By Lucia Mutikani

Labor Market Update

WASHINGTON (Reuters) – The number of Americans filing new applications for jobless benefits slipped last week, indicating a decline in re-employment opportunities for laid-off workers. This suggests that the unemployment rate likely remained elevated in August.

The labor market is showing signs of slowing but is doing so in a manner that keeps economic expansion on track. In fact, the economy grew at a faster rate than initially reported in the second quarter, driven by consumer spending. Corporate profits have also rebounded, which eases concerns about a recession.

While the labor market slowdown may allow the Federal Reserve to cut interest rates as soon as next month, the current data argues against a significant 50 basis point reduction. According to Christopher Rupkey, chief economist at FWDBONDS, “The soft landing narrative for the economy remains intact for now.”

Unemployment Claims

Initial claims for state unemployment benefits fell by 2,000 to a seasonally adjusted 231,000 for the week ending Aug. 24. Economists had forecast 232,000 claims. This decline follows an 11-month high in late July, as distortions from temporary motor vehicle plant shutdowns and Hurricane Beryl impacts diminish.

The Bureau of Labor Statistics previously estimated that employment growth was overstated by 68,000 jobs per month over the past year, but many economists consider this benchmark revision misleading. The revisions are based on data that may not account for jobs filled by undocumented immigrants.

Hiring Trends

The slowdown in hiring due to tighter monetary policy rather than layoffs has caught the attention of U.S. central bank officials. Fed Chair Jerome Powell mentioned that “the time has come for policy to adjust.”

Market Expectations

Financial markets anticipate that the Fed will begin its easing cycle next month with a 25-basis-point reduction in its benchmark overnight interest rate. The Fed has kept its policy rate in the current 5.25%-5.50% range for more than a year, following a series of rate hikes in 2022 and 2023.

Stocks on Wall Street were trading higher, while the dollar strengthened against a basket of currencies. U.S. Treasury prices fell.

Consumer Spending and Economic Growth

Continued unemployment claims, an indicator of hiring, increased by 13,000 to a seasonally adjusted 1.868 million during the week ending Aug. 17. This figure indicates prolonged unemployment spells.

Economists expect the jobless rate for August to remain near a three-year high of 4.3% or dip to 4.2%. The unemployment rate has increased for the last four months, partly due to an influx of labor supply resulting from immigration.

According to the Commerce Department, Gross Domestic Product (GDP) increased at a 3.0% annualized rate last quarter, revised up from an earlier estimate of 2.8%. Consumer spending saw a rise, partly driven by wages, while there were downgrades to business investment and exports.

Inflation remained moderate, enhancing purchasing power, and household disposable income grew by 1.0%. However, the personal saving rate fell to 3.3% from 3.5%. Corporate profits also rose to a record high, indicating stability that could support future business investments.

Despite the widening goods trade deficit and rising tariffs, economic growth is expected to decelerate but not lead to a recession. Gus Faucher, chief economist at PNC Financial, asserts that “Growth will slow in the near term, but there will not be a recession.”