Recent data indicates a slowing US economy. Last week, initial claims for unemployment benefits decreased slightly, while new home construction hit its lowest level in almost four years in May. This points to moderate economic activity in the second quarter.
This slowdown, combined with weak retail sales last month, suggests that the Federal Reserve might cut interest rates in September. Despite the Fed’s optimistic stance, financial markets expect rate cuts this year due to the impact of higher borrowing costs.
“Second-quarter indicators show another slow period for economic activity,” said Bill Adams, Comerica’s chief economist. “Weak economic and labor market data support expectations for the Fed to cut rates, starting in September and again in December.”
State unemployment benefits dropped by 5,000 to 238,000 for the week ending June 15, according to the Labor Department. This only partially reversed the previous week’s surge, which pushed claims to a 10-month high. Economists had predicted 235,000 claims.
A dozen states reported significant increases in layoffs the previous week, affecting education, transportation, warehousing, food services, manufacturing, agriculture, healthcare, and retail.
The four-week average of claims rose by 5,500 to 232,750, the highest since mid-September.
“Claims are trending up,” said Ian Shepherdson, Pantheon Macroeconomics’ chief economist. “The Fed is too optimistic about unemployment.”
The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range since last July. Last week, officials revised their rate cut projections for this year from three to one quarter-point reduction.
Job growth accelerated in May, but the unemployment rate rose to 4.0%, the highest since January 2022, indicating potential difficulty for laid-off workers in finding new jobs.
Upcoming data on people receiving benefits after their initial aid week, an indicator of hiring, could shed more light on June’s labor market.
Continuing claims rose to a seasonally adjusted 1.828 million during the week ending June 8, the highest since January.
“Initial claims suggest May’s job gains won’t repeat in June,” said Ryan Sweet, Oxford Economics’ chief US economist. “The Fed should be concerned about labor market risks.”
Wall Street stocks rose, the dollar strengthened, and US Treasury prices fell.
Declining Homebuilding
A separate Commerce Department report showed a 5.5% drop in housing starts in May, the lowest since June 2020. Economists had expected a rebound to 1.370 million units. Starts fell 19.3% year-on-year in May. New construction had been spurred by a housing shortage but was stymied by rising mortgage rates. The 30-year fixed mortgage rate peaked at 7.22% in early May before dropping to just below 7.0% by month’s end.
Despite further drops in the 30-year fixed mortgage rate, housing starts may take time to recover. Homebuilder confidence hit a six-month low in June, with the National Association of Home Builders citing high mortgage rates as a deterrent for potential buyers.
Goldman Sachs economists reduced their second-quarter GDP growth estimate from 2.0% to 1.9% annualized. The economy grew at a 1.3% pace in the first quarter. Single-family housing starts, the bulk of homebuilding, fell 5.2% to 982,000 units in May, the lowest since October.
Future housing permits, an indicator of upcoming projects, dropped 3.8%, also the lowest since June 2020. Single-family permit filings fell 2.9% to 949,000 units, the lowest in nearly a year. “The drop in May’s housing starts aligns with the recent slowdown in permit issuance, suggesting continued construction struggles this year,” said Thomas Ryan, Capital Economics’ North America economist.