WRAPUP 2-US labor market fairly tight, broader economy losing steam

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(Adds details from reports, analyst comments throughout)

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Weekly jobless claims fall 10,000 to 222,000

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Continuing claims increase 13,000 to 1.794 million

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Single-family housing starts slip 0.4% in April

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Import prices jump 0.9%; March data revised higher

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Manufacturing production decreases 0.3%

By Lucia Mutikani

WASHINGTON, May 16 (Reuters) – The number of Americans filing new claims for jobless benefits fell last week, unwinding nearly half of the jump at the start of the month, indicating that labor market conditions remain fairly tight even as job growth is cooling.

There are signs the economy slowed further early in the second quarter as the delayed effects of the Federal Reserve’s hefty interest rate hikes start to have a bigger impact. Single-family homebuilding dropped again in April and permits for future construction hit an eight-month low. Output at factories unexpectedly fell, other reports showed on Thursday.

April’s economic data, including nonfarm payrolls and retail sales, have so far come in below economists’ expectations.

“The economy is losing momentum in the face of restrictive monetary policy,” said Sal Guatieri, a senior economist at BMO Capital Markets. “But the jury remains out on how quickly inflation will subside to provide some rate relief.”

Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 222,000 for the week ended May 11, the Labor Department said. Economists polled by Reuters had forecast 220,000 claims in the latest week. Claims raced to an eight-month high in the prior week.

Unadjusted claims decreased 13,325 to 196,725. Claims in New York tumbled 9,442, almost reversing a prior surge which the state attributed to layoffs in transportation and warehousing, accommodation and food services as well as educational services industries. There were significant drops in filings in Illinois and Indiana, more than offseting a notable rise in Florida.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 13,000 to a seasonally adjusted 1.794 million during the week ending May 4, the claims report showed. The so-called continuing claims remain low by historical standards.

The labor market is steadily rebalancing in the wake of 525 basis points worth of rate hikes from the U.S. central bank since March 2022 to cool demand in the overall economy. That, together with the resumption in inflation’s downward trend have raised the odds of a rate cut in September. The Fed earlier this month left its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July.

But the road back to the Fed’s 2% inflation target is likely to be bumpy. A separate report from the Labor Department showed import prices vaulting 0.9% last month, the largest increase since March 2022, after an upwardly revised 0.6% rise in March. Economists had expected import prices, which exclude tariffs, to advance 0.3% following a previously reported 0.4% gain in March.

In the 12 months through April, import prices accelerated 1.1%, the largest gain since December 2022. The hot import price readings, which were fanned by rising costs for petroleum and other goods, prompted economists at Goldman Sachs to upgrade their estimates for the personal consumption expenditures price indexes for April by one basis point each.

The PCE price indexes are the inflation measures tracked by the Fed for monetary policy.

Goldman Sachs now expects the core PCE price index to have increased by 0.26% in April after rising 0.3% in March. It forecast core inflation advancing 2.77% year-on-year, essentially matching March’s increase after rounding.

Economists, however, believe the heating up in import prices is temporary, pointing to stabilizing food and oil prices as well as dollar appreciation and falling Chinese producer prices.

“The surge in April import prices won’t instill the Fed with greater confidence inflation is decelerating, but officials will assuredly put much more stock in yesterday’s CPI report which was a small step in the right direction,” said Matthew Martin, U.S. economist at Oxford Economics.

Stocks on Wall Street were trading higher, with the Dow Jones Industrial Average breaching the 40,000 level for the first time. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.

HOUSING, MANUFACTURING STRUGGLING

Higher borrowing costs are threatening the housing market recovery and keeping manufacturing on the backfoot.

Single-family housing starts, which account for the bulk of homebuilding, slipped 0.4% to a seasonally adjusted annual rate of 1.031 million units last month, the Commerce Department’s Census Bureau said in a third report. Homebuilding dropped in the Northeast, South and Midwest, but rose in the West.

The second straight monthly decline in single-family starts followed a recent run up in mortgage rates. With homebuilder sentiment slumping in May, a rebound in the coming months is unlikely. Indeed, single-family building permits fell 0.8% to a rate of 976,000 units, the lowest level since August.

Nonetheless, new construction remains supported by a severe housing shortage. There were 728,000 housing units on the market in the first quarter, well below the 1.145 million units before the COVID-19 pandemic. Single-family housing starts rose 17.7% year-on-year in April. The housing market contributed to the economy’s 1.6% annualized growth rate in the first quarter.

A fourth report from the Fed showed manufacturing output dropped 0.3% last month following a downwardly revised 0.2% increase in March. Economists had forecast factory output rising 0.1% after a previously reported 0.5% advance in March. Production at factories fell 0.5% year-on-year in April. Manufacturing accounts for 10.4% of the economy.

“High interest rates are weighing on capital-intensive sides of the economy like manufacturing and homebuilding,” said Bill Adams, chief economist at Comerica Bank. “Economic growth in the second quarter will likely hold under 2% annualized.”

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)