The number of Americans submitting new claims for jobless benefits decreased last week, reversing nearly half of the increase from the beginning of the month. This suggests that labor market conditions are still relatively tight despite cooling job growth.

The US Economy is Slowing Down

The US economy experienced further slowing, attributed to the delayed effects of significant interest rate hikes by the Federal Reserve at the beginning of the second quarter. Single-family homebuilding declined again in April, reaching an eight-month low for permits issued for future construction. Factory output unexpectedly decreased, and nonfarm payrolls and retail sales have thus far fallen short of economists' expectations, as revealed in April's job reports.

While the economy loses momentum due to restrictive monetary policy, Sal Guatieri, a senior economist at BMO Capital Markets, noted that it is uncertain how quickly inflation will decrease to offer some relief in interest rates.

The Cooling Job Market's Adjustment

The Labor Department reported that initial claims for state unemployment benefits decreased by 10,000 to a seasonally adjusted 222,000 for the week ending May 11. Economists surveyed by Reuters had anticipated 220,000 claims for the latest week. Claims had surged to an eight-month high in the previous week.

Unadjusted claims fell by 13,325 to 196,725. New York saw a sharp decline of 9,442 claims, nearly reversing a previous surge attributed to layoffs in transportation, warehousing, accommodation, food services, and educational services industries. Illinois and Indiana experienced significant decreases in filings, outweighing a considerable increase in Florida.

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During the week ending May 4, the number of individuals receiving benefits after an initial week of aid, which serves as a proxy for hiring, rose by 13,000 to a seasonally adjusted 1.794 million, as indicated in the claims report. These so-called continuing claims continue to remain low compared to historical standards.

The labor market is gradually adjusting following a series of rate hikes totaling 525 basis points by the US central bank since March 2022. These hikes were aimed at tempering demand in the broader economy, which has increased the likelihood of a rate cut in September, coupled with the return to a downward trend in inflation. Earlier this month, the Fed maintained its benchmark overnight interest rate within the current range of 5.25%-5.50%, which has remained unchanged since July. 

The Fed's Inflation Obstacles

However, obstacles are expected in the journey to reach the Fed's 2% inflation target. A distinct report from the Labor Department revealed a notable surge in import prices, rising by 0.9% last month, marking the most substantial increase since March 2022, following an upwardly revised 0.6% rise in March. Economists had anticipated import prices, excluding tariffs, to increase by 0.3%, following a previously reported 0.4% gain in March.

Over the 12 months leading up to April, import prices surged by 1.1%, marking the most significant increase since December 2022. These elevated import price figures, driven by rising costs for petroleum and other goods, led economists at Goldman Sachs to revise upward their estimates for the personal consumption expenditures (PCE) price indexes for April by one basis point each. The PCE price indexes serve as the inflation measures monitored by the Fed for shaping monetary policy.

Goldman Sachs predicts the core PCE price index rose by 0.26% in April, similar to March's 0.3% increase. Core inflation is expected to rise 2.77% year-on-year, closely matching March's figure after rounding. Economists think the recent increase in import prices is temporary due to stabilized food and oil prices, the appreciation of the dollar, and declining Chinese producer prices.

While the surge in April import prices may not boost the Fed's confidence in inflation deceleration, officials will likely emphasize yesterday's CPI report, which showed a slight improvement, according to Matthew Martin, a US economist at Oxford Economics. Meanwhile, stocks on Wall Street were trading higher, with the Dow Jones Industrial Average surpassing the 40,000 level for the first time. The dollar remained stable against a basket of currencies, while US Treasury prices declined.

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