Unemployment Claims and Producer Prices Overview

By Lucia Mutikani
WASHINGTON (Reuters) – The number of Americans filing new applications for unemployment benefits increased slightly last week, indicating low layoffs despite a slowing labor market.

Other data from the Labor Department on Thursday revealed that producer prices rose a bit more than expected in August, primarily due to an uptick in service costs. The stable labor market alongside persistent inflation raises questions about the Federal Reserve’s potential interest rate cut next Wednesday, which many anticipate will mark the beginning of an easing cycle.

Recent reports also showed that the unemployment rate dropped in August from a near three-year high reached in July, with inflation data displaying some continuity in trends. Financial markets have significantly reduced the expectations of a half-point rate reduction to under 15%.

“Producer prices are not too hot and the employment markets are not deteriorating too much either, so there is probably no need for Fed officials to surprise the markets with a bigger-than-expected 50 basis points rate cut next week,” said Christopher Rupkey, chief economist at FWDBONDS.

Initial claims for state unemployment benefits rose by 2,000 to a seasonally adjusted 230,000 for the week ending Sept. 7, aligning with economists’ expectations. The previous week’s data included Labor Day holiday effects.

Claims have fluctuated around public holidays, having stabilized since falling from an 11-month high of 250,000 in late July. Unadjusted claims decreased by 12,968 to 177,663 last week, aided by substantial drops in California, Georgia, Michigan, Ohio, and New York, with no state reporting increases over 1,000.

A slowdown in the labor market is notably influenced by businesses reducing hiring due to higher borrowing costs affecting economic demand. Recent government data indicated that nonfarm payrolls had a lesser-than-expected increase in August, yet the unemployment rate fell from 4.3% July to 4.2%.

Financial markets estimated a roughly 13% chance of a 50 basis point rate cut at the Fed’s soon upcoming policy meeting, according to CME Group’s FedWatch Tool, while the odds for a 25 basis point cut were around 87%.

The central bank retained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year, after raising it by 525 basis points in 2022 and 2023.

In broader market activity, stocks on Wall Street were mixed, and the dollar fell against the euro. The European Central Bank reduced interest rates on Thursday without providing an explicit indication of future actions. U.S. Treasury yields appeared relatively stable.

Services Prices Rebound

The number of individuals receiving ongoing benefits, which is a proxy for hiring, rose by 5,000 to a seasonally adjusted 1.850 million during the week ending Aug. 31. There’s potential for a decrease in continuing claims in the upcoming weeks as schools in Minnesota resumed for the new academic year in September.

Non-teaching staff in Minnesota can apply for unemployment benefits throughout summer breaks, explaining the surge in continuing claims witnessed in July, reminiscent of levels from late 2021. The decline in continuing claims during August aligns with the collapsing unemployment rate.

With a cooler labor market, the threat of escalating inflation appears low. A separate report from the Labor Department indicated the producer price index (PPI) for final demand rose by 0.2% in August, and July’s data was revised lower to indicate no change rather than a rise of 0.1% as initially suggested. Economists anticipated a 0.1% increase in the PPI for August.

Over the 12 months leading to August, the PPI gained 1.7%, the slowest growth in six months and following a 2.1% climb in July. A 0.4% rise in services largely contributed to the PPI increase in August, with notable boosts from hotel and motel room prices, which surged by 4.8%. Prices for doctor consultations remained stable, although hospital outpatient care increased by 0.2% while inpatient care costs held steady.

Airline fares decreased by 0.8%. Portfolio management fees showed no change, while trade services, representing the margins received by wholesalers and retailers, grew by 0.6%, indicating businesses retain pricing power despite consumer resistance to rising prices.

Components such as portfolio management fees, hotel accommodations, and airline fares help calculate the personal consumption expenditures (PCE) price indexes, which the Fed monitors for its 2% inflation target.

Wholesale goods prices remained unchanged in August following a 0.6% rise in July. Energy prices fell by 0.9%, while food prices experienced a slight gain of 0.1%. Core goods prices climbed by 0.2%, matching the gain from July. The narrower measure of PPI, excluding food, energy, and trade, rose by 0.3%, similar to July’s increase. The core PPI reflected a yearly increase of 3.3%, slightly above the 3.2% seen in July.

Estimations for the PCE price index, omitting food and energy volatility, ranged from a 0.14% to 0.18% increase in August. Core PCE inflation was noted to have risen by 0.2% in July.

Forecasts indicate a potential annual growth in core inflation of 2.7% for August, slightly above July’s 2.6%. This annual increase is attributed to the previous year’s lower readings dropping out of the calculations.

“The six-month annualized run rate, however, would cool to 2.3% from 2.6% in July, while the three-month annualized rate remains below 2%,” remarked Michael Hanson, economist at J.P. Morgan.