The US job market is hot, but low earnings cast a shadow over the economy

People line up outside a newly reopened job center for personal appointments in Louisville, US, April 15, 2021. REUTERS/Amira Carrod/File Photo

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits fell more than expected last week as the labor market remained tight amid strong labor demand despite rising interest rates and tightening financial conditions.

But the outlook for the economy is uncertain, as other data on Thursday showed corporate profits fell across the board in the first quarter. Some economists believe that eroding earnings and falling stock prices may force companies to stop hiring or begin laying off workers.

Several retailers, including Walmart Inc (WMT.N), have lowered their full-year profit forecasts, citing higher inflation. Snap (SNAP.N), the parent company of Snapchat, issued an earnings warning this week, leading to a sale of social media shares.

“The biggest cost for most companies is always labor,” said Christopher Robke, chief economist at FWDBONDS in New York. Tech companies that are flying at the highest level have seen their share prices drop sharply, which will force management to tighten its belts.

The Labor Department said initial claims for state unemployment benefits fell 8,000 to a seasonally adjusted 210,000 for the week ending May 21. The decline partially offset some of the rally in the previous week, which pushed claims to their highest level since January.

There were 5,316 decreases in applications in California. Claims also decreased by 4,059 in Illinois and 3,564 in Kentucky.

Economists polled by Reuters had expected 215,000 orders in the last week. The number of people receiving benefits after an initial week of aid rose from 31,000 to 1.346 million during the week ending May 14.

Some economists attributed the recent increase in applications to less generous seasonal factors, the model the government uses to exclude seasonal fluctuations from the data, in May compared to the previous two months.

Others believe, however, that some retailers were laying off workers. High inflation, with annual consumer prices rising at their fastest pace in 40 years, is slashing profits.

That was confirmed by a separate report from the Commerce Department on Thursday showing that corporate profits from current production fell to $66.4 billion, or a 2.3% rate, in the first quarter, the first decline in nearly two years.

The decline was in financial and non-financial companies as well as external operations. After taxes, earnings fell 4.3% after rising at a pace of just 0.2% in the fourth quarter. However, earnings are up 12.5% ​​from last year.

But some retailers thrive in a high inflation environment. Macy’s Inc (MN) raised its annual earnings forecast as demand for party wear surged, while Dollar General (DG.N) and Dollar Tree (DLTR.O) boosted their annual sales forecasts.

Stocks on Wall Street rose after recent sharp losses. The dollar fell against a basket of currencies. US Treasury bond prices fell.

Open job history

The Federal Reserve has raised its policy interest rate by 75 basis points since March. The US central bank is expected to raise its overnight interest rate by half a percentage point at each of its upcoming meetings in June and July.

There are concerns that the Fed’s aggressive monetary policy stance could push the economy into a recession next year. The housing market is already showing signs of slowing down.

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But with 11.5 million record jobs at the end of March, layoffs are likely to be minimal and people who have lost a job can easily find another.

The minutes of the May 3-4 Fed meeting released on Wednesday showed that officials comment that “labor demand has continued to outpace supply across many parts of the economy and their business contacts have continued to report difficulties in hiring and retaining staff.” Many expected the labor market to remain tight and wage pressures to remain high for some time to come.

“At this point, we don’t see any change in the fundamental picture of a tight labor market with employers unwilling to fire workers,” said Conrad de Quadros, chief economic adviser at Brian Capital in New York.

Higher wages, even though they come after inflation, help consumers keep spending and support the economy.

While the Commerce Department confirmed that the economy contracted in the first quarter under the weight of a record trade deficit and a slightly slower pace of inventory buildup than in the fourth quarter, other measures of growth were robust.

In its second estimate of GDP, the government said that gross domestic product fell at a rate of 1.5% year-on-year in the most recent quarter, after adjusting for the pace of decline by 1.4% in April. The economy grew at a robust 6.9% pace in the fourth quarter.

Final sales to private domestic buyers, which exclude trade, inventories and government spending, rose 3.9%. This measure of domestic demand was previously reported to grow at a rate of 3.7%. The upward adjustment reversed a stronger pace of consumer spending than initially thought.

Also underlining the economy’s resilience, production rose 2.1% last quarter when measured on the income side. Gross domestic income grew 6.3% in the fourth quarter.

“Tried and real recession indicators continue to indicate that while the risks of a recession are already uncomfortably high, a recession is still not the most likely scenario for the US economy,” said Scott Hoyt, chief economist at Moody’s Analytics in West Chester. , Pennsylvania.

(Covering) Lucia Mutikani Editing: Nick Ziminsky and Chizu Nomiyama

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