Last week, the number of new unemployment benefit applications filed by Americans dropped more than anticipated, easing concerns about the labor market's stability and reinforcing the notion that a gradual softening is still in place. According to the Labor Department, initial claims for state unemployment benefits decreased by 17,000 to a seasonally adjusted 233,000 for the week ending August 3, marking the largest decline in approximately 11 months. Economists surveyed by Reuters had predicted 240,000 claims for the latest week. This positive turnaround follows a surprising surge in jobless claims the previous week, likely due to temporary factors such as motor vehicle plant shutdowns and Hurricane Beryl. The prior week's claims were revised slightly upwards to 250,000 from the initially reported 249,000.
This development also suggests that the unexpectedly poor monthly payrolls report for July, which raised concerns about the labor market's health, might have been partly a temporary anomaly caused by severe weather conditions preventing many from working. Following the release of this data, U.S. stocks rose, and benchmark Treasury yields climbed back above 4%. The U.S. dollar also strengthened against a basket of currencies. Marc Chandler, chief market strategist at Bannockburn Global Forex, commented, "The talk of an imminent recession seems wide of the mark." Investors in interest rate futures contracts reduced their bets on a significant Federal Reserve rate cut next month, adjusting the probability to about 58% from 70% prior to the release.
Claims have generally trended upwards since June, partly due to volatility related to motor vehicle plant shutdowns and Hurricane Beryl's disruptions in Texas. Unadjusted claims fell by 13,589 to 203,054 last week. Notably, claims dropped sharply in Michigan and Missouri, states heavily impacted by motor vehicle assembly plant operations, which had seen a rise in claims the previous week. Auto manufacturers typically shut down assembly lines in July for retooling for new models. Over the past few weeks, overall claims have remained near the high end of this year's range, but layoffs remain generally low. Government data showed that the layoffs rate in June was the lowest in over two years. The labor market's slowdown is being driven by less aggressive hiring, influenced by the Fed's interest rate hikes in 2022 and 2023, which have dampened demand.
The Fed closely monitors the comparison between jobless rolls and the size of the labor force to assess the job market's health. The labor force's growth has largely kept pace with the gradual increase in those claiming jobless benefits and is about where it was before the COVID-19 pandemic. Last week, the U.S. central bank maintained its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July, signaling its intention to reduce borrowing costs at its next policy meeting in September. However, the government's monthly nonfarm payrolls report last Friday indicated a significant slowdown in job gains in July and an increase in the unemployment rate to 4.3%, raising concerns in the market about the labor market's potential rapid deterioration.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased by 6,000 to a seasonally adjusted 1.875 million during the week ending July 27, continuing an upward trend. This has led some economists to remain cautious. Jeffrey Roach, chief economist at LPL Financial, advised, "Investors have to be careful not to read too much into one report like they did recently with the last payroll report. If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by a half of a percent." In other economic news, the housing market, struggling with high interest rates, received some positive updates. The average rate on the popular U.S. 30-year mortgage fell 26 basis points to 6.47%, its lowest level since May of last year, according to Freddie Mac. Additionally, U.S. wholesale inventories increased in June, contributing to economic growth in the second quarter, as reported by the Commerce Department's Census Bureau.
