Rise in Recurring Jobless Claims Signals Higher US Unemployment

 

U.S. corporate profits fell sharply in the first quarter and could continue to be squeezed this year by higher costs from tariffs that are threatening to undercut the economic expansion.

Profits from current production with inventory valuation and capital consumption adjustments dropped $118.1 billion last quarter, the Commerce Department's Bureau of Economic Analysis (BEA) said on Thursday. Profits surged to $204.7 billion in the October-December quarter.

President Donald Trump's sweeping import duties have cast a shadow over the economy, knocking business and consumer sentiment as well as unleashing unprecedented volatility on financial markets.

A U.S. trade court on Wednesday blocked most of Trump's tariffs from going into effect in a sweeping ruling that the president overstepped his authority. Economists said the ruling, while it offered some relief, had added another layer of uncertainty over the economy.

The increasingly uncertain environment was echoed in minutes of the Federal Reserve's May 6-7 meeting published on Wednesday, which noted "participants judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases."

Companies ranging from airlines, retailers, to motor vehicle manufacturers have either withdrawn or refrained from giving financial guidance for 2025, citing the uncertainty caused by the on-again and off-again nature of some duties.

Businesses front-loaded imports and households engaged in pre-emptive buying of goods last quarter to avoid higher costs, making it difficult to get a clear picture of the economy.

The deluge of imports sent gross domestic product declining at an upwardly revised 0.2% annualized rate in the January-March quarter, the BEA said in its second estimate of GDP.

The economy was initially estimated to have contracted at a 0.3% pace. It grew at a 2.4% rate in the fourth quarter. When measured from the income side, the economy also contracted at a 0.2% rate in the first quarter. Gross domestic income (GDI) expanded at a 5.2% pace in the October-December quarter.

The average of GDP and GDI, also referred to as gross domestic product and considered a better measure of economic activity, declined at a 0.2% rate. Gross domestic product grew at a 3.8% pace in the fourth quarter.

 The number of Americans filing new applications for jobless benefits increased more than expected last week, and the unemployment rate appeared to have picked up in May, suggesting layoffs were rising as tariffs cloud the economic outlook.

The report from the Labor Department on Thursday showed a surge in applications in Michigan last week, the nation's motor vehicle assembly hub. The number of people collecting unemployment checks in mid-May was the largest in 3 1/2 years. The outlook for the economy is dimming, with other data showing a sharp decline in corporate profits in the first quarter.

A U.S. trade court on Wednesday blocked most of Trump's tariffs from going into effect in a sweeping ruling that the president overstepped his authority. Economists said the ruling, while it offered some relief, had added another layer of uncertainty over the economy.

"This is a sign that cracks are starting to form in the economy and that the outlook is deteriorating," said Christopher Rupkey, chief economist at FWDBONDS. "There is nothing great about today's jobless claims data, and the jump in layoffs may be a harbinger of worse things to come."

Initial claims for state unemployment benefits rose 14,000 to a seasonally adjusted 240,000 for the week ended May 24, the Labor Department said. Economists polled by Reuters had forecast 230,000 claims for the latest week.

Initial jobless claims

Unadjusted claims increased 10,742 to 212,506 last week, lifted by a 3,329 jump in filings in Michigan. There were also notable increases in applications in Nebraska and California.

Despite the rise in claims, worker hoarding by employers following difficulties finding labor during and after the COVID-19 pandemic continues to underpin the job market.

Nonetheless, there has been an uptick in layoffs because of economic uncertainty as Trump's aggressive trade policy makes it challenging for businesses to plan ahead.

A report from the Bank of America Institute noted a sharp rise in higher-income households receiving unemployment benefits between February and April compared to the same period last year. Its analysis of Bank of America deposit accounts also showed notable rises among lower-income as well as middle-income households in April from the same period a year ago.

Economists expect claims in June to break above their 205,000-243,000 range for this year, mostly driven by difficulties adjusting the data for seasonal fluctuations, following a similar pattern in recent years.

Minutes of the Federal Reserve's May 6-7 policy meeting published on Wednesday showed that while policymakers continued to view labor market conditions as broadly in balance, they "assessed that there was a risk that the labor market would weaken in coming months."

They noted that there was "considerable uncertainty" over the job market's outlook, adding "outcomes would depend importantly on the evolution of trade policy as well as other government policies."

The U.S. central bank has kept its benchmark overnight interest rate in the 4.25%-4.50% range since December as officials struggle to estimate the impact of Trump's tariffs, which have raised the prospect of higher inflation and slower economic growth this year.

U.S. stocks opened higher. The dollar eased against a basket of currencies after a brief rally. U.S. Treasury yields fell.

SWELLING UNEMPLOYMENT ROLLS

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 26,000 to a seasonally adjusted 1.919 million during the week ending May 17, the claims report showed. The elevated so-called continuing claims reflect companies' hesitance to increase headcount because of the economic uncertainty.

Continuing jobless claims

Continuing claims covered the period during which the government surveyed households for May's unemployment rate. They increased between the April and May survey periods, suggesting an uptick in the unemployment rate this month. The jobless rate was at 4.2% in April.

