Written by Lucia Mutikani
WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits held steady at a low level last week, indicating a labor market that remains fairly tight and is expected to continue to support the economy in the second quarter.
Economists largely ignored other data from the Labor Department on Thursday that showed worker productivity growth nearly stalled in the first quarter, noting that the trend in productivity remained strong. They also argued that there is a seasonal imbalance, which tends to bias GDP and lower productivity in the first quarter.
On the face of it, a sharp slowdown in productivity and the accompanying rise in labor costs would raise concerns about building inflationary pressures as well as shrinking profit margins, which could impact labor demand.
“We believe such concerns are misplaced,” said Conrad Diquadros, chief economic advisor at Brain Capital. “We have identified a residual seasonal adjustment bias in measures of quarterly GDP growth that leads to lower first-quarter growth, and since productivity is measured by sector GDP divided by hours worked, this bias also leads to lower productivity.”
Initial claims for state unemployment benefits were unchanged at a seasonally adjusted level of 208,000 for the week ending April 27. Economists polled by Reuters had expected 212,000 claims in the last week. Claims ranged between 194,000 and 225,000 this year.
Although demand for labor has declined, with job openings falling to a three-year low in March, layoffs remain very low as companies hold on to their workers after challenges in finding labor during and after the COVID-19 pandemic.
The Federal Reserve on Wednesday left the US central bank's benchmark overnight interest rate unchanged in the current range of 5.25% to 5.50%, where it has been since July.
Federal Reserve Chairman Jerome Powell told reporters on Wednesday that progress on lowering inflation has stalled. Powell described the labor market as remaining “relatively tight,” but also noted that “supply and demand conditions are now in better balance.” He has opposed talk of stagflation and the need for the central bank to raise interest rates again.
Since March 2022, the Fed has raised interest rates by 525 basis points. Labor costs and inflation jumped in the first quarter.
Layoffs are low
The number of people receiving benefits after an initial week of aid, an indicator of employment, was also unchanged at a seasonally adjusted level of 1.774 million during the week ending April 20, the claims report showed.
The claims data has no impact on the April employment report, which is scheduled to be published on Friday. Nonfarm payrolls are likely to increase by 243,000 jobs in April after an increase of 303,000 in March, according to a Reuters survey of economists. The unemployment rate is expected to remain unchanged at 3.8%.
In a separate report released Thursday, the Labor Department's Bureau of Labor Statistics said nonfarm productivity, which measures hourly output per worker, increased at an annual rate of 0.3% in the first quarter after rising at a 3.5% pace in the October-December period.
The government on Friday corrected productivity data from 2019 to 2023 due to a mathematical error.
Economists had expected productivity to increase by 0.8%. Productivity advanced by 2.9% compared to last year. Economists monitor productivity to gauge how quickly labor costs can rise without reigniting inflation.
Unit labor costs – the price of labor per unit of production – jumped to an average of 4.7% from January to March after remaining unchanged in the previous quarter. Labor costs rose 1.8% compared to last year.
Compensation rose 5.0% in the most recent quarter after rising 3.5% in the October-December quarter. It increased by 4.7% compared to last year.
“The underlying trend in productivity growth continues to look very healthy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “The 1.8% year-over-year growth in unit labor costs is easily consistent with the inflation target (2%) and supports the Fed’s view that the labor market has moved to a better equilibrium.”
(Reporting by Lucia Mutikane; Editing by Chizu Nomiyama and Paul Simao)
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