Workers staying unemployed

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Thursday June 21 1:52 PM ET

Workers Staying Unemployed

By Joanne Morrison

WASHINGTON (Reuters) - A growing number of U.S. workers are remaining within the ranks of the unemployed, a government report showed, raising fresh questions about how soon the Federal Reserve can start to scale back its aggressive interest-rate cutting campaign.

The Labor Department reported on Thursday that the number of Americans filing continued claims for unemployment benefits was a hair's breadth below 3 million in the week ended June 9.

That was the highest level since early November 1992, when the United States was still shaking off the worst effects of a recession, and signaled that laid-off workers are not getting re-employed as quickly as in the past.

For the past three weeks, these so-called continued claims have flirted with the 3 million level, indicating that the pace of hiring is slow and the U.S. employment market is indeed weakening further.

And, while most Wall Street dealers still expect the Fed to slow its frenetic interest-rate cutting pace when it meets next week by trimming key short-term rates a slim quarter of a percentage point, a recent spate of economic data showing virtually no signs of recovery may impel a bigger move.

``To me that's another confirmation that the Fed is going to be cutting interest rates by a half point, not by a quarter point,'' economist Sung Won Sohn of Wells Fargo Bank in Minneapolis said of the claims report and April trade data.

SLOWING AT HOME AND ABROAD

In a separate report, the government said the U.S. trade gap narrowed slightly in April as exports and imports both fell amid an economic slowing in the United States and abroad. ``You can see how important the U.S. locomotive has been and now the U.S. economy is stalling and therefore it certainly is having a big impact overseas,'' Sohn said.

There were some signs of an improvement in the blighted manufacturing picture, however. Industrial activity in the U.S. mid-Atlantic region shrank for a seventh straight month in June but at a very slow pace, according to a report from the Federal Reserve Bank of Philadelphia that suggested a deep manufacturing slump may soon end.

``The economy looks bad now, but the conditions for improvement are starting to unfold and we'll probably see better numbers later in the year,'' Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis, said of the Philadelphia Fed report.

With the exception of capital spending plans, the survey's six-month forecasts pointed to a manufacturing recovery in the region surrounding Philadelphia by the end of the year.

The Federal Reserve Bank of Philadelphia said its monthly index of business conditions in Delaware, eastern Pennsylvania and southern New Jersey rose to -3.7 in June from -8.8 in May, the latest rise in a steady improvement seen since January.

But economists said the weak jobs claims report and the bleak trade statistics added to signs that have called hopes for a quick economic turnaround into question, even after the Fed's five sharp interest-rate cuts this year.

``We've just gotten through the most aggressive interest rate cuts in 20 years, but there is very little evidence that those cuts have done anything,'' said Mark Vitner, economist with First Union Securities in Charlotte, N.C.

So far, the U.S. Treasury bond market has already priced in a 25 basis point cut by the Fed at its next policy-setting meeting, scheduled for June 26-27. A bigger rate reduction by the central bank next week would likely be good news for the bond market, economists said.

``I think a 50-basis-point cut would probably produce a more favorable result for the bond market. It would state very clearly that the Fed is still concerned about the lack of any tangible signs of improvement in the economy,'' Vitner said.

On Thursday, prices for longer-dated Treasuries moved higher, with the 30-year bond up over a point near midday, pushing the yield down to 5.640, while the 10-year note was up 6/32s to yield 5.188.

NEW UNEMPLOYMENT CLAIMS FALL

While the number of workers continuing on state unemployment benefits has risen, there were actually fewer new applications for these benefits filed last week. First-time claims for state unemployment insurance benefits fell 34,000 to a seasonally adjusted 400,000 in the week ended June 16 from 434,000 in the prior week, defying Wall Street projections, on average, for a modest drop to 423,000 claims.

Analysts said that while the decrease was bigger than expected, it was no sign of strength in the labor market. ``We're likely to see more weeks of big swings like this,'' said Vitner, adding that temporary plant shutdowns during the summer can skew the data.

Even with the latest weekly decline, first-time applications have hovered around the 400,000 level for five straight weeks, the longest run since a similar string from August 29, 1992 to September 26, 1992.

The four-week moving average, closely watched by economists because it smooths out weekly volatility, fell to 422,500 in the week ended June 16 from 425,250 the prior week.

-- Swissrose (cellier3@mindspring.com), June 21, 2001


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