Jobless Claims in U.S. Jump to Highest Level in Six Weeks

More Americans than projected filed claims for jobless benefits last week and manufacturing in the Philadelphia region unexpectedly shrank in May, signs the slowdown in growth is rippling through the U.S. economy.

The number of applications for unemployment insurance payments jumped by 32,000 to 360,000 in the week ended May 11, the most since the end of March, Labor Department figures showed today in Washington. The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 5.2 from 1.3 in April.

Concern the automatic federal budget cuts that took effect in March will hurt sales may be prompting employers to trim staff and factories to pull back. At the same time, another report showing inflation is retreating as gasoline costs drop means households have extra cash to buy other goods and services, which will help underpin consumer spending.

“We are seeing things like the sequester and budget cuts act as a restraining factor,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “Second-quarter growth is going to be slower than the first quarter, and we haven’t yet broken out of this pattern of strong quarters followed by weak quarters.”

Stocks fell, ending four days of records for the Standard & Poor’s 500 Index, after the reports and comments by a Federal Reserve official that the central bank may slow the pace of stimulus as early as this summer. The S&P 500 dropped 0.5 percent to 1,650.47 at the close in New York.

Treasuries Jump

The signal was clearer for fixed-income investors as the benchmark 10-year Treasury note jumped, pushing its yield down to 1.87 percent from 1.94 percent late yesterday.

Internationally, reports showed improving economies elsewhere. Euro-area exports increased in March for a third month as the currency bloc’s four largest economies all shipped more goods, while Japan’s economy expanded last quarter at the fastest pace in a year as consumer spending and exports gained.

Other reports today showed U.S. consumers are gaining confidence the world’s largest economy will pick up and housing remains a bright spot.

The monthly Bloomberg consumer economic expectations gauge rose to minus 1 in May, the best reading in five months, from minus 4 in April. The weekly Consumer Comfort Index slipped to minus 30.2 for the period ended May 12 from minus 29.5 the prior week, hovering around a five-year high.

While builders pulled back last month after housing starts reached an almost five-year high in March, a surge in permits signals residential construction will soon rebound.

Home Construction

Starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate from a revised 1.02 million pace in March, figures from the Commerce Department showed. Building permits jumped 14.3 percent to a 1.02 million annualized rate in April, the highest level since June 2008.

“The housing sector has had a bit of a pause recently but the permits data suggests the momentum will resume,” said David Sloan, a senior economist at 4Cast Inc. in New York and the top forecaster for housing starts in the past two years, according to data compiled by Bloomberg.

While housing will probably recover, manufacturing is struggling. The drop in the Philadelphia Fed index this month countered expectations of a gain to 2, according to the median forecast of economists surveyed. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Manufacturing Shrinks

The setback was in line with other reports this week. The Federal Reserve Bank of New York’s general economic index showed manufacturing unexpectedly shrank in the New York, northern New Jersey and southern Connecticut region. Figures from the Fed in Washington yesterday indicated output at factories, mines and utilities declined in April by the most in eight months, reflecting broad-based cutbacks.

The slowdown in growth may be making it tougher for companies to boost prices. The cost of living fell in April for a second month, the first back-to-back declines since late 2008, according to figures from the Labor Department.

The consumer-price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March. Economists surveyed by Bloomberg projected a 0.3 percent drop, according to the median estimate. The so-called core price measure, which excludes more volatile food and energy costs, increased 0.1 percent, less than projected.

Inflation Ebbs

“The fact that core inflation has started to decelerate again is reflective of a lack of purchasing power in the economy,” said BNP Paribas’ Coronado, who correctly projected the drop in prices last month and is the best CPI forecaster in the past two years, according to data compiled by Bloomberg. “For now, the Fed is definitely going to keep going.”

Any discussion that policy makers will soon begin to reduce the amount of securities they are buying is “going to be pushed off,” Coronado said.

The increase in jobless claims last week exceeded all forecasts of 50 economists surveyed by Bloomberg. The median projection called for a rise to 330,000. Estimates ranged from 315,000 to 355,000. The Labor Department revised the previous week’s figure to 328,000 from an initially reported 323,000.

“It’s possible that we could get a little bit more firing as the economy slows in the second quarter,” said Gennadiy Goldberg, a U.S. strategist at TD Securities Inc. in New York. “Volatility aside, the layoff part of the equation still looks positive. It looks more like employers aren’t very keen to fire workers but they are keen to reduce hours.”

Cutting Staff

Procter & Gamble Co., the Cincinnati-based maker of Gillette razors and Tide detergent, is among companies paring headcount. As of the end of March, P&G had reduced 6,250 positions, Chief Financial Officer Jon Moeller said on an earnings call on April 24. That’s ahead of its target under a previously-announced cost-cutting plan that called for a reduction in non-manufacturing staffing of 10 percent, or about 5,700, by the end of the fiscal year that ends June 30, he said.

The economy may cool to a 1.6 percent pace this quarter, after growing at a 2.5 percent rate in the first three months of 2013, according to the median forecast in a Bloomberg survey of economists from May 3 to May 8. The projection reflects the lagged effect from a two percentage-point rise in the payroll tax at the start of 2013 and $85 billion in automatic budget cuts that began on March 1.

For now, consumers are holding up as lower fuel costs combined with rising stock and home values boost buying power. Sales at retailers unexpectedly advanced in April, rising 0.1 percent after a decrease of 0.5 percent in March, a report showed earlier this week.

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