U.S. jobless claims fall; boost hopes for recovery

Congress considering tax changes to further reduce unemployment rate
By Lucia Mutikani
|Canadian Payroll Reporter|Last Updated: 12/10/2010

(Reuters) — Fresh U.S. economic data on Thursday provided more signs of economic recovery, with claims for jobless benefits falling and wholesalers stocking up in anticipation of strong holiday demand.

Initial claims for state unemployment benefits dropped 17,000 to a seasonally adjusted 421,000, the Labor Department said on Thursday, easing doubts about the jobs market after a surprisingly weak report on November employment last Friday.

"It's another report that suggests the monthly employment numbers that we got last week probably understated the position in jobs, and it's another number that suggests we're going to get some upside surprises in economic activity," said Michael Strauss, chief operating officer and chief economist of Commonfund, in Connecticut.

The government said last Friday that employers added a mere 39,000 jobs last month, while the jobless rate spiked to 9.8 percent from 9.6 percent.

"Assuming we get the passage of a (tax) plan in Washington, we're probably looking at a situation where it wouldn't surprise me if we got either first or second quarter of next year GDP growth near 4.0 percent," Strauss said.

The U.S. Congress is debating a tax plan that would extend personal income, dividend and capital gains tax cuts and renew unemployment benefits for a further period.

The plan is expected to boost economic growth next year by anywhere from half to a full percentage point and cut the stubbornly high unemployment rate by between a quarter to a half a percentage point.

A separate report from the Commerce Department on Thursday showed wholesale inventories rose 1.9 percent in October even as sales increased at the fastest rate in seven months, suggesting businesses were growing optimistic about a healthy holiday shopping season.   

The economic outlook was also brightened by a third report from the Federal Reserve showing household wealth rebounded $1.2 trillion in the third quarter after falling $1.4 trillion in the prior period.

U.S. stocks were slightly on Thursday after the encouraging data, but gains were limited by this week's rise in U.S. Treasury debt yields and a firmer U.S. dollar.


The surprisingly small gain in employment last month had blurred the labor market picture, but the bigger-than-expected drop in weekly new claims for unemployment benefits strengthened perceptions a durable recovery was under way.

In a sign that a gradual labor market healing was firmly entrenched, the four-week average of new jobless claims, viewed as a better measure of underlying trends, fell 4,000 to 427,500, the lowest level since early August 2008.

Both initial claims and the four-week average have now held below 450,000 for five straight weeks. The 450,000 mark is generally considered by economists as dividing line between a market where jobs are growing and where they are being lost.

"The change coincides with a modest improvement in small firms' sentiment and the end of the contraction in bank lending to commercial and industrial companies," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

"This is not an accident, in our view. Small firms, which employ half the work force, have been hamstrung by tight credit. If claims continue to drift down it would be reasonable to expect better payroll numbers very soon."

A Bank of America-Merrill Lynch survey of chief financial officers released on Thursday showed nearly half of the 801 executives who participated expected their companies to hire employees next year, up from 28 percent who expected to hire in 2010.

Another encouraging sign in the claims data was that the number of people still receiving benefits under regular state programs after an initial week of aid fell in the week ended November 27 to the lowest level since mid-November 2008.

The number of people on emergency unemployment benefits in the week ended November 20, the latest week for which data is available, also fell sharply.

A total of 8.30 million people were claiming unemployment benefits during the November 20 period under all programs, down 611,994 from the prior week.

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