By Lucia Mutikani
WASHINGTON (Reuters) - The number of Americans filing new applications for unemployment benefits dropped to a one month-low last week, suggesting an orderly labor market slowdown remained in place, and dashing financial market hopes that the Federal Reserve could cut interest rates by 50 basis points next month.
The economy's resilience was reinforced by other data on Thursday showing retail sales increased by the most in 1-1/2 years in July. Investors have been on edge after a jump in the unemployment rate to a near three-year high of 4.3% in July sparked fears that the economy was either in recession or nearing a downturn, concerns not shared by most economists.
"The economy is not going off the rails," said Christopher Rupkey, chief economist at FWDBONDS. "There is no storm brewing in the labor markets that could possibly argue for a giant-sized 50 basis points rate cut."
Initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 227,000 for the week ended Aug. 10, the Labor Department said. Economists polled by Reuters had forecast 235,000 claims for the latest week.
The second straight weekly decline erased the increase in late July, which had boosted claims to an 11-month high. Much of the rise last month was blamed on temporary motor vehicle plant shutdowns and disruptions caused by Hurricane Beryl in Texas.
Unadjusted claims fell 4,500 to 199,530 last week amid big declines in California, Texas and Massachusetts.
Layoffs remain historically low, with much of the slowdown in the labor market coming from businesses scaling back hiring, trailing an immigration-induced surge in labor supply. The U.S. central bank's 525 basis points worth of rate hikes in 2022 and 2023 are curbing demand.
Financial markets lowered the odds of a half-percentage-point rate reduction at the Fed's Sept. 17-18 policy meeting to 27.5% from 41.5% before the data, according to CME Group's FedWatch tool. They saw a 72.5% chance of a 25-basis-point rate cut, up from 58.5% earlier.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. Treasury prices fell.
"If the economy continues to be resilient, especially in conjunction with slowing inflation, then the Fed can begin a rate-cutting cycle without the economy entering recession and history shows this is an extremely positive environment for the stock market," said Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance.
Companies pulling back on hiring, however, mean it is becoming harder for laid-off workers to land new jobs.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 7,000 to a seasonally adjusted 1.864 million during the week ending Aug. 3, the claims report showed. The so-called continued claims are near levels last seen in late 2021.
BROAD RETAIL SALES GAINS
Nonetheless, the labor market continues to underpin consumer spending through still-high wage growth. A separate report from the Commerce Department's Census Bureau showed retail sales jumped 1.0% in July, the largest increase since January 2023, after a downwardly revised 0.2% drop in June.
Economists had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.3% after previously being reported as unchanged in June.
Retail sales increased 2.7% year-on-year in July. Subsiding inflation, bargain hunting and consumers trading down to lower-priced substitutes are sustaining spending.
Receipts at motor vehicle and parts dealers rebounded 3.6%, reversing a 3.4% drop in June that was blamed on a cyberattack.
Online store sales gained 0.2% after jumping 2.2% in June. Sales at gasoline stations edged up 0.1%. Building material and garden equipment store sales increased 0.9%.
Sales at food services and drinking places, the only services component in the report, rose 0.3% after ticking up 0.1% in June. Economists view dining out as a key indicator of household finances. Furniture store sales advanced 0.5%. Receipts at electronics and appliance outlets vaulted 1.6%.
But consumers spent less at clothing retailers as well as sporting goods, hobby, musical instrument and book stores.
Retail sales excluding automobiles, gasoline, building materials and food services rose 0.3% last month after advancing by an unrevised 0.9% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Last month's gain and June's unrevised increase in core retail sales put consumer spending on a higher growth path early in the third quarter.
Economists at Morgan Stanley raised their third-quarter consumer spending growth forecast to a 2.8% annualized rate from a 2.1% pace. They upgraded their GDP growth estimate to a 2.3% rate from a 2.1% pace. Consumer spending increased at a 2.3% rate in the April-June quarter, contributing to lifting the economy to a 2.8% growth pace during that period.
While some economists have pointed to a decline in savings as portending weaker consumer spending, Bank of America Institute data suggests otherwise.
"It's important to note that not all the drawdown in savings and checking balances has been spent, either," Bank of America Institute said in a note.
"Some households have been moving their money into less-liquid investment accounts. Some households may also have been taking money out of liquid deposits to invest directly in stocks, bonds and other financial assets."
The flow of upbeat reports was dimmed somewhat by a third report from the Fed showing manufacturing production fell 0.3% in July after being unchanged in June.
But a sharp drop in motor vehicle production amid annual plant shutdowns for retooling and disruptions from Hurricane Beryl accounted for much of the decline in factory output. Excluding motor vehicles, manufacturing output rose 0.3%.
"The temporary disruptions should reverse this month," said Thomas Ryan, North America economist at Capital Economics. "Excluding those temporary factors ... it reinforces our view that a soft landing is the most likely outcome for the economy."
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
