Jobless Claims Drop, Leading Index Dips

Thu Jul 22, 2004
By Andrea Hopkins

WASHINGTON (Reuters) - The number of Americans signing up for jobless benefits fell more than expected last week, but a closely watched gauge of future economic activity showed momentum slowed in June, according to data released on Thursday.

First-time claims for state unemployment insurance benefits dropped 11,000 in the week ended July 17 to 339,000, the Labor Department said. That was below Wall Street forecasts for 345,000 new claims.

While markets initially read the report as further proof that the job market is improving, statistical quirks in the data and an unexpectedly weak private-sector report on the economy's future later dampened sentiment.

The Conference Board said its index of leading indicators fell 0.2 percent in June to 116.2, suggesting economic momentum has slowed from its heady pace of earlier in the year.

The drop broke a string of three consecutive monthly increases in the forward-looking data and was below Wall Street forecasts for an unchanged reading.

The dollar slipped to session lows against the euro after the report, while prices for U.S. Treasury bonds recovered after traders decided seasonal factors made the unemployment data too distorted to trust.

"The safest bet is to ignore claims for the entire month of July and wait for the July payroll report," economists at RBS Greenwich Capital Markets said in research note.

AUTOWORKERS SKEW DATA

The Labor Department has said recent jobless claims data have been heavily influenced by seasonal factors linked to the closure of car plants for their annual retooling, during which thousands of auto workers briefly claim unemployment benefits.

Initial claims have whip-sawed from 349,000 to 309,000 to 350,000 to 339,000 in the last four weeks.

Still, the indicator's closely watched four-week average, which irons out weekly volatility, dipped to 336,750 last week, down from 339,250 the prior week -- confirming that layoffs continue to slow.

"The latest drop by initial state jobless claims suggests that (Federal Reserve Chairman) Alan Greenspan's optimism was warranted, and that the U.S. economy will regain momentum in the third quarter," said John Lonski, chief economist for Moody's Investors Service in New York.

In testimony before congressional panels this week, Greenspan said: "There have been much clearer indications over recent months that conditions in the labor market are improving."

The number of people who already qualify for benefits and remain on the jobless rolls fell to the lowest level in more than three years, but the Labor Department linked the decline to seasonal factors related to the auto plant shutdowns.

ECONOMIC MOMENTUM HAS SLOWED

The unexpected drop in the Conference Board's index marked the first monthly decline since March 2003.

"Strong economic performance in May gave way to a weaker June," said Conference Board economist Ken Goldstein. "The data reflects a strong economic environment, but one with less momentum."

Home building moderated in June as mortgage rates edged higher and mortgage applications slowed, and retail and auto sales were also weak, Goldstein said.

"But income growth is relatively stable, and investment in equipment is now the hottest sector in the U.S. economy," he said, noting the index is still about 3.4 percent higher in the second quarter than in the first.

Economists were also reluctant to put too much weight on one month of weakness in the index, noting that Greenspan had dismissed recent weak data as a "soft spot" in an otherwise healthy recovery.

"The index of leading indicators reflects the June swoon that appeared in most of the economic indicators for the month," said Insight Economics economist Steven Wood. "These data still suggest that, on balance, the economy has shifted to a moderate self-sustaining expansion from a robust stimulus-led one."

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