Jobless Claims Fell Slightly Last Week, Housing Starts Decline 14.4% in May

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The labor market remains strong, but housing is slowing amid rising mortgage rates.

The number of Americans filing first-time claims for unemployment benefits fell by 3,000 to 229,000 last week, the Labor Department reported on Thursday.

Economists had forecast the number would be 220,000, following last week’s revised increase to 232,000.

The four-week moving average, meanwhile, was 218,500, an increase of 2,750 from the prior level.

The labor market remains strong but any indication it is cooling off would be welcomed by the Federal Reserve and companies, as the supply-demand balance for workers eases pressure on inflation.

The Fed on Wednesday raised interest rates by 75 basis points in an aggressive move against consumer inflation that is running at an 8.6% annual rate. Fed Chairman Jerome Powell cited the robust labor market as one reason why he thinks the economy can handle higher interest rates.

Job growth has averaged more than 400,000 a month so far this year, which is a level above what is generally thought of as enough to keep the labor market operating smoothly. The unemployment rate, meanwhile, is 3.6%, just shy of its pre-pandemic level. Powell said he thought the rate could rise to more than 4% and still be considered good by historic standards.

“Our objective really is to bring inflation down to 2% while the labor market remains strong,” Powell said at a press conference following the Fed’s announcement. But he acknowledged that some events were out of his control, such as the war in Ukraine that is wreaking havoc with food and energy costs worldwide.

“I think that what’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” Powell said.

Economists remain skeptical that Powell can break inflation without also causing economic pain.

“To get inflation lower quickly we ideally need the supply side capacity of the economy to better balance with strong demand,” James Knightley, ING’s chief international economist, and Padhraic Garvey, ING’s regional head of research in the Americas, wrote Wednesday.

“However, the geopolitical backdrop, Covid containment measures in Asia and the lack of worker supply in the US suggests this isn’t going to happen soon,” they added. “Consequently, inflation is likely to be slow and sticky on its descent, thereby putting the onus on the Fed to weaken demand via higher interest rates.”

The Bank of England followed the Fed on Thursday in raising interest rates 25 basis points, while also indicating inflation in the UK could worsen to 11% this year. That, along with markets coming to grips with the Fed’s move and increasing fears of recession, sent futures on the Dow Jones Industrial Average down nearly 500 points in premarket trading. The Dow had risen more than 300 points Wednesday but has mostly been on a downward trajectory in recent days.

“We are changing our base case forecast for next year from an economic soft landing to a mild recession starting in mid-2023,” Wells Fargo Securities Chief Economist Jay Bryson wrote on Wednesday. “Recent data suggest that inflation is becoming increasingly entrenched in the economy. High inflation is eroding real income, which likely will weigh on consumer spending growth in coming quarters.”

However, Bryson says any downturn “will be more or less equivalent in magnitude and duration to the downturn of 1990-1991. That recession lasted for two quarters with a peak-to-trough decline in real GDP of 1.4%.”

While much economic data of late has been strong, there are signs that higher interest rates and inflation are starting to bite. Retail sales fell in May by 0.3%, although sales of gasoline and food increased mainly due to inflation. Housing, meanwhile, has slowed from its red-hot pace with mortgage rates up more than two percentage points in recent months.

On Thursday, the Census Bureau reported that housing starts fell 14.4% in May, following a decline in April. Starts are now 3.5% below the rate of a year ago. Building permits dropped 7% from a month earlier.

“Uncertainty around quickly changing economic conditions has caused sentiment in the building industry to falter, and housing starts slowed in reaction to these factors, as well as in light of persistent supply chain issues,” said Kelly Mangold of RCLCO Real Estate Consulting.

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