The number of Americans filing new claims for unemployment benefits fell more than expected last week, pointing to continued labor market strength, though financial markets turmoil is casting a shadow over the economy.
Other data on Thursday also struck a fairly upbeat note on the economy, with homebuilding surging in February, potentially setting the stage for a spring housing market revival. Imported inflation pressures were subdued last month, but regional manufacturing activity remained depressed.
The reports and rising fears of contagion in the banking sector pose a dilemma for the Federal Reserve when policymakers meet next Tuesday and Wednesday. Economists have lowered their growth estimates for this year, citing tighter credit and financial conditions following the recent collapse of two regional banks, as well as trouble at Credit Suisse (CSGN.S).
“The Fed has a tough balancing act ahead as it battles to restore price stability without rattling financial markets further and causing a recession,” said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets in Toronto.
Initial claims for state unemployment benefits decreased 20,000 to a seasonally adjusted 192,000 for the week ended March 11, the Labor Department said. The drop was the largest since July. Economists polled by Reuters had forecast 205,000 claims for the latest week.
Unadjusted claims declined 21,396 to 217,444 last week. Claims in New York tumbled 15,305, reversing the prior week’s jump, which had been attributed to a mid-winter school break.
There were notable declines in filings in California, Georgia, Oregon and Minnesota, offsetting significant increases in Indiana and Ohio.
Despite job cuts by major technology companies, the labor market has remained resilient, with employers generally reluctant to lay off workers after struggling to find labor during the COVID-19 pandemic.
Persistent labor market tightness, with 1.9 job openings for every unemployed person in January, and stubbornly high inflation support the case for the Fed to continue raising interest rates next week. But the failure of Silicon Valley Bank in California and Signature Bank in New York, has led some economists to urge caution.
Financial markets were on Thursday expecting a 25-basis-point rate hike at the Fed’s March 21-22 policy meeting, according to CME Group’s FedWatch tool.
They had wavered between a quarter-point rate hike and pause of the U.S. central bank’s most aggressive monetary policy tightening campaign since the 1980s. The Fed has raised its benchmark overnight interest rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range.
Economists expect the small banks’ stress to raise the cost of funding for businesses, especially for small establishments, and tighten the availability of credit, with ripple effects on the labor market and economic growth. Goldman Sachs on Thursday raised the probability of a U.S. recession over the next 12 months by 10 percentage points to 35%.
“We were already expecting a meaningful slowdown in growth and job gains over the coming months, and the prospect of substantial tightening in credit conditions raises the risk that a soft landing turns into a harder one,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York.
U.S. stocks rose. The dollar slipped against a basket of currencies. U.S. Treasury prices fell.
The claims report also showed the number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 29,000 to 1.684 million during the week ending March 4. The low so-called continuing claims suggest some laid-off workers could be easily finding new work for now.
The battered housing market could be finding a floor. Single-family homebuilding, which accounts for the bulk of homebuilding, increased 1.1% to a seasonally adjusted annual rate of 830,000 units last month, the Commerce Department reported. Single-family starts rose in the Northeast and West, but tumbled in the densely populated South and the Midwest.
Single-family homebuilding dropped 31.6% on a year-on-year basis in February. But the worst of the housing market downturn could be over. A survey on Wednesday showed the National Association of Home Builders/Wells Fargo Housing Market Index increased for a third straight month in March, though homebuilder sentiment remains depressed.
Mortgage rates, which had resumed their upward trend, could start falling as U.S. Treasury yields have declined sharply amid the banking sector turmoil.
“Low yields could help support housing activity into the spring season,” said Veronica Clark, an economist at Citigroup in New York.
Housing starts for projects with five units or more shot up 24.1% to a rate of 608,000 units, the highest level since last April. Multi-family housing construction remains underpinned by demand for rental accommodation, and more supply could help to lower inflation.
Overall housing starts surged 9.8% to a rate of 1.450 million units last month, the highest level since September.
Permits for single-family housing increased 7.6% to a rate of 777,000 units after declining for 11 months. Permits for housing projects with five units or more jumped 24.3% to a rate of 700,000 units. Overall, building permits vaulted 13.8% to a rate of 1.524 million units.
Another report from the Labor Department showed import prices slipped 0.1% last month after decreasing 0.4% in January. In the 12 months through February, import prices dropped 1.1%, the first decline since December 2020.
But import prices outside fuels rose solidly, indicating that the fight against inflation is far from over.