0.3% in May. In June, wholesalers experienced a slight increase in the time it would take them to clear their shelves, with the sales pace indicating a timeframe of 1.37 months, compared to 1.35 months in May.
