Firings in U.S. remain elevated and factories retrench

BLOOMBERG — More Americans than forecast filed claims for jobless benefits and manufacturing in the Philadelphia region shrank, adding to evidence the U.S. economic expansion is weakening.

Applications for unemployment insurance payments fell by 2,000 to 387,000 in the week ended June 16, according to Labor Department figures released Thursday (June 21). The median forecast of 45 economists surveyed by Bloomberg News called for 383,000. The Federal Reserve Bank of Philadelphia’s factory index dropped to minus 16.6 in June, the lowest level since August.

Stocks and bond yields fell as the data reinforced concerns the recovery is faltering after Fed policy makers yesterday cut their growth forecasts and extended a program to keep long-term interest rates low. Another report today showed sales of existing homes fell in May, showing that tight credit and the weakest employment gains in a year are holding back residential real estate.

“The labor-market recovery appears to be stalling,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York. “We are likely to see further moderation in consumer spending, which suggests weakness in manufacturing. This provides confirmation of the Fed’s stance.”

Elsewhere, euro-area manufacturing shrank in June at the fastest pace in three years and a gauge for China showed output contracted as Europe’s worsening fiscal crisis clouded global economic-growth prospects.

Sales of previously owned U.S. homes declined 1.5% in May to a 4.55 million annual rate, figures from the National Association of Realtors showed in Washington. Nonetheless, the pace of purchases surpassed the 4.26 million houses sold in 2011, showing the market is stabilizing.

“It’s a bumpy trajectory,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “It’s going to be a gradual recovery.”

The claims report showed the four-week average, a less volatile measure, climbed to 386,250, the highest since the week ended Dec. 3, from 382,750.

Last week included the 12th of the month, which coincides with the period the Labor Department uses in its survey of employers to calculate monthly payroll growth. The four-week average for the May survey week was about 10,000 lower, indicating little progress this month. The employment report for June will be released on July 6.

Payrolls in May expanded by 69,000 workers, the slowest pace in a year, and have cooled each month since January. The jobless rate, which climbed to 8.2% in May, has been stuck above 8% since February 2009.

“Momentum is slowing,” said Ryan Wang, at HSBC Securities USA Inc. in New York, the only economist in the Bloomberg survey to correctly forecast the level of claims. “Companies have curtailed demand for labor. This means less income growth. That’s a restraint on consumer spending.”

Estimates for claims in the Bloomberg survey ranged from 371,000 to 390,000. The Labor Department revised the previous week’s figure up to 389,000 from an initially reported 386,000.

Another report today showed the fewest Americans in five months said the economy was improving in June, signaling the slowdown in employment is seeping into consumer psychology.

The share of households viewing the economy as heading in the right direction fell to 22% this month, the lowest since January, pushing the Bloomberg monthly expectations gauge to minus 11 from minus 1 in May. The weekly Bloomberg Consumer Comfort Index was minus 37.9 in the period ended June 17, down from a four-week high of minus 36.4.

“The steady drip of dreary economic data and a deteriorating labor market is reshaping public expectations,” said Bloomberg LP senior economist Joseph Brusuelas. The decline “will likely result in slower spending, which in turn will likely have an adverse impact on business confidence.”

The Philadelphia Fed’s report provided evidence of such a drop. The central bank’s data showed orders and sales contracted this month.

Not all the news on manufacturing today was as dire. Figures from London-based Markit Economics showed U.S. factories continued to expand this month, albeit at a slower pace.

“Businesses are nervous, but they’re not panicking, and that gives the recovery a fighting chance,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pa., who projected the Philadelphia index would drop. “We’re in a soft patch,” he said. “July’s going to be very, very important. If this weakness lingers into July, there’s serious cause for concern.”

Also today, the index of U.S. leading economic indicators rose in May, propelled by a jump in home-building permits, signaling the expansion will be sustained. The Conference Board’s gauge of the outlook for the next three to six months increased 0.3% after a 0.1% drop in April, the New York-based group said.