By Lucia Mutikani
WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits increased less than expected last week, pointing to a still-tight labor market, while the economy rebounded faster than previously estimated in the third quarter.
Labor market strength, which also was underscored by some shrinking of unemployment rolls in early December after mostly expanding since October, raises the risk that the Federal Reserve could continue raising interest rates to a higher level and keep them there for a while as it tackles inflation. The U.S. central bank is trying to cool demand for everything from housing to labor to bring inflation back to its 2% target.
"The economy isn't quite as close to death's door as markets had thought," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The Fed may well need to raise interest rates even higher in 2023 because the economy isn't slowing so upward price pressures may persist."
Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 216,000 for the week ended Dec. 17, leaving the bulk of the prior week's decline intact, Labor Department data showed on Thursday.
Economists polled by Reuters had forecast 222,000 claims for the latest week. Claims have swung up and down in recent weeks, but have remained below the 270,000 threshold, which economists said would raise a red flag for the labor market.
A raft of layoffs in the technology sector and interest-rate sensitive industries like housing have not had a material impact on claims so far. Unadjusted claims dropped 4,064 to 247,867 last week, amid big declines in California, Indiana, Ohio and Texas, which offset a large increase in Massachusetts.
Fed Chair Jerome Powell last week said "it feels like we have a structural labor shortage out there." The Fed last Wednesday hiked its policy rate by 50 basis points to a 4.25%-4.50% range, the highest since late 2007. Fed officials expect the rate to rise to between 5.00% and 5.25% next year.
Stocks on Wall Street fell. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.
The claims data covered the period during which the government surveyed business establishments for the nonfarm payrolls component of December's employment report.
Claims fell moderately between the November and December survey weeks, suggesting another month of solid employment gains. Job growth has averaged 392,000 per month this year. Data next week on the number of people on unemployment rolls will offer more clues on the state of hiring in December.
HOARDING WORKERS
Economists believe that companies are likely to cut back on hiring before embarking on layoffs. Employers have been generally reluctant to lay off workers after struggling to find labor during the COVID-19 pandemic.
The claims report showed the number of people receiving benefits after an initial week of aid fell 6,000 to 1.672 million in the week ending Dec. 10, retreating from a 10-month high. The so-called continuing claims, a proxy for hiring, had trended higher since early October.
Despite the recent increases, continuing claims are about 150,000 lower than they were during this time in 2019, which some economists said suggested that the labor market was far from loosening up.
"With continuing claims so low, there is a much smaller pool of 'potential' workers that can be hired into jobs," said Isfar Munir, an economist at Citigroup (NYSE:C) in New York.
"While this could just be indicative of a larger-than-typical amount of people having rolled off the jobless benefits program, it ultimately does not help the labor market loosen unless these persons elect to return to work."
Other economists, however, believed that the unemployment rate for people on jobless benefits stuck at an eight-month high of 1.2% was a sign of caution among businesses about hiring new workers as they braced for a dreaded recession next year.
Nevertheless, labor market strength is helping to underpin the economy by generating solid wage gains, which are contributing to higher consumer spending.
A second report from the Commerce Department on Thursday confirmed the economy rebounded in the third quarter after contracting in the first half of the year.
Gross domestic product increased at a 3.2% annualized rate last quarter, the government said in its third estimate of GDP. That was revised up from the 2.9% pace reported last month. The economy had contracted at a 0.6% rate in the second quarter.
The upward revision to GDP last quarter reflected upgrades to consumer spending, business investment as well as state and local government outlays. Domestic demand was also revised higher to show moderate growth instead of being tepid.
But the housing market decline was deeper than previously estimated, with residential investment contracting for six straight quarters, the longest such stretch since the housing market collapse in 2006.
GRAPHIC: Housing market a major drag on U.S. growth - https://www.reuters.com/graphics/USA-ECONOMY/GDP-HOUSING/akpeqqyqbpr/chart_eikon.jpg
Sixteen out of 22 industries contributed to the rebound in GDP, led by information, professional, scientific and technical services as well as mining, retail trade and real estate, rental and leasing. Construction subtracted the most from GDP followed by utilities and finance and insurance industries.
GRAPHIC: Industry group contributions to percent change in GDP - https://www.reuters.com/graphics/USA-ECONOMY/GDP-INDUSTRY/byvrllnrzve/chart.png
Growth estimates for the fourth quarter are as high as a 2.7% pace, with consumers doing the heavy lifting, also buttressed by savings accumulated during the pandemic.
Income at the disposal of households after adjusting for inflation increased in the third quarter for the first time in a while as price pressures subsided. Business spending on equipment has also remained resilient.
Still, a recession is most likely next year as labor market strength raises the prospect of more rate hikes, further reducing household wealth, which is being squeezed by declining stock market and house prices. Consumers are also running down their savings and a strong dollar will hurt exports.
A third report showed The Conference Board's leading indicator, a gauge of future U.S. economic activity, fell for a ninth straight month in November.
Graphic: U.S. Leading Economic Index hits key level - https://www.reuters.com/graphics/USA-ECONOMY/GDP-INDUSTRY/byvrllnrzve/chart.png
"We expect a mild recession starting in the spring of 2023," said Gus Faucher, chief economist at PNC Financial (NYSE:PNC) in Pittsburgh, Pennsylvania.