U.S. labor market hot, but declining profits cast shadow over economy
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[May 27, 2022] By
Lucia Mutikani
WASHINGTON (Reuters) - The number of
Americans filing new claims for unemployment benefits fell more than
expected last week as the labor market remains tight amid strong demand
for workers despite rising interest rates and tightening financial
conditions.
But the outlook for the economy is uncertain, with other data on
Thursday showing corporate profits falling across the board in the first
quarter. Some economists believe the erosion of profits and falling
share prices could force companies to pause hiring or start laying off
workers.
Several retailers, including Walmart Inc, have lowered their full-year
earnings forecasts, citing high inflation. Snap, the parent of Snapchat
issued a profit warning this week, sparking a sell-off of social media
stocks.
"The biggest expense for most companies is labor always," said
Christopher Rupkey, chief economist at FWDBONDS in New York.
"High-flying tech companies have seen their share prices plummet which
will force management to tighten their belts."
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Initial claims for state unemployment benefits decreased 8,000 to a
seasonally adjusted 210,000 for the week ended May 21, the Labor
Department said. The decline partially unwound some of the prior week's
surge, which had pushed claims to their highest level since January.
There was a 5,316 plunge in applications in California. Claims also
dropped by 4,059 in Illinois and 3,564 in Kentucky.
Economists polled by Reuters had forecast 215,000 applications for the
latest week. The number of people receiving benefits after an initial
week of aid increased 31,000 to 1.346 million during the week ending May
14.
Some economists blamed the recent increase in applications to less
generous seasonal factors, the model that the government uses to strip
out seasonal fluctuations from the data, in May relative to the prior
two months.
Others, however, believed some retailers were laying off workers. High
inflation, with annual consumer prices increasing at their fastest pace
in 40 years, is squeezing profits.
That was confirmed by a separate report from the Commerce Department on
Thursday showing corporate profits from current production fell at a
$66.4 billion, or 2.3% rate, in the first quarter, the first drop in
nearly two years.
The decline was across financial and nonfinancial corporations as well
as overseas operations. After tax profits dropped at a 4.3% rate after
rising at only a 0.2% pace in the fourth quarter. Still, profits
increased 12.5% from a year ago.
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But some retailers are thriving in the high inflation environment.
Macy's Inc raised its annual profit forecast as party-wear demand
rebounds, while Dollar General and Dollar Tree bumped up their annual
sales forecasts.
Stocks on Wall Street were higher after recent sharp losses. The dollar
slipped against a basket of currencies. U.S. Treasury prices fell.
RECORD JOB OPENINGS
The Federal Reserve has raised its policy interest rate by 75 basis
points since March. The U.S. central bank is expected to hike the
overnight rate by half a percentage point at each of its next meetings
in June and July.
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![](../images/052722PIX/busine57.jpg)
People line up outside a newly reopened career center for in-person
appointments in Louisville, U.S., April 15, 2021. REUTERS/Amira
Karaoud/File Photo
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There are worries that the Fed's aggressive monetary policy posture could push
the economy into recession next year. The housing market is already showing
signs of slowing.
A third report from the National Association of Realtors showed contracts to buy
a previously owned home fell for a sixth straight month in April.
But with a record 11.5 million job openings at the end of March, layoffs are
likely to be minimal and people who lose a job can easily find another one.
Minutes of the Fed's May 3-4 meeting published on Wednesday showed officials
commenting that "demand for labor continued to outstrip available supply across
many parts of the economy and that their business contacts continued to report
difficulties in hiring and retaining workers." Many expected the labor market to
remain tight and wage pressures to stay elevated for some time.
"At this point, we do not see any change in the fundamental picture of a tight
labor market with employers unwilling to fire workers," said Conrad DeQuadros,
senior economic advisor at Brean Capital in New York.
Higher wages, though they are trailing inflation, are helping consumers to keep
spending and supporting the economy.
While the Commerce Department confirmed the economy contracted in the first
quarter under the weight of a record trade deficit and a slightly slower pace of
inventory accumulation compared to the fourth quarter, other measures of growth
were solid.
Gross domestic product decreased at a 1.5% annualized rate last quarter, the
government said in its second GDP estimate, revised down from the 1.4% pace of
decline reported in April. The economy grew at a robust 6.9% pace in the fourth
quarter.
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Final sales to private domestic purchasers, which exclude trade, inventories and
government spending, increased at a 3.9% rate. This measure of domestic demand
was previously reported to have grown at a 3.7% rate. The upward revision
reflected a stronger pace of consumer spending than initially thought.
Also underscoring the economy's resilience, output increased at a 2.1% pace last
quarter when measured from the income side. Gross domestic income grew at a 6.3%
in the fourth quarter.
"Our tried-and-true recession indicators continue to signal that, while
recession risks are indeed uncomfortably high, a recession is still not the most
likely scenario for the U.S. economy," said Scott Hoyt, a senior economist at
Moody's Analytics in West Chester, Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Nick Zieminski and Chizu Nomiyama)
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