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The number of Americans filing new applications for unemployment benefits fell sharply last week as the spring break-related boost from the prior week faded, suggesting the labor market continued to chug along, though risks are mounting from tariffs.
Employers are hoarding workers after difficulties finding labor during and after the COVID-19 pandemic. But that could become tougher as other data from the Labor Department on Thursday showed worker productivity dropping for the first time in almost three years in the first quarter, lifting labor costs.
Though productivity was likely distorted by President Donald Trump’s sweeping import duties, which depressed output last quarter, it nonetheless highlighted the economic risks wrought by the ever-shifting trade policy.
“Pro-cyclical productivity growth, a resilient labor market, and solid household income gains remain critical pillars of U.S. exceptionalism,” said Gregory Daco, chief economist at EY-Parthenon. “However, the durability of these pillars is being tested. With tariffs increasing the cost of goods sold … the ability of firms to maintain margin discipline without resorting to labor shedding is under pressure.”
Initial claims for state unemployment benefits dropped 13,000 to a seasonally adjusted 228,000 for the week ended May 3. Economists polled by Reuters had forecast 230,000 claims for the latest week. The decline unwound some of the surge from school spring breaks in New York state, which had lifted claims to a two-month high.
Unadjusted claims for New York tumbled 15,089 last week. They had soared 15,418 in the prior week, attributed to layoffs in the transportation and warehousing, accommodation and food services as well as public administration and educational services industries.
But filings vaulted 6,906 in Michigan, potentially hinting at layoffs in the automobile industry amid duties on motor vehicles and parts. General Motors and Ford Motor have pulled their annual forecasts. General Motors said it expected a $4-$5 billion tariff hit on profits, while Ford estimated the drag at $1.5 billion.
A separate program for unemployment compensation for federal employees (UCFE), which is reported with a one-week lag, still showed little impact of the mass firings of public workers, part of the Trump administration’s unprecedented campaign to drastically shrink the federal government.
Many workers have taken severance packages, which will run out in September, while others have been put on paid leave after courts ordered their reinstatement.
Trump’s tariffs, including hiking duties on Chinese imports to 145%, have soured business and consumer sentiment, heightening economic uncertainty. Trump sees the tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base.
Economists say it is only a matter of time before the weakness in business and consumer surveys spills over to so-called hard data like claims, inflation and employment reports.
They expect the tariff drag to become evident in the second half of this year.
The Federal Reserve on Wednesday kept its benchmark overnight interest rate in the 4.25%-4.50% range. Fed Chair Jerome Powell told reporters “the tariff increases announced so far have been significantly larger than anticipated,” adding “if sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment.”
Stocks on Wall Street traded higher after Trump announced a trade deal with the United Kingdom. The dollar rose against a basket of currencies. U.S. Treasury yields were higher.
WORKER HOARDING
Worker hoarding accounts for most of the labor market’s resilience. Some companies more exposed to the trade tensions have started laying off workers, though on a small scale.
An Institute for Supply Management survey last week showed manufacturing employment remained depressed in April, noting that “layoffs were the primary tools used, an indication that head-count reduction is becoming more urgent.”
Rising economic uncertainty has added to companies’ hesitancy to hire more workers, leaving those who lose their jobs experiencing long bouts of unemployment.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 29,000 to a seasonally adjusted 1.879 million during the week ending April 26, the claims report showed.
The unemployment rate was unchanged at 4.2% in April, but the median duration of joblessness jumped to 10.4 weeks from 9.8 weeks in March. The economy added 177,000 jobs in April.
In a separate report, the Labor Department’s Bureau of Labor Statistics said nonfarm productivity, which measures hourly output per worker, fell at a 0.8% annualized rate in the first quarter. That was the first decline since the second quarter of 2022 and followed a 1.7% growth pace in the October-December quarter. Productivity grew at a 1.4% rate from a year ago.
The quarterly drop in productivity was flagged by the government’s advance gross domestic product report for the first quarter published last week, which showed the economy contracting at a 0.3% rate, the first decline in three years.
The economy was swamped by a flood of imports as businesses rushed to bring in goods before tariffs kicked in.
Unit labor costs — the price of labor per single unit of output — jumped at a 5.7% rate in the first quarter after rising at a 2.0% rate in the October-December period.
Labor costs are volatile. They rose at a 1.3% rate from a year ago, down from a 1.9% rate in the prior quarter and supporting the Fed’s contention the labor market is not a significant source of inflation. The U.S. central bank has a 2% inflation target. Nonetheless, the first-quarter surge in labor costs is worrisome.
“Higher costs for workers are coming at an inopportune time for businesses with profit margins expected to be squeezed by rising costs for inputs from tariffs and increasing signs of waning consumer demand,” said Ben Ayers, senior economist at Nationwide. “As a result, we expect business investment to remain sluggish in coming quarters, acting as a further headwind for overall growth.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
