US labour market tightens while growth in key services sector slows down

Service sector, which accounts for two-thirds of US economy, cools down

PUBLISHED : Friday, 04 August, 2017, 1:56am
UPDATED : Friday, 04 August, 2017, 1:56am

The number of Americans filing for unemployment benefits fell last week, pointing to a tightening labour market that likely keeps the Federal Reserve on course to announce plans next month to start reducing its massive bond portfolio.

Labour market strength was also underscored by another report on Thursday showing US-based employers last month announced the fewest job cuts in eight months. But a moderation in services sector activity to an 11-month low in July put a wrinkle in the brightening economic outlook.

The services sector accounts for more than two-thirds of the US economy and analysts worry that the slowdown, if sustained, could keep inflation tame.

“The services economy is cooling, which makes the Fed’s goal of 2 per cent inflation a little harder to achieve,” said Chris Rupkey, chief economist at MUFG in New York. “But with the labour market tight, the Fed can continue mopping up the stimulus provided to fight the financial crisis and recession.”

Initial claims for state unemployment benefits decreased 5,000 to a seasonally adjusted 240,000 for the week ended July 29, the Labour Department said. Economists had forecast claims falling to 242,000.

Claims have now been below 300,000, a threshold associated with a healthy labour market, for 126 straight weeks. That is the longest such stretch since 1970, when the labour market was smaller. The labour market is near full employment, with the jobless rate at 4.4 per cent.

The four-week moving average of claims, considered a better measure of labour market trends as it irons out week-to-week volatility, fell 2,500 to 241,750 last week, the lowest level since May.

Economists believe that labour market tightness will encourage the Fed to announce a plan to start offloading its US$4.2 trillion portfolio of Treasury bonds and mortgage-backed securities in September.

The US central bank is, however, expected to delay raising interest rates until December because of low inflation. The Fed has raised rates twice this year.

The claims data has no bearing on July’s employment report, which is scheduled to be released on Friday, as it falls outside the survey period.

According to a Reuters survey of economists, non-farm payrolls probably increased by 183,000 jobs last month after surging by 222,000 in June. The unemployment rate is seen falling one-tenth of a percentage point to 4.3 per cent.

In a separate report on Thursday, global outplacement consultancy Challenger, Gray & Christmas said US-based employers announced 28,307 job cuts last month, down 9 per cent from June and the fewest number since November 2016.

Retailers planned to cut 3,862 jobs in July. They were closely followed by the health care products and services sector where employers planned 3,634 layoffs.

“While retailers are cutting the most jobs this year, those companies are also announcing the most hiring,” said John Challenger, chief executive officer of Challenger, Gray & Christmas. “New retail jobs could be going to places like fulfilment and distribution centres.”

A third report from the Institute for Supply Management (ISM) showed its non-manufacturing index fell to a reading of 53.9 last month, the lowest since August 2016, from 57.4 in June. A reading above 50 in the ISM index indicates an expansion in the services sector.

“The ISM report is clearly a big disappointment and suggests that the economy may have lost some momentum going into the third quarter,” said Andrew Hunter, an economist at Capital Economics. “But it is worth remembering that these monthly surveys have always been volatile.”