The Labor Department reported on Thursday that the number of Americans filing new claims for unemployment benefits experienced an unexpected decline last week. This decline was the largest in 20 months and served as a positive sign for the economy, potentially leading the Federal Reserve to resume raising interest rates in July. Prior to this decline, initial jobless claims had been steadily increasing over the past three weeks, reaching levels not seen since October 2021. This increase in claims had caused concern among economists, who speculated that layoffs were on the rise as a result of the Fed’s rate hikes.
The economy’s resilience and strong labor market are helping to defy predictions of a recession. New data revealed that the economy grew faster than previously estimated in the first quarter, thanks to robust consumer spending. Additionally, reports from this month have shown better-than-expected employment growth in May, as well as gains in retail sales and housing starts. These positive indicators have led economists to question whether a recession is truly inevitable or if the economy could achieve a soft landing.
For the week ending June 24, initial claims for state unemployment benefits decreased by 26,000 to a seasonally adjusted 239,000. This drop was the largest since October 2021 and surpassed economists’ forecast of 265,000 claims. The recent increase in claims over the past three weeks was partly due to policy changes in Minnesota, which made hourly paid school workers eligible for state unemployment benefits during the summer break. Suspected fraud in Ohio also contributed to the increase.
When looking at unadjusted claims, there was a decrease of 17,843 to 233,048 claims last week. Notably, claims dropped by 10,108 in California and 9,187 in Texas. Pennsylvania saw a decline of 3,263 claims, while Minnesota reported a decrease of 2,387. These decreases offset a 6,013 surge in Connecticut and a 5,206 jump in New Jersey.
It is worth noting that claims could become volatile in July due to temporary plant closures by automakers as they retool for new models. These closures do not always occur at the same time, which can disrupt the government’s model for removing seasonal fluctuations from the data.
Despite the recent increase in claims, they are still well below the level of 280,000 that some economists believe would signal a significant slowdown in job growth. In fact, employment growth has been averaging 314,000 jobs per month this year. Experts have also noticed that there is currently no sign of a substantial deterioration in demand for workers, further indicating the strength of the labor market.
Financial markets have already priced in a 25 basis points rate hike at the Federal Reserve’s upcoming policy meeting in July. Fed Chair Jerome Powell has expressed that the moderate pace of interest rate decisions is expected to continue, following the pause in June.
In addition to the positive news about unemployment claims, the revised first-quarter gross domestic product (GDP) figures were released. The Commerce Department reported an increase in GDP growth to a 2.0 percent annualized rate, up from the previously estimated 1.3 percent pace. This revision was due to upgrades in consumer spending and exports. The economy grew at a 2.6 percent pace in the fourth quarter of the previous year. The upward revision to GDP growth came as a pleasant surprise to economists who had expected a smaller increase to a 1.4 percent pace.
Several industries contributed to the GDP growth, including healthcare and social assistance, retail trade, agriculture, real estate, and rental and leasing, as well as accommodation and food services. However, seven industries, including finance and insurance, manufacturing, and wholesale trade, had a negative impact on GDP.
Furthermore, corporate profits saw a decline for the third consecutive quarter. However, the decline in the first quarter was not as steep as initially estimated. After-tax profits only decreased at a 1.2 percent rate instead of the previously estimated 2.1 percent pace. This data indicates that economic output contracted at a 1.8 percent rate when measured from the income side. Gross domestic income (GDI), which measures the total income generated within the country, was initially estimated to have declined at a 2.3 percent pace in the first quarter. While GDP and GDI should be equal, there is often a difference due to the different sources of data used for calculation.
The average of GDP and GDI, considered a better measure of economic activity, showed a slight increase of 0.1 percent last quarter instead of the previously reported decline of 0.5 percent. Economists expect that when the government revises the data later this year, GDI will be revised towards GDP.
Overall, the unexpected decline in unemployment claims, along with the upward revision to GDP growth, are positive indicators for the US economy. These factors suggest that the economy is displaying resilience and may be able to avoid a recession. As a result, the Federal Reserve may be prompted to resume raising interest rates in July. However, claims could become volatile in the coming months, and economists will continue to closely monitor the labor market and other economic indicators for further insight into the economy’s trajectory.
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