Improving Job Market, Weak Inflation Make Fed Call Tougher

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A delivery in Peoria, Illinois.

A delivery in Peoria, Illinois.

Photographer: Daniel Acker/Bloomberg

The fewest claims for jobless benefits in 15 years signal the U.S. labor market continues to strengthen even as the world’s largest economy struggles to regain momentum.

The number of applications for unemployment insurance payments unexpectedly fell by 1,000 to 264,000 in the week ended May 9, pushing the monthly average to the lowest level since April 2000, according to Labor Department data issued Thursday in Washington. Another report showed producer prices declined broadly last month.

Persistently low firings are typically accompanied by bigger payroll gains, indicating employers probably will continue to beef up staff. That means Federal Reserve policy makers are likely to meet their goal of putting more Americans back to work, while the other half of their equation -- a pickup in pricing power -- is less within reach.

“They’re pretty close to meeting their full-employment mandate,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed researcher. “They’re obviously further away from meeting their price-stability mandate, but that can change in a relatively short amount of time.”

Feroli projects the Fed will wait until September to raise its benchmark interest rate, which it has held near zero since late 2008.

Shares Climb

The Standard & Poor’s 500 Index closed at an all-time high, halting a three-session slide, spurred by a rally in technology companies and gains in multinational companies. The S&P 500 climbed 1.1 percent to 2,121.1 at the close in New York.

The Labor Department’s report on producer prices showed costs unexpectedly fell 0.4 percent in April from the prior month, depressed by declining profit margins at wholesalers and retailers. The decrease was below the lowest estimate of economists surveyed by Bloomberg.

Over the past 12 months, wholesale prices fell 1.3 percent, the most in records dating back to 2010.

Businesses have seen muted wholesale costs as a plunge in energy prices in the second half of 2014 and a stronger dollar limit inflation early in the pipeline. Fed officials are looking for signs that price growth will rise toward their goal, which is 2 percent annually by their preferred measure, as they consider raising the benchmark rate.

“Today’s PPI report supports our dovish expectations for the Fed,” Jason Schenker, chief economist and president of Prestige Economics LLC in Austin, Texas, said in a research note. The decline may also weigh on consumer prices, so “we find support for our expectations that the Fed will not raise rates until Q4 2015.”

Claims Survey

The persistently low level of jobless claims is surprising most analysts. The median forecast of 53 economists surveyed by Bloomberg projected an increase to 273,000 for last week.

“These are quite remarkable numbers,” said Raymond Stone, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey. “Typically, when you have low claims you have strong payroll numbers.”

Payrolls grew by 223,000 last month, and the unemployment rate fell to 5.4 percent from 5.5 percent in March, another Labor Department report showed last week. The increase in payrolls followed a revised 85,000 gain in March that was the smallest since June 2012.

Gains in employment are coming as the economy shows little sign of strengthening after stalling in the first three months of the year due in part to transitory issues, including bad weather and port disputes on the West Coast.

Retail Sales

A report Wednesday showed retail sales barely budged in April after a 0.2 percent drop from January through March that marked the first quarterly decline in almost three years.

JPMorgan Chase’s Feroli lowered his forecast for second-quarter gross domestic product after the report to a 2 percent annualized rate from 2.5 percent. The economy grew at 0.2 percent pace in the first three months of the year, Commerce Department figures showed in late April.

Data out since then indicate it probably contracted as the trade deficit swelled even more than the government projected. Revised figures are due later this month.

“The bigger issue, in our view, is if and when the weaker GDP figures flow through to a slower pace of labor market improvement,” Feroli wrote in a research note Wednesday. If the signal from jobless claims “proves correct and job growth remains robust, then we believe our September liftoff call is still appropriate, even with a disappointing first half for GDP.”

Fed Researcher

David Altig, research head at the Federal Reserve Bank of Atlanta, is among those who project hiring and growth will converge.

Weak productivity, which explains why GDP and employment have diverged, is unlikely to remain so muted, Altig said in an interview on May 13 before a conference in Madrid.

“That does mean something is going to give,” he said. “Either the labor market is going to slow down some, or GDP is going to pick up some and I would expect to see both of those things happening as we move forward.”

Fed Chair Janet Yellen and her colleagues are monitoring the labor market while also looking for signs of inflation as they consider the appropriate time to raise their benchmark interest rate from near zero.

The personal consumption expenditures index, the Fed’s preferred inflation gauge, rose 0.3 percent in March from a year earlier and has been below the Fed’s 2 percent goal since May 2012. The core measure increased 1.3 percent in the 12 months ending in March.

The producer price index is one of three monthly inflation gauges from the Labor Department. The CPI, due for release May 22, rose 0.1 percent in April, according to the Bloomberg survey median. A report Wednesday showed the cost of imported goods fell 0.3 percent last month, marking the 10th straight decline as the dollar rose and overseas economies cooled.

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