The US labor market remains tight as weekly jobless claims rise

WASHINGTON, June 1 (Reuters) – The number of Americans filing new jobless claims rose modestly last week, pointing to continued tightness in the labor market that could push the Federal Reserve to keep interest rates high.

The resilience of the labor market was underscored by other data on Thursday showing that private payrolls rose more than expected in May, boosted by hiring in the leisure and hospitality industries as well as the natural resources and construction sectors.

Demand has remained strong despite 500 basis point rate hikes by the Federal Reserve since March 2022, when the US central bank began its fastest monetary tightening campaign since the 1980s.

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

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

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

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

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

The number of people receiving benefits after a first week of assistance, a proxy for employment, rose by 6,000 to 1.795 million in the week ended May 20, the claims report showed.

The claims data have no bearing on Friday’s employment report for May as they fall outside the survey period.

According to a Reuters poll of economists, nonfarm payrolls likely rose by 190,000 jobs in May after rising by 253,000 in April. Unemployment ticks up to 3.5% from a 53-year low of 3.4% in April.

U.S. stocks were mostly higher in early trade. The dollar fell against a basket of currencies. Prices of US government bonds rose.

WAGE INFLATION IS STRIKING

The financial markets see a roughly 70% chance that the Fed will keep the key interest rate unchanged at the US central bank’s meeting on 13-14. June, 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 “remaining strong” in May but noted that “many contacts” were “fully staffed.”

It added that some contacts “halted hiring or reduced headcount due to weaker actual or prospective demand or greater uncertainty about the economic outlook.”

A separate report from global outplacement firm Challenger, Gray & Christmas on Thursday showed job cuts announced by US-based employers rose about 20% to 80,089 in May. Companies have announced 417,500 layoffs this year, an increase of 315% from the same period last year. With the exception of 2020, when the pandemic started, this is the highest January-May number since 2009.

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

The leisure and catering sector added 208,000 jobs. Payrolls in the natural resources and mining industry increased by 94,000 jobs, while employment in the construction industry rose by 64,000. But manufacturing lost 48,000 jobs and employment in financial services fell by 35,000.

Despite general strength in the labor market, wage growth is slowing. According to the ADP report, wage growth for workers who switched jobs increased 12.1%, slowing by a full percentage point from April. Wages for those remaining in work rose 6.5% after rising 6.7% in April.

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

It was a downward revision from the 6.3% growth estimated last month. Labor costs fell 2.2% in the fourth quarter, instead of growing 3.3% as previously estimated. Unit labor costs rose 3.8% from a year ago, down from a previously reported 5.8%.

Yet labor costs are rising too quickly to be consistent with the Fed’s 2% inflation target.

Reporting by Lucia Mutikani; editing by Chizu Nomiyama and Paul Simao

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