U.S. jobs market tightens amid slow inflation growth

The number of Americans filing for unemployment benefits fell more than expected last week, pointing to shrinking labor market slack that could allow the Federal Reserve to raise interest rates again this year despite moderate inflation growth.

According to Reuters’ report, inflation could remain sluggish for a while as other data on Thursday showed import prices recorded their biggest drop in 15 months in May. The Fed on Wednesday raised interest rates for the second time this year amid expectations of moderate economic growth and further strengthening in the labor market.

“Labor is scarce and separations are low as companies try and hang onto skilled labor,” said John Ryding, chief economist at RDQ Economics in New York. “At present, it appears the labor market data rather than the inflation data are in the driving seat for data-dependent Fed policy.”

Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 237,000 for the week ended June 10, the Labor Department said on Thursday, better then economists’ expectations for a decline to 242,000.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 119 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller. The labor market is near full employment, with the jobless rate at a 16-year low of 4.3 percent.

While monthly job growth has slowed, record high job openings suggest that is likely because companies cannot find qualified workers. The number of people still receiving benefits after an initial week of aid increased 6,000 to 1.94 million in the week ended June 3.

The so-called continuing claims have now been below 2 million for nine straight weeks, pointing to diminishing labor market slack.

The upbeat labor market data helped to lift the dollar against a basket of currencies while prices for U.S. Treasuries fell. Stocks on Wall Street were trading lower, led by technology shares amid worries over stretched valuations.

Mixed factory data

In another report, the Labor Department said import prices declined 0.3 percent last month as the cost of imported petroleum products tumbled. That was the biggest drop since February 2016 and followed a 0.2 percent increase in April.

In the 12 months through May, import prices rose 2.1 percent, the smallest gain since last December. Import prices rose 3.6 percent year-on-year in April.

The slowdown in import prices suggests domestic inflation could remain soft for a while. Consumer inflation measures have slowed in recent months, retreating below the U.S. central bank’s 2 percent target.

The Fed on Wednesday acknowledged the ebb in price pressures and said it expected annual inflation rates to remain somewhat below 2 percent in the near term but to stabilize around the target over the medium term.

In May, import prices excluding petroleum were unchanged after increasing 0.3 percent in April. They increased 1.0 percent in the 12 months through May.

“Not enough to stir up inflation pressures,” said Chris Rupkey, chief economist at MUFG in New York.

A third report from the Fed showed manufacturing production fell 0.4 percent last month, weighed down by a 2.0 percent drop in motor vehicle assembly. With auto sales slowing and inventories bloated, motor vehicle production could remain a drag on factory output for a while.

Manufacturing output jumped 1.1 percent in April. It rose 1.4 percent in the 12 months to May, pointing to underlying strength in manufacturing, which accounts for about 12 percent of the U.S. economy.

That was supported by a survey from the New York Fed showing its Empire State current business conditions index surged 21 points to 19.8 in June, the highest reading since September 2014.

While another survey from the Philadelphia Fed showed a measure of business conditions in the mid-Atlantic region fell to a reading of 27.6 this month from 38.8 in May, unfilled orders and delivery times increased.

“This gives us some comfort that any deterioration in the manufacturing sector is not going to be especially severe,” said Daniel Silver, an economist at JPMorgan in New York.

Courtesy Reuters