Weak U.S. data points to further Fed easing; new jobless claims rise

10/14/2010

WASHINGTON — New U.S. claims for jobless benefits unexpectedly rose last week, hardening the view the central bank will pump more money into the economy in hopes of boosting growth and lowering unemployment.

At the same time, record-high imports from China helped push the U.S. trade deficit wider in August, which could drag on U.S. growth and increase international tensions over trade and currency policy.

“We are basically plodding along at subpar growth. Overall, the whole data set is disappointing,” said Omair Sharif, an economist with RBS Securities in Stamford, Connecticut.

The weak economic data kept the pressure on President Obama's Democratic party, which looks likely to lose control of the House in Nov. 2 elections, a Reuters-Ipsos poll projected Wednesday.

U.S. stocks were lower at midday, weighed down by the data and a drop in bank stocks on concerns over the impact of a state probe of foreclosure practices.

The dollar hit a low for the year against a basket of major currencies on expectations the Federal Reserve will further ease monetary policy, but bond prices were little changed.

Initial claims for state unemployment benefits rose to a higher-than-expected 462,000 in the latest week, the Labor Department said Thursday.

In a sign of modest improvement, the number of workers continuing to collect benefits after an initial week of aid dropped in the week ended Oct. 2 to the lowest level since November 2008.

“Job growth is still weak and layoffs will continue,” said economist Christopher Low at FTN Financial in New York.

EYES ON CHINA

The U.S. trade deficit for August jumped to a larger-than-expected $46.4 billion as the shortfall with China hit a record $28.0 billion, the Commerce Department said.

The United States is pressuring Beijing to let its yuan currency appreciate faster, while many emerging economies have taken steps to weaken their currencies to offset the impact of the dollar's decline.

The trade data “will fuel growing fears of a currency war,” said economist Paul Dales at Capital Economics in Toronto. ‘'Calls for action against China are only likely to get louder.”

The trade report is one of the last pieces of data U.S. Treasury Department officials will examine before deciding whether to declare China a currency manipulator in a semi-annual report scheduled to be released Friday.

Higher imports means U.S. consumer demand is picking up. But it also means the increased demand is being met by overseas rather than domestic production, putting a damper on U.S. economic growth.

Forecasting firm Macroeconomic Advisers said it cut its forecast for third-quarter U.S. GDP growth by four-tenths of a percentage point to 1.2 percent on the back of the trade report.

Another report on Thursday showed inflation at the wholesale level rose twice as quickly as expected last month. With little leverage to pass on costs to consumers, the data suggests business profits could suffer.

The Labor Department said U.S. producer prices rose 0.4 percent in September. The core index, which excludes volatile food and energy prices, rose just 0.1 percent.

A Reuters poll on Thursday showed economists' outlook had darkened significantly over the past month, and they unanimously agreed the Fed would embark on a fresh round of asset purchases to prop up the economy and keep the inflation rate from drifting lower, likely as soon as next month.

Policymakers are not fully united about this plan, however. Richmond Federal Reserve Bank President Jeffrey Lacker, who is not a voter on the Fed's policy panel this year, said Wednesday he would probably not support further easing because he is not very worried about subdued inflation.

Fed Chairman Ben Bernanke is likely to give guidance on future policy on Friday when he is scheduled to give a speech on tools policymakers can use to try to spur growth in a low-inflation environment.

The U.S. economy slowed sharply in the second quarter, weighed down by a hefty trade gap and dwindling fiscal stimulus.

The housing sector, which was at the center of the deepest recession since the Great Depression, continues to struggle.

The number of U.S. homes taken over by banks topped 100,000 for the first time in September, though foreclosures are expected to slow in coming months as lenders work through questionable paperwork, real estate data company RealtyTrac said Thursday.