Many people who have lost their jobs are experiencing long spells of unemployment. The median duration of unemployment jumped to 10.4 weeks in April from 9.8 weeks in March.

With profits under pressure, there is probably little incentive for businesses to boost hiring. Mass layoffs are, however, unlikely with a Conference Board survey of chief executive officers released on Thursday showing most captains of business anticipated no change in the size of their workforce over the next year, even as about 83% said they expected a recession in the next 12-18 months.

Profits from current production with inventory valuation and capital consumption adjustments dropped $118.1 billion in the first quarter, the Commerce Department's Bureau of Economic Analysis (BEA) said in a separate report. Profits surged to $204.7 billion in the October-December quarter.

Companies ranging from airlines and retailers to motor vehicle manufacturers have either withdrawn or refrained from giving financial guidance for 2025, citing the uncertainty caused by the on-again and off-again nature of some duties.

Businesses front-loaded imports and households engaged in pre-emptive buying of goods last quarter to avoid higher costs, making it difficult to get a clear picture of the economy.

The deluge of imports sent the gross domestic product declining at a 0.2% annualized rate in the January-March quarter, the BEA said in its second estimate of GDP. The economy was initially estimated to have contracted at a 0.3% pace. It grew at a 2.4% rate in the fourth quarter.

A column chart titled "US gross domestic product" that tracks the metric over the last year.

Other alternative measures of growth, gross domestic income and gross domestic product, also showed the economy contracting at a 0.2% pace in the first quarter.

The US economy shrank at the start of the year, restrained by weaker consumer spending and an even bigger impact from trade than initially reported.

Gross domestic product decreased at a 0.2% annualized pace in the first quarter, the second estimate from the Bureau of Economic Analysis showed Thursday. That compares with an initially reported 0.3% decline.

US Economy Struggled to Start the Year

GDP report shows downward in consumer spending, a bigger hit from trade

Source: Bureau of Economic Analysis

The economy’s primary growth engine — consumer spending — advanced 1.2%, down from an initial estimate of 1.8% and the weakest pace in almost two years. Meanwhile, net exports subtracted nearly 5 percentage points from the GDP calculation, slightly more than the first projection and the largest on record.

The slight upward revision in GDP reflected stronger business investment and a greater accumulation of inventories. Federal government spending wasn’t as much of a drag as originally reported.

GDP figures are revised multiple times as more data become available, enabling the government to fine-tune its estimate. The first projection, released in late April, showed the economy contracted for the first time since 2022. The final estimate is due next month.

Metric (QoQ, SAAR)	Latest	Prior est.
GDP	-0.2%	-0.3%
Consumer spending	+1.2%	+1.8%
Imports	+42.6%	+41.3%
Business investment	+10.3%	+9.8%
PCE price index, excl. food, energy	+3.4%	+3.5%

Economic growth was dragged down at the start of the year by a surge in imports as US businesses tried to get ahead of President Donald Trump’s tariffs. More moderate consumer spending, as well as a decline in federal government spending, also weighed on the figure.

Since then, the White House has walked back or delayed some of the more punitive levies, and most of the tariffs have been blocked by a US trade court. While the pauses have helped calm Americans’ concerns about the economy and prompted many economists to scrap their recession calls, tariff rates are still substantially higher than before Trump took office.

Forecasters largely expect GDP to rebound in the second quarter as higher duties discourage imports, and the goods already brought in will accumulate in larger inventories that add to growth. Beyond that, economists and policymakers will be paying close attention to how Trump’s policies — including trade, but also immigration and taxation — will impact consumer and business spending going forward.

Thursday’s data showed underlying demand across the economy was weaker than initially thought in the first quarter. Final sales to private domestic purchasers — a measure favored by economists that combines consumer spending and business investment — rose at a 2.5% rate, the slowest in nearly two years.

Consumer spending was revised lower, largely on weaker demand for cars. Outlays for services, including health care and insurance, were also lower.

Trump contends his trade policies will stoke economic growth over the longer term through the revival of domestic manufacturing, which he says will boost employment and lower the prices of US-made goods.

GDI Estimate

The government’s other main gauge of economic activity — gross domestic income — fell 0.2%, after a 5.2% annualized advance in the fourth quarter. That was the first decline since the end of 2022. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services.

The GDI data includes figures on corporate profits. The 2.9% decrease in profits — the most since 2020 — followed a 5.4% advance in the fourth quarter.

While recent data have suggested businesses are mostly taking the hit so far, many firms — including Walmart Inc., the world’s largest retailer — are warning that consumers will start seeing price hikes soon.

Inflation Outlook

The GDP report showed the Fed’s preferred inflation metric — the personal consumption expenditures price index, excluding food and energy — rose 3.4% at the start of the year, down slightly from the first projection. April PCE data are due Friday and will also offer insights into real consumer spending and wage growth at the start of the second quarter.

While recent reports have pointed toward tamer inflation, Fed officials are still wary of price pressures rearing back up again, and, combined with heightened uncertainty, are keeping interest rates on hold for now.

In separate data, continuing jobless claims, a proxy for the number of people receiving unemployment benefits, rose to the highest level since November 2021. Initial claims also increased, according to Labor Department figures released Thursday.