U.S. labor market tightening; productivity drops in first quarter

WASHINGTON (Reuters) - New applications for U.S. jobless benefits fell sharply last week and the number of Americans on unemployment rolls hit a 17-year low, pointing to a tightening labor market that could allow the Federal Reserve to raise interest rates next month.

FIEL PHOTO: Job seeker Tony Harris (top) shakes hands with a representative from Verizon at a City of Boston Neighborhood Career Fair in Boston, Massachusetts, U.S., May 1, 2017. REUTERS/Brian Snyder

Diminishing job market slack has left companies scrambling for workers as they seek to shore up weak productivity, leading to a rise in labor costs. Other data on Thursday showed worker productivity falling in the first quarter.

“The tightening labor market is raising costs but firms are failing to improve productivity to offset those increases,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “There simply is no reserve army of the unemployed or underemployed to call on and hours worked are already fairly high.”

Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 238,000 for the week ended April 29, the Labor Department said. The decline unwound most of the prior two weeks’ increases, which economists had blamed on volatility arising from the different timings of the Easter holidays and spring breaks.

The Fed on Wednesday kept its benchmark overnight interest rate unchanged and said it expected labor market conditions would “strengthen somewhat further.” Officials at the U.S. central bank also viewed the pedestrian 0.7 percent annualized economic growth pace in the first quarter as likely “transitory” and expected economic activity to expand at a “moderate” pace.

Most economists expect a rate hike in June. Jobless claims have now been below 300,000, a threshold associated with a healthy labor market, for 113 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller. The labor market is close to full employment, with the unemployment rate at a near 10-year low of 4.5 percent.

The number of people still receiving benefits after an initial week of aid declined 23,000 to 1.96 million in the week ended April 22, the lowest level since April 2000.

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The dollar was trading lower against a basket of currencies and prices for U.S. Treasuries fell. Stocks on Wall Street also were lower.


Last week’s claims report has no bearing on April’s employment report due on Friday as it falls outside the survey period. Claims were low in April compared to March. A separate report from global outplacement consultancy Challenger, Gray & Christmas on Thursday showed U.S.-based employers announced 36,602 job cuts in April, down 15 percent from March.

The layoffs were concentrated in the retail sector, which has been hit by store closures amid stiff competition from online retailers. According to a Reuters survey of economists, job growth likely rebounded 185,000 following March’s paltry 98,000 gain, which was the smallest in 10 months.

In another report, the Labor Department said productivity decreased at a 0.6 percent annualized rate in the first quarter, the weakest in a year, after rising at a 1.8 percent pace in the fourth quarter. It increased at a 1.1 percent rate compared to the first quarter of 2016.

Productivity has increased at an average annual rate of 0.6 percent over the last five years, well below its long-term rate of 2.1 percent from 1947 to 2016. Weak productivity suggests economic growth is likely to remain moderate.

“The (Trump) administration is looking for 3 percent trend real GDP growth and, given the demographic effects of an aging population on the workforce, such an outcome would require productivity growth to be significantly above its long-run trend for a decade,” said John Ryding, chief economist at RDQ Economics in New York.

With productivity soft, unit labor costs jumped at a 3.0 percent pace in the first quarter after rising at a 1.3 percent rate in the fourth quarter. They increased at a 2.8 percent rate compared to the first quarter of 2016.

A fourth report from the Commerce Department showed the trade gap dipped 0.1 percent to $43.7 billion in March as both imports and exports fell, signaling slackening domestic and global demand.

In another report, the department said new orders for U.S.-made goods increased for a fourth straight month in March and orders for capital equipment were stronger than previously reported, suggesting a sustained recovery in the manufacturing sector.

Reporting By Lucia Mutikani; Editing by Andrea Ricci