U.S. Unemployment Claims Surge as Labor Market Cools

The number of Americans filing new claims for unemployment benefits reached a 10-month high, hinting at a weakening labor market. Producer prices also fell unexpectedly, adding fuel to the speculation that the Federal Reserve might cut interest rates in September. Economic indicators suggest a cautious but possible easing of monetary policy.

The number of Americans filing new claims for unemployment benefits increased to a 10-month high last week, suggesting the labor market was losing momentum and keeping hopes of a September interest rate cut from the Federal Reserve alive. That was reinforced by other data from the Labor Department on Thursday showing producer prices unexpectedly falling in May. The largest decline in prices at the factory gate since October followed news on Wednesday that consumer prices were unchanged in May for the first time in nearly two years.

The U.S. central bank on Wednesday kept its benchmark overnight interest rate in the current 5.25%-5.50% range, where it has been since last July. Fed officials pushed out the start of rate cuts to perhaps as late as December, with policymakers projecting only a single quarter-percentage-point reduction for this year. But economists remained optimistic that the Fed would reduce borrowing costs twice this year, starting in September. "These data nudge the door a little wider open for the Fed to start cutting interest rates later this year," said Bill Adams, chief economist at Comerica Bank.

Initial claims for state unemployment benefits jumped 13,000 to a seasonally adjusted 242,000 for the week ended June 8, the highest level since last August, the Labor Department said. Economists polled by Reuters had forecast 225,000 claims in the latest week. It was the third straight weekly rise in claims, leading some economists to believe that cracks were widening in the labor market. Others blamed lingering volatility related to the Memorial Day holiday in late May.

The four-week moving average of claims, which strips out seasonal fluctuations, increased 4,750 to a nine-month high of 227,000. Unadjusted claims shot up 38,530 to 234,707, driven by a 10,311 surge in California. Some economists speculated that the jump could reflect layoffs after a minimum wage hike for fast food workers in the state came into effect in April. "Initial claims have been drifting up for some time, but the big increase this week leaves the uptrend far harder to dismiss," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

"High long-term rates, tight credit conditions and a gradual softening in demand are starting to weigh more heavily on businesses, and on small companies in particular." Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

SEPTEMBER STILL IN PLAY Financial markets continued to anticipate that the Fed would begin its easing cycle in September. The Fed has raised its policy rate by 525 basis points since March 2022. The unemployment rate increased to a still relatively low 4% in May for the first time since January 2022.

Fed Chair Jerome Powell told reporters on Wednesday that "a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic, relatively tight but not overheated." The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 30,000 to a seasonally adjusted 1.820 million during the week ending June 1, the claims report showed. That was the highest reading since January for the so-called continuing claims, suggesting unemployed workers were having difficulties landing new jobs.

In a separate report, the Labor Department's Bureau of Labor Statistics said the producer price index for final demand decreased 0.2% in May. That was the biggest drop in the PPI since October and followed an unrevised 0.5% rise in April. Economists had forecast the PPI nudging up 0.1%. In the 12 months through May, the PPI gained 2.2% after rising 2.3% in April.

Goods prices fell 0.8%, with a 7.1% plunge in the cost of wholesale gasoline accounting for nearly 60% of the decline. Goods prices rose 0.4% in April. Wholesale food prices dipped 0.1% as the cost of eggs declined. Excluding food and energy, goods prices climbed 0.3% after gaining 0.2% in April. The cost of services was unchanged after accelerating 0.6% in April. Transport and warehousing prices fell 1.4%. Airline fares plunged 4.3%. Portfolio management fees dropped 1.8%, while hotel and motel room prices fell 0.5%. But healthcare costs increased.

Portfolio management fees, healthcare, hotel and motel accommodation, insurance and airline fares are among components that go into the calculation of the personal consumption expenditures (PCE) price indexes. The PCE price indexes are the inflation measures tracked by the Fed for it 2% target. The narrower measure of PPI, which strips out food, energy and trade services components, was unchanged after rising 0.5% in April. The core PPI increased 3.2% year-on-year, matching April's gain.

Based on the CPI and PPI data, economists estimated that core PCE inflation edged up 0.1% in May after climbing 0.2% in April. Core inflation is forecast to have increased 2.6% on a year-on-year basis in May after gaining 2.8% in April. "That supports our view that the Fed will cut rates twice this year, beginning in September," said Bernard Yaros, lead U.S. economist at Oxford Economics.

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