U.S. unemployment claims drop to 7-week low

The number of people applying for unemployment benefits fell last week to the lowest level in seven weeks, although applications remain elevated.

The Labor Department said Thursday that applications for benefits dropped by 14,000, to a seasonally adjusted 418,000. The four-week average, a less volatile measure, declined for the first time in four weeks, to 424,750.

Applications have topped 400,000 for 13 weeks, evidence the job market has weakened since the beginning of the year. Applications had fallen in February to 375,000, a level that signals sustainable job growth. They stayed below 400,000 for seven of the next nine weeks. But then applications surged to an eight-month high of 478,000 in April and have shown only modest improvement since.

The department says that about 2,500 applications in Minnesota were from state employees temporarily laid off because of a state government shutdown.

Stock futures rose after payroll processor ADP said the private sector added 157,000 jobs last month. That was more than double what economists had forecast.

The government will release its June employment report on Friday. Economists expect employers added a net total of 90,000 jobs last month and the unemployment rate remained stuck at 9.1 percent, according to a survey by FactSet.

But the ADP and unemployment benefits reports caused several economists to boost their forecasts for hiring in June.

The ADP report "suggests that the U.S. economy started to recover some of the momentum lost over the preceding couple of months," said Paul Ashworth, an economist at Capital Economics, in a note to clients. He expects employers added 80,000 jobs last month, but "if we were starting from scratch, the forecast would be nearer to 120,000."

The economy slowed this spring, partly because of temporary factors. High gas prices forced consumers to cut back on discretionary purchases, such as vacations and appliances, which help drive growth. And the March 11 earthquake in Japan led to a parts shortage that reduced U.S. manufacturing output.

Companies responded by reining in hiring. Employers added only 54,000 net new jobs in May, much slower than the average gain of 220,000 per month in the previous three months. The unemployment rate rose to 9.1 percent from 9 percent in April.
Ian Shepherdson, chief U.S. economist for High Frequency Economics, raised his forecast to 175,000 jobs after seeing the better-than-expected ADP report.

"We always took the view that May was hit by one-time factors like severe weather and supply-chain disruptions but this report suggests those factors were more significant than we thought," Shepherdson said.

The government said last month that the economy grew only 1.9 percent in the January-March quarter. Analysts are expecting similarly weak growth in April-June quarter, as well.

There are signs that growth will pick up in the second half of the year.

Gas prices have declined since peaking in early May at a national average of nearly $4 per gallon. Gas prices averaged $3.58 a gallon nationwide on Thursday, according to AAA.

And manufacturing activity expanded in June at a faster pace than the previous month, according to the Institute for Supply Management. That suggests the parts shortage is beginning to abate.

The economy should grow at a 3.2-percent pace in final six months of the year, according to an Associated Press survey of 38 economists.

Still, growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

The number of people receiving benefits dropped 43,000, to 3.7 million, the department said. But that doesn't include millions of additional laid-off workers who are receiving extended support under emergency programs enacted during the recession. All told, 7.5 million people received unemployment benefits in the week ending June 18, the most recent data available. That's down about 61,000 from the previous week.