By Lucia Mutikani
WASHINGTON, May 21 (Reuters) – The number of Americans filing claims for unemployment benefits fell last week, pointing to labor market resilience and giving the Federal Reserve room to focus on surging inflation from the war with Iran.
There are no signs yet that employers are responding to rising costs by reducing headcount. The nearly three-month long U.S.-Israeli conflict with Iran has disrupted shipping in the Strait of Hormuz, boosting energy prices, as well as straining global supply chains and causing shortages of a wide range of goods, including fertilizers, aluminum and consumer products.
“We still can’t rule out some spillover effects from the war and the spike in oil prices on to the labor market, which we have always expected would come with a lag,” said Matthew Martin, a senior U.S. economist at Oxford Economics. “But for now, we think the labor market is showing enough stability to allow the Fed to feel comfortable keeping policy steady.”
Initial claims for state unemployment benefits slipped 3,000 to a seasonally adjusted 209,000 for the week ended May 16, the Labor Department said on Thursday. Economists polled by Reuters had forecast 210,000 claims for the latest week. Claims have remained low despite high-profile layoffs in the technology sector, linked to the adoption of artificial intelligence.
Financial markets expect the U.S. central bank to keep its benchmark overnight interest rate in the 3.50%-3.75% range into next year. Minutes of the Fed’s April 28-29 meeting published on Wednesday showed concerns about inflation because of the conflict intensified last month, with a growing number of policymakers saying the Fed should lay the groundwork for a possible rate hike.
Policymakers “generally expected labor market conditions to remain stable in the near term,” the minutes showed, though most judged “that risks to the employment side” of the Fed’s “dual mandate were tilted to the downside.”
Last week’s claims data covered the period during which the government surveyed businesses for the nonfarm payrolls component of May’s employment report. Claims decreased between the April and May survey weeks. Payrolls increased by 115,000 jobs in April after rising 185,000 in March.
The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, increased 6,000 to a seasonally adjusted 1.782 million during the week ended May 9, the claims report showed.
U.S. stocks on Wall Street opened lower as oil prices rebounded after Reuters reported that Iran’s Supreme Leader had issued a directive that the country’s near-weapons-grade uranium should not be sent abroad. The dollar advanced versus a basket of currencies. U.S. Treasury yields were higher.
FRAGILE HOUSING MARKET
While the labor market is holding up, the war is inflicting more pain on an already fragile housing market. A report from the Commerce Department’s Census Bureau showed single-family housing starts, which account for the bulk of homebuilding, tumbled 9.0% to a seasonally adjusted annual rate of 930,000 units in April. Single-family homebuilding fell in all four regions. It declined 2.4% year-on-year in April.
The inflation fallout from the Middle East conflict is driving up U.S. Treasury yields. Mortgage rates track the 10-year Treasury note, whose yield is hovering near a 1-1/2-year high. The popular 30-year fixed mortgage rate averaged 5.98% at the end of February, when the war started, as Freddie Mac and Fannie Mae expanded purchases of mortgage-backed securities.
It has since surged, averaging 6.36% last week, data from mortgage finance agency Freddie Mac showed. Homebuilding was already under pressure from tariffs on imported goods, including lumber and vanity cabinets, as well as higher land, labor and construction costs. Residential investment, which includes home building, has contracted for five straight quarters.
Permits for future construction of single-family homes dropped 2.6% last month to a rate of 872,000 units. They decreased 5.5% year-on-year in April. An improvement is unlikely. A National Association of Home Builders survey this week showed homebuilder sentiment remaining depressed in May.
“Americans looking to buy a new single-family home of their own will remain disappointed,” said Christopher Rupkey, chief economist at FWDBONDS. “Inflation and financing is pushing building costs sharply higher and that will make new homes even more unaffordable if you could find one.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
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