US labor market on firmer ground as Hurricane Helene threatens to disrupt strikes

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for jobless benefits rose slightly last week, but the devastation wrought by Hurricane Helene in the southeastern U.S. and strikes at Boeing and ports could affect the job market picture in the near term distort.

Thursday's report from the Labor Department showed that the labor market was wavering at the end of the third quarter, a condition that could allow the Federal Reserve to avoid rushing to make large interest rate cuts. The economy also ended the third quarter on a solid footing. Another report showed that service sector activity rose to its highest level in just over 1 1/2 years in September amid strong growth in new orders.

“Right now, the job market appears to be stable and the economy appears to have missed falling headlong over the cliff into the depths of recession,” said Christopher Rupkey, chief economist at FWDBONDS. “Fed officials are unlikely to pursue aggressive rate cuts unless the labor market continues to deteriorate.”

Initial claims for state jobless benefits rose by 6,000 last week to a seasonally adjusted 225,000 for the week ending Sept. 28. Economists polled by Reuters had forecast 220,000 applications last week.

Unadjusted claims fell by 1,066 to 180,647 last week. However, the decline was smaller than the 5,692 drop expected by the model used by the government to eliminate seasonal fluctuations from the data.

As a result, seasonally adjusted losses increased. Only Michigan reported registrations above 1,000 last week.

Total applications are at a level consistent with a stable labor market based on low levels of layoffs.

However, the peace is likely to be temporarily disrupted after Helene wreaked havoc in North Carolina, South Carolina, Georgia, Florida, Tennessee and Virginia late last week. It destroyed homes and infrastructure and killed at least 162 people across the six states. US Homeland Security Secretary Alejandro Mayorkas said this week that reconstruction would be a years-long “multibillion-dollar undertaking.”

Work stoppages by around 30,000 machinists at Boeing and 45,000 longshoremen at ports on the US East and Gulf Coasts are also likely to dampen the labor market situation.

Although striking workers are not eligible for unemployment benefits, their labor dispute is likely to impact the supply chain and other companies dependent on Boeing and ports, leading to temporary layoffs.

Boeing has announced the temporary layoffs of tens of thousands of employees. Claims in Washington state, where the aircraft maker has large production facilities, rose last week above their recent average.

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Economists disagree about the extent of Helene's damage. Some estimate claims could rise to 250,000 in the coming weeks. Others argued the impact would be minimal.

Abiel Reinhart, an economist at JP Morgan, noted that counties in the six states eligible for FEMA disaster assistance accounted for a fifth of total employment.

“Even if claims were to double or triple in the disaster-affected areas of the Southeast, the impact at the national level would still be quite small and should be easy to see from state-level loss data,” Reinhart said.

Stocks on Wall Street were lower as investors eye the Middle East. The dollar gained against a basket of currencies on safe-haven inflows. US Treasury yields rose.

The development of unemployment has hardly changed

The number of people receiving benefits after an initial week of aid, an indicator of hiring, fell by 1,000 to a seasonally adjusted 1.826 million in the week ended Sept. 21, the claims report showed.

So-called persistent claims have calmed after hitting more than 2 1/2-year highs in July following policy changes in Minnesota that allowed non-teaching staff in the state to apply for unemployment benefits during the summer school break.

The slowdown in the labor market is being driven by lower hiring after the Federal Reserve delivered 525 basis points of interest rate hikes in 2022 and 2023 to combat inflation.

The Fed cut its benchmark interest rate by an unusually large 50 basis points last month to 4.75% to 5.00%, marking the first cut in borrowing costs since 2020, acknowledging growing risks to the labor market.

Federal Reserve Chairman Jerome Powell suggested this week that policymakers were likely to stick with interest rate cuts of a quarter of a percentage point going forward, acknowledging the economy's resilience confirmed by upward revisions to growth data last week.

The economy appears to have retained most of its strength from the second quarter. The Institute for Supply Management said in a separate report on Thursday that its non-manufacturing purchasing managers' index (PMI) rose to 54.9 last month from 51.5 in August, the highest level since February 2023.

A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. While employers in the service sector are holding back on hiring new employees, there is also a shortage of workers in some sectors. The ISM noted that companies' responses to the survey last month included: “Employees are leaving and it is difficult to find new ones.”

Financial markets expect the Fed to cut interest rates again in November and December.

The claims data does not impact the September employment report because it falls outside the survey week. Nonfarm payrolls likely rose by 140,000 last month, after rising by 142,000 in August, according to a Reuters poll. Last year, job growth averaged 202,000 per month.

If the Boeing and port strikes continue beyond next week, they could depress October payrolls on the eve of the Nov. 5 presidential election.

The unemployment rate is expected to remain unchanged at 4.2% in September. It rose from 3.4% in April 2023 as a surge in immigration increased labor supply.

“Hurricane Helene and strikes by longshoremen and Boeing employees will make it more difficult to gauge economic trends in the near term,” said Bill Adams, chief economist at Comerica Bank.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci)