By Lucia Mutikani
WASHINGTON, April 16 (Reuters) – New applications for U.S. unemployment benefits fell more than expected last week, suggesting labor market conditions remained stable, though employers are cautious about increasing headcount as the war with Iran casts a shadow over the economy.
A surge in oil prices and the accompanying rise in inflation pressures because of the conflict have pushed consumer sentiment to record lows, and economists warned households could scale back spending, with ripple effects on the labor market. Some anticipated labor market weakness due to the oil price shock.
“At some point, elevated energy costs and prices for materials will cause firms to lay off marginal workers to protect profit margins,” said Carl Weinberg, chief economist at High Frequency Economics. “Just keep in mind that in the 1973 oil shock, it took about three months for claims to start to rise in any meaningful way.”
Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 207,000 for the week ended April 11, the Labor Department said on Thursday. Economists polled by Reuters had forecast 215,000 claims for the latest week.
Claims are in the lower end of their 201,000-230,000 range for this year. While layoffs remain low, the U.S.-Israeli war with Iran could be hindering hiring. The Federal Reserve’s Beige Book report on Wednesday showed “several districts noted increased demand for temporary or contract workers, as firms remained cautious about committing to permanent hires.”
The report based on information collected in early April also noted the Middle East conflict “was cited as a major source of uncertainty that complicated decision-making around hiring, pricing and capital investment, with many firms adopting a wait-and-see posture.”
Oil prices have soared more than 35% since the war started at the end of February. Gasoline and diesel prices have increased sharply, contributing to higher consumer and producer prices in March, government data showed recently.
President Donald Trump has imposed a blockade of the Strait of Hormuz, halting seaborne trade in and out of Iran.
Stocks on Wall Street were mostly lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.
The labor market was already in a holding pattern prior to the war, blamed by economists on uncertainty stemming from Trump’s sweeping import tariffs and mass deportations. The Middle East conflict was just another layer of uncertainty for businesses, economists said.
For now, continued labor market stability is seen giving the Federal Reserve room to keep interest rates unchanged for some time while policymakers monitor the inflation fallout from the war. The U.S. central bank last month left its benchmark overnight interest rate in the 3.50%-3.75% range.
WAR HAS INCREASED LABOR MARKET’S VULNERABILITY
“The labor market has become more vulnerable since the start of the war, and we expect concerns about the labor market will lead the Fed to look past the hit to inflation from higher oil prices and lower rates twice this year,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
Financial markets are pricing in roughly a one-in-three chance of a rate cut this year. The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, increased 31,000 to a seasonally adjusted 1.818 million during the week ended April 4, the claims report showed.
The so-called continuing claims have dropped from last year’s lofty levels likely in part due to people exhausting their eligibility for benefits, limited to 26 weeks in most states. The data does not include some unemployed young workers, who typically have a limited or no work history.
The job market for young adults is tough. The unemployment rate for the 20-to-24-year-old age group was at 6.4% in March. In contrast, the overall jobless rate was at 4.3%.
The conflict threatens to derail a nascent recovery in the manufacturing sector. Factory production dipped 0.1% in March after an upwardly revised 0.4% increase in February, the Fed said in a separate report. Economists had forecast manufacturing output gaining 0.1% after a previously reported 0.2% rise in February. Factory production rose 0.5% year-on-year in March.
Manufacturing, which accounts for 10.1% of the economy, had shown signs of recovery after being hammered by tariffs. It grew at a 3.0% annualized rate in the first quarter, rebounding from the fourth quarter’s 3.2% pace of decline.
In March, motor vehicle production dropped 3.7%. There were decreases in the output of primary metals, machinery as well as furniture and related products.
Though output at high-technology industries, including communications equipment and semiconductors, increased 0.7%, that followed a 0.9% decline in February. Mining output declined 1.2% after rebounding 2.1% in February. Energy production fell 1.6%, with oil and gas well drilling decreasing 2.4%.
The Beige Book noted that though activity in the energy sector rose slightly in early April, “many producers remained cautious about increasing drilling due to uncertainty about the persistence of higher prices.”
Utilities production dropped 2.3% as demand for heating declined. Utilities production increased 1.8% in February. Overall industrial production dropped 0.5% after increasing 0.7% in February. Industrial output rose 0.7% year-on-year in March and grew at a 2.4% rate in the first quarter.
A survey from the Philadelphia Fed showed a measure of new orders received by factories in the mid-Atlantic region jumped. It mirrored a similar rise reported in the New York Fed’s survey on Wednesday.
“Ongoing policy uncertainty, relatively high interest rates, and the likely slowdown in demand resulting from the energy shock all raise a risk that we will see a brief period of catch-up growth, rather than a sustained manufacturing recovery,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
