US economy eyes strong 2021 finish as labour market tightens, spending accelerates

The number of Americans filing new claims for unemployment benefits dropped to a 52-year low last week, suggesting economic activity was accelerating as a year ravaged by shortages, high inflation and an unrelenting pandemic draws to a close. 

The plunge in claims reported by the Labor Department on Wednesday was, however, exaggerated by difficulties adjusting the data for seasonal fluctuations this time of the year. Still, the labour market is tightening, with jobless rolls shrinking in mid-November to the smallest since March 2020 when the economy was in the grips of the first wave of Covid-19 infections.

The economy's strengthening tone was confirmed by other data showing strong consumer spending in October as well as business orders for equipment, excluding transportation. The goods trade deficit narrowed sharply last month as exports surged.

But prices remained stubbornly high, with annual inflation jumping by the most in nearly 31 years. The raft of solid reports ahead of Thursday's Thanksgiving holiday prompted economists to boost their fourth-quarter growth estimates to as high as an 8.6 per cent annualized rate.

"There might be some seasonal adjustment problems, but the handwriting is on the wall and all the anecdotal reports on how companies cannot find the help they need is true," said Christopher Rupkey, chief economist at FWDBONDS in New York.

"The economy will finish the year with a bang, there are lots to give thanks for."

Initial claims for state unemployment benefits tumbled 71,000 to a seasonally adjusted 199,000 for the week ended Nov. 20, the lowest level since mid-November 1969.

Economists polled by Reuters had forecast 260,000 applications for the latest week.

Unadjusted claims rose 18,187 to 258,622 last week amid a surge in Virginia, which offset declines in California, Kentucky and Missouri. More volatility is likely over the holiday season.

"The claims series can be noisy and especially choppy around holidays like Thanksgiving when the seasonal factors anticipate large swings in the underlying data," said Daniel Silver, an economist at JPMorgan in New York. "But even so, initial claims fell by more than a half-million over the year through Nov. 20, both before and after seasonal adjustment."

Claims have declined from a record high of 6.149 million in early April 2020, and are now viewed as consistent with a healthy labour market, though an acute shortage of workers caused by the pandemic is hindering faster job growth.

But there is hope for an expansion of the labour pool. The number of people continuing to receive benefits after an initial week of aid dropped 60,000 to 2.049 million in the week ended Nov. 13, a 20-month low, the claim report showed. 

There were 10.4 million job openings as of the end of September. The workforce is down 3 million people from its pre-pandemic level, even as generous federal government-funded benefits have expired, schools have reopened for in-person learning and companies are raising wages.

Stocks on Wall Street fell. The dollar gained versus a basket of currencies. US Treasury prices rose.

Brightening picture

Signs the economy was regaining momentum after hitting a speed bump in the July-September quarter as coronavirus cases flared up over summer and shortages became more widespread could result in the Federal Reserve quickly winding up its bond-buying program.

Indeed, minutes of the US central bank's Nov. 2-3 policy meeting published on Wednesday showed some Fed officials would be open to doing so. 

"We see the Fed accelerating tapering in January to clear the runway for a September rate liftoff," said Lydia Boussour, lead US economist at Oxford Economics in New York.

A separate report from the Commerce Department on Wednesday showed gross domestic product rose at a 2.1 per cent rate in the third quarter. That was a slight upward revision from the 2.0 per cent pace estimated in October but was still the slowest in more than a year. The economy grew at a 6.7 per cent rate in the second quarter.

But that is all in the rear-view mirror. A third report from the Commerce Department showed consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.3 per cent in October after rising 0.6 per cent in September.

Consumers, buoyed by rising wages and massive savings, bought motor vehicles and travelled, showing no signs yet of holding back because of high inflation.

Global economies' simultaneous recovery from the pandemic, fueled by trillions of dollars in relief money from governments, has strained supply chains, unleashing inflation.

President Joe Biden announced on Tuesday that the United States would release 50 million barrels of crude from the US Strategic Petroleum Reserve to help cool oil prices, in coordination with China, India, South Korea, Japan and Britain.

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.4 per cent last month after gaining 0.2 per cent in September. In the 12 months through October, the so-called core PCE price index accelerated 4.1 per cent. That was the largest gain since January 1991 and followed a 3.7 per cent year-on-year advance in September.

The core PCE price index is the Fed's preferred inflation measure for its flexible 2 per cent target. 

Adjusted for inflation, consumer spending rose a solid 0.7 per cent.

In another boost to the economy, orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.6 per cent last month, the Commerce Department said in a fourth report. 

With corporate profits hitting a record high last quarter, businesses are likely to keep spending.

More goods were exported in October, sharply narrowing the goods trade deficit by 14.6 per cent to $82.9 billion. If the trend holds, trade could contribute to GDP growth this quarter.

Wholesalers continued to rebuild inventories last month though motor vehicle shortages stymied progress by retailers, a fifth report showed.

Inventory accumulation, the key driver of GDP growth last quarter, will likely continue to support the economy. The strong data flow led the Atlanta Fed to raise its fourth-quarter GDP growth estimate to an 8.6 per cent rate from an 8.2 per cent pace. JPMorgan boosted its forecast to a 7.0 per cent pace from a 5.0 per cent rate.