U.S. Jobless Claims Fall; Inflation Revised Higher In Fourth Quarter

The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to a persistently tight labor market, and further fueling fears that the Federal Reserve could raise interest rates higher than anticipated.

Those worries were amplified by other data on Thursday showing inflation was much stronger than initially thought in the fourth quarter, which raises the risk of higher readings when the government publishes January's personal consumption expenditures (PCE) price data on Friday.

While the Fed is expected to deliver two additional rate hikes of 25 basis points in March and May, financial markets are betting on another increase in June. The U.S. central bank has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range.

"If the labor market is the light guiding the Fed's path to bringing inflation under control, policymakers have some more work to do because growth remains positive and the demand for labor is strong," said Christopher Rupkey, chief economist at FWDBONDS in New York. "There's no recession anywhere in today's data and inflation looks slightly worse."

Initial claims for state unemployment benefits decreased 3,000 to a seasonally adjusted 192,000 for the week ended Feb. 18, the Labor Department said. Economists polled by Reuters had forecast 200,000 claims for the latest week.

Unadjusted claims declined 14,465 to 210,867. Claims for four states including California were estimated, likely because of Monday's Presidents' Day holiday, which usually means less time for state offices to process applications.

Claims for California were estimated to have fallen sharply, which together with significant declines in Michigan, New York and Minnesota offset a surge in Kentucky.

Claims have been hemmed in a tight 183,000-206,000 range this year, and run consistently low despite high-profile layoffs in the technology sector and interest-rate sensitive industries.

Economists have long argued that the big job cuts by Twitter, Microsoft Amazon.com and Meta, the parent of Facebook, which over-hired during the pandemic, were not representative of the overall economy.

That view is also shared by policymakers. Minutes of the Federal Reserve's Jan. 31-Feb. 1 policy meeting published on Wednesday showed "several participants noted that recent reductions in the workforces of some large technology businesses followed much larger increases over the previous few years and judged that these reductions did not appear to reflect widespread weakness in the demand for labor."

U.S. stocks opened higher. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

STRONG LABOR MARKET

The claims data covered the week during which the government surveyed business establishments for the nonfarm payrolls component of February's employment report. Claims were unchanged between the January and February survey weeks.

Economists expect strong employment growth in February, though the pace probably slowed from last month's eye-popping 517,000 jobs. Data next week on the number of people receiving benefits after an initial week of aid will cast more light on the state of the labor market in February.

The so-called continuing claims, a proxy for hiring, dropped 37,000 to 1.654 million during the week ending Feb. 11, the claims report also showed. Though continuing claims have been elevated in recent weeks, they remain very low by historical standards amid millions of job openings.

There were 1.9 job openings for every unemployed person in December, data showed this month. The unemployment rate at 3.4% in January was the lowest in more than 53 years. Goldman Sachs said on Wednesday it expected the jobless rate to rise to 3.6% by the end of this year and stay there at the end of 2024.

Strong wage growth generated by the tight labor market is helping to underpin the overall economy as well as keeping inflation elevated. A separate report from the Commerce Department on Thursday confirmed that the economy grew solidly in the fourth quarter, though much of the increase in output came from unsold goods at businesses.

Gross domestic product increased at a downwardly revised 2.7% annualized rate last quarter, the government said in its second estimate of fourth-quarter GDP. The economy was previously reported to have grown at a 2.9% pace. The revision reflected downgrades to consumer spending and exports.

The robust second-half growth erased the 1.1% contraction in the first six months of the year. The economy grew 2.1% in 2022.

Inflation increased much faster than initially estimated last quarter. A measure of inflation in the economy, the price index for gross domestic purchases, rose at a 3.6% rate last quarter, revised up 0.4 percentage point from the advance estimate.

The PCE price index advanced at a 3.7% pace, revised up from the previously estimated 3.2% pace. Excluding food and energy, the PCE price index rose at a 4.3% rate, an upward revision of 0.4 percentage point. The PCE price indexes are the Fed's preferred inflation measures.

The revisions to prices were led by used and new motor vehicles, and fees for nonprofit hospital services. They also reflected revisions to the Labor Department's Bureau of Labor Statistics' consumer and producer price data published this month. The upgrades point to higher January PCE price index readings.

The GDP report also showed wages and salaries growth in the third quarter was much stronger than previously reported.

Wages and salaries are now estimated to have increased $303.0 billion in the July-September quarter, an upward revision of $115.2 billion. As a result, the economy grew at a 2.8% rate in the third quarter instead of the previously estimated 0.8% pace, when measured from the income side.