By Lucia Mutikani
WASHINGTON, March 26 (Reuters) – New applications for U.S. unemployment benefits rose slightly last week, suggesting the labor market remains stable and likely giving the Federal Reserve scope to hold interest rates steady while monitoring inflation risks from the conflict in the Middle East.
The report from the Labor Department on Thursday also showed the number of people collecting unemployment checks in mid-March was the lowest in nearly two years. Part of the decline, however, was probably due to people exhausting their eligibility for aid, which is limited to 26 weeks in most states.
The job market remains in what economists describe as a “low-hire, low-fire” state. Despite the relative calm, economists expected the labor market would take a hit from the U.S.-Israeli war with Iran, which has sent oil prices surging.
“It takes time for companies to recognize what a shock like this means for the economy, and then to have the conviction needed to start shedding workers,” said Carl Weinberg, chief economist at High Frequency Economics. “Things will decay, we are sure. However, they have not started to decay yet.”
Initial claims for state unemployment benefits increased 5,000 to a seasonally adjusted 210,000 for the week ended March 21. Economists polled by Reuters had forecast 210,000 claims for the latest week. Claims have been tucked in a 201,000-230,000 range this year amid low layoffs.
Economists said lingering uncertainty caused by President Donald Trump’s aggressive import tariffs has undercut demand for workers, with private nonfarm payrolls averaging only 18,000 jobs per month in the three months through February. Reduced labor supply because of the Trump administration’s immigration crackdown also is weighing on job growth, they said.
That situation has created what Fed Chair Jerome Powell this month called a “zero-employment growth equilibrium,” that has “a feel of downside risk.” The turmoil in the Middle East has sparked worries of a surge in inflation. Oil prices have jumped more than 30% since the war started at the end of February.
Goldman Sachs estimated the oil price shock could raise the unemployment rate by one-tenth of a percentage point and reduce nonfarm payrolls by roughly 10,000 jobs per month on a net basis through the end of this year.
“We expect the unemployment rate to rise 0.2 percentage point in total to 4.6% by the third quarter, partly because of this impact from the oil shock and partly because job growth is already running at a pace that we think is a bit too slow to keep up with labor supply growth,” Goldman Sachs economist Pierfrancesco Mei wrote in a note.
Stocks on Wall Street were trading lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.
INFLATION RISKS RISING
Import and producer prices shot up in February, and economists expected the hit from the war, which has also raised fertilizer prices, to be evident in consumer inflation data for March. Economists have been steadily raising their inflation forecasts for this year as the conflict drags on.
The U.S. central bank left its benchmark overnight interest rate in the 3.50%-3.75% range this month. In updated projections released alongside the decision, Fed policymakers anticipated only a single reduction in borrowing costs this year. Financial markets, however, see the odds of any rate cut fading.
The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, decreased 32,000 to a seasonally adjusted 1.819 million during the week ended March 14, the lowest level since May 2024, the claims report showed.
The so-called continuing claims data covered the period during which the government surveyed households for March’s unemployment rate. Continuing claims fell between the February and March survey weeks.
Economists were split on what this meant for March’s unemployment rate, with some predicting a decline and others a rise. They noted that the data did not include young people who are out of work and are having a tough time finding employment. Members of this demographic typically have limited or no work history, disqualifying them from claiming unemployment benefits.
The Chicago Fed is forecasting the unemployment rate to be 4.46% this month, which would round up to 4.5%. The unemployment rate increased to 4.4% in February from 4.3% in January.
“The relationship between claims and unemployment is relatively weak from month to month, partly due to noise in the employment report’s household survey, but also because only around a quarter of those unemployed are eligible to claim, with the long-term unemployed and new entrants to the labor market generally excluded,” said Oliver Allen, senior U.S. economistat Pantheon Macroeconomics.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
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