U.S. economy tepid in early second quarter, but jobs market resilient

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy was on a modest growth path early in the second quarter with home resales falling in April and manufacturing activity on the backfoot in May, although the labor market continued to tighten.

Growth is struggling to rebound strongly after slumping at the start of the year, weighed down by bad weather, a strong dollar, port disruptions and deep energy spending cuts.

The sturdy labor market keeps the Federal Reserve on track to raise interest rates later this year. Minutes of the U.S. central bank’s April meeting released on Wednesday showed most policymakers saw little chance of a June rate hike because of the anemic pace of the rebound in growth so far.

“The labor market is doing well and continues to tighten. Still, the economy got off to a slow start this quarter. It seems it hasn’t found a rhythm after the poor first three months of the year,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

The National Association of Realtors said existing home sales declined 3.3 percent to an annual rate of 5.04 million units last month. Despite the fall, which followed a hefty increase in March, the sales pace remained above 5 million units.

The Realtors group said sales continued to be hampered by a shortage of properties on the market, which is pushing up home prices and limiting choice for potential buyers.

But last month’s drop in sales could be temporary amid signs supply is gradually improving as higher house prices encourage more sellers to put their properties on the market.

The inventory of unsold homes on the market increased 10 percent from March to 2.21 million units. However, supply was down 0.9 percent from a year ago. At April’s sales pace, it would take 5.3 months to clear houses from the market, up from 4.6 months in March.

The median price for a previously owned homed rose 8.9 percent in April from a year ago, the largest gain since January 2014 and marking the 38th straight month of year-over-year price increases.

“Supply constraints continue to push home prices skyward, but new home sales are picking up and new construction is beginning to follow suit. These developments should help ease supply pressures,” said Stephanie Karol, a U.S. economist at

IHS Global Insight in Lexington, Massachusetts.

“We expect existing home sales to regain momentum in the spring and summer.”

SOFT MANUFACTURING

In a separate report, the Philadelphia Fed said its business activity index dipped to 6.7 this month from 7.5 in April. Any reading above zero indicates expansion in the region’s manufacturing.

That weakness was mirrored by another report from financial data firm Markit showing its preliminary U.S. manufacturing purchasing managers’ index fell to 53.8 this month from 54.1 in April. A reading above 50 represents growth in national factories.

Manufacturing is being pressured by a strong dollar and deep spending cuts by energy companies whose profits have been squeezed by lower crude oil prices.

There is cautious optimism, however, that a fading dollar rally could ease some of the pressure on manufacturing. The Philadelphia Fed survey showed an increase in demand for manufactured goods and a rise in shipments.

U.S. stocks were trading higher, while the dollar slipped against a basket of currencies. U.S. Treasury debt prices rose.

In a fourth report, the Labor Department said initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 274,000 for the week ended May 16.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell to a fresh 15-year low.

Claims have been running below 300,000, a threshold associated with a strengthening labor market, for 11 straight weeks, a very rare occurrence that economists say underscores the jobs market’s resilience.

The claims data covered the period during which the government surveyed employers for the payrolls portion of May’s employment report. The four-week average of claims fell 18,750 between the April and May survey period, suggesting another month of job growth above 200,000.

Nonfarm payrolls rose 223,000 in April and the unemployment rate slipped to a near seven-year low of 5.4 percent.

The claims report showed the number of people still receiving benefits after an initial week of aid fell 12,000 to 2.21 million in the week ended May 9. That was the lowest level since November 2000.

The unemployment rate among people receiving benefits fell 0.1 percentage point to 1.6 percent, the lowest since July 2000. This rate tracks the short-term unemployment rate.

“With long-term unemployment on a downward trend, we would not be surprised to see the unemployment rate fall to 5.3 percent in May,” said John Ryding, chief economist at RDQ Economics in New York.

(Reporting by Lucia Mutikani; Additional reporting by Jason Lange; Editing by Andrea Ricci)

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