U.S. labor market strengthening, factories struggling

WASHINGTON (Reuters) - The number of Americans filing for unemployment benefits last week fell from a five-month high, suggesting sustained labor market healing that could lead to further Federal Reserve interest rate hikes next year.

Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012. REUTERS/Mike Segar

The sign of underlying economic strength came a day after the U.S. central bank raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, the first increase in nearly a decade.

“The labor market continues to stay tight with demand for workers strong and pockets of actual shortages in many industries. The Fed has achieved the employment part of its dual mandate and this is what triggered the rates liftoff yesterday,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 271,000 for the week ended Dec.12, the Labor Department said on Thursday.

It was the 41st straight week that claims remained below 300,000, a threshold associated with strong labor market conditions. That is the longest such run since the early 1970s.

The four-week moving average of claims, considered abetter measure of labor market trends as it strips outweek-to-week volatility, slipped 250 to 270,500 last week.

The Fed said in its policy statement on Wednesday that there had been “further improvement” in the labor market and that “underutilization of labor resources” had diminished appreciably since the beginning of the year.

Despite the labor market momentum, there remains no respite for the manufacturing sector, which has been slammed by a robust dollar, deep spending cuts by energy firms, weak global demand and efforts by businesses to reduce an inventory glut.

A separate report from the Philadelphia Federal Reserve showed its gauge of manufacturing activity in the region fell to -5.9 this month from 1.9 in November. It was the third negative reading in the past four months.

Factories in the mid-Atlantic region reported that new orders continued to decline this month, though there was an increase in shipments. Order books shrunk, while inventories increased for the first time in four months.

“The intense headwinds facing the U.S. manufacturing sector continue to linger,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

A survey early this month showed manufacturing, which accounts for 12 percent of the U.S. economy, contracted in November for the first time in three years. The weak Philadelphia Fed survey brought it in line with other regional surveys that have been mired in contractionary territory.

U.S. stocks fell, while the dollar jumped to a fresh two-week high against a basket of currencies. U.S. government debt prices rose.


The claims data covered the survey period for December nonfarm payrolls. The four-week average of claims dipped 500 between the November and December survey periods, suggesting another strong month of job gains. Payrolls increased by 211,000 in November.

“We expect a 200,000 December nonfarm payroll increase, with limited upside risk from a tight claims path,” said Michael Englund, chief economist at Action Economics in Boulder, Colorado.

Dollar strength, which has eroded exports and the profits of multinational corporations, helped to push the current account deficit in the third quarter to its highest level in nearly seven years, another report from the Commerce Department showed.

The current account deficit, which measures the flow of goods, services and investments into and out of the country, increased 11.7 percent to $124.1 billion, the largest shortfall since the fourth quarter of 2008.

The current account was also pressured by an increase in remittances, government grants and pensions, and dividend payments to foreign individuals and entities.

The deficit represented 2.7 percent of gross domestic product, the biggest share since the second quarter of 2012, up from 2.5 percent in the second quarter. The current account shortfall, however, is not a problem as the United States continues to attract ample income from overseas.

“With rates of return in foreign economies likely to remain depressed for the foreseeable future, we look for the dollar to strengthen further in the coming quarters,” said Jay Bryson, global economist at Wells Fargo in Charlotte, North Carolina.

Reporting by Lucia Mutikani; Editing by Paul Simao