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US labor market still tight as weekly jobless claims edge up

The number of Americans filing new claims for unemployment benefits increased modestly last week, pointing to continued labor market tightness that could push the Federal Reserve to keep interest rates elevated.

Labor market resilience was underscored by other data on Thursday showing private payrolls increased more than expected in May, boosted by hiring in the leisure and hospitality industry as well as the natural resources and construction sectors.

Demand has remained strong despite 500 basis points worth of interest rate increases from the Federal Reserve since March 2022, when the U.S. central bank embarked on its fastest monetary policy tightening campaign since the 1980s.

“Labor market conditions are still tight,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York. “While we expect the Fed to leave rates steady at its upcoming meeting, a more sustained loosening of labor market conditions is needed to keep rate hikes permanently off the table.”

Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 232,000 for the week ended May 27, the Labor Department said. Economists polled by Reuters had forecast 235,000 claims for the latest week.

Unadjusted claims increased by 5,296 to 207,941 last week, with notable rises in New York, Ohio and Illinois. Only 58 claims were filed in Massachusetts, which had been swamped by fraudulent applications in recent weeks.

Though employment growth has slowed from last year’s robust pace, demand for labor remains strong. The government reported on Wednesday there were 10.1 million job openings at the end of April, with 1.8 vacancies for every unemployed person, well above the 1.0-1.2 range that is consistent with a labor market that is not generating too much inflation.

There have been high-profile layoffs in the technology sector and industries sensitive to interest rates, such as housing, but employers have been generally hoarding workers after difficulties finding labor in the wake of the COVID-19 pandemic.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased by 6,000 to 1.795 million during the week ending May 20, the claims report showed.

The claims data does not have a bearing on Friday’s employment report for May as it falls outside the survey period.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 190,000 jobs in May after rising by 253,000 in April. The unemployment rate is seen ticking up to 3.5% from a 53-year low of 3.4% in April.

U.S. stocks were mostly higher in early trading. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

Financial markets see a roughly 70% chance of the Fed keeping its policy rate unchanged at the U.S. central bank’s June 13-14 meeting, according to CME Group’s FedWatch Tool.

Expectations for a slowdown in job growth were supported by the Fed’s “Beige Book” report on Wednesday, which described the labor market as having “continued to be strong” in May, but noted that “many contacts” were “fully staffed.”

It added that some contacts “were pausing hiring or reducing headcounts due to weaker actual or prospective demand or to greater uncertainty about the economic outlook.”

A separate report from global outplacement firm Challenger, Gray & Christmas on Thursday showed job cuts announced by U.S.-based employers increased about 20% to 80,089 in May. Companies have announced 417,500 layoffs this year, a 315% surge from the same period last year. Excluding 2020, when the pandemic started, this is the highest January-May total since 2009.

But job growth may surprise on the upside. Private payrolls increased by 278,000 jobs last month after rising by 291,000 in April, ADP’s national employment report showed. Economists had forecast private employment would increase by 170,000.

The leisure and hospitality sector added 208,000 jobs. Payrolls in the natural resources and mining industry increased by 94,000 jobs, while construction employment rose by 64,000. But manufacturing shed 48,000 positions and financial activities employment decreased by 35,000.

Despite overall labor market strength, wage inflation is slowing. According to the ADP report, wage gains for workers changing jobs increased 12.1%, slowing by a full percentage point from April. Wages for those remaining in their jobs rose 6.5% after advancing 6.7% in April.

There was more encouraging news on the inflation front, with a separate report from the Labor Department showing unit labor costs – the price of labor per single unit of output – rebounded at a 4.2% rate in the first quarter.

That was a downward revision from the 6.3% growth pace estimated last month. Labor costs dropped at a 2.2% rate in the fourth quarter, rather than growing at a 3.3% pace as previously estimated. Unit labor costs rose at a 3.8% rate from a year ago, revised down from the previously reported 5.8% pace.

Nevertheless, labor costs are rising too quickly to be consistent with the Fed’s 2% inflation target.
Source: Reuters (Reporting by Lucia Mutikani; editing by Chizu Nomiyama and Paul Simao)

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