US jobless claims fall sharply, easing recession fears

The number of Americans filing new claims for unemployment benefits fell sharply last week, according to Reuters, easing fears of a possible slowdown in the US labour market.

In a boost to the US labour market, the Labor Department said on Thursday that initial claims for state unemployment benefits dropped 17,000 to a seasonally adjusted 233,000 for the week ended August 3.

This was the largest decline in almost 11 months and better than economists' expectations of 240,000 claims.

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The drop in claims for state unemployment benefits came on the heels of a surprise spike the week before that was probably driven by seasonal shutdowns at motor vehicle plants as well as effects from Hurricane Beryl.

Claims from the previous week were revised slightly higher to 250,000 from the previously reported 249,000.

The better-than-expected jobless claims data lifted financial markets. US equities advanced, while benchmark Treasury yields climbed above 4 per cent.

The US dollar was also higher against a basket of currencies following the release of the data.

Marc Chandler, chief market strategist at Bannockburn Global Forex, commented, "The talk of an imminent recession seems wide of the mark.". Investors scaled back their expectations for a drastic interest rate cut by the Fed any time soon.

Bets on a 50 basis point rate cut in September fell to 58 per cent from 70 per cent before the data was released.

Much of the uptick in claims since June has been blamed on temporary factors, such as auto plant retooling and bad weather.

Claims dropped the most in Michigan and Missouri, two states with significant motor vehicle assembly operations.

Automakers usually idle their assembly lines for retooling during July to bring on new models, a factor that makes for volatility in jobless claims. Although claims have been lingering toward the higher end of this year's range, layoffs have generally remained low.

Government data for June showed the layoff rate was the lowest in over two years.

The slowing labour market seems to be largely a function of less aggressive hiring as interest rate hikes by the Fed in 2022 and 2023 dampen demand.

The Fed is looking closely at claims as a share of the labour force—the claims ratio—for evidence of labour market health.

Labour force growth has generally kept pace with the modest increase in claims, which has changed little from pre-pandemic levels.

Indeed, last week the Fed voted to keep its benchmark overnight interest rate within the 5.25 per cent-5.50 per cent range but signaled a possible cut of borrowing costs at its September meeting.

While a positive jobs-claims outcome, some caution remains. The number of beneficiaries due to continuing claims and the number of people continuing to receive benefits after an initial week of aid measure of hiring trends was 6,000 to a seasonally adjusted 1.875 million in the week ending July 27, continuing an upward trend.

If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by half a per cent," said Jeffrey Roach, chief economist at LPL Financial, urging investors not to overreact to one report.

In other economic news, the Commerce Department's Census Bureau reported that US wholesale inventories increased by 0.2 per cent in June, adding to economic growth in the second quarter.

The rise followed a 0.5 per cent increase in May. Inventories, a major contribution to gross domestic product, added 0.82 percentage points to GDP growth in the April-June quarter, helping to offset a 0.72 percentage point drag from the wider trade gap.

Wholesale motor vehicle inventories climbed 0.8 percent in June while wholesale inventories of less autos advanced by 0.1 percent.

Sales at wholesalers dropped 0.6 per cent in June after a 0.3 per cent rise in May, suggesting there are some residual issues in the wholesale sector.