U.S. Labor Market Firming, but Inflation Remains Benign

By Lucia Mutikani

WASHINGTON -- The number of Americans filing new claims for jobless benefits fell sharply last week and a gauge of factory activity hit an eight-month high in early November, hinting at some strength in the economy.

Other data Thursday showed wholesale prices fell for a second straight month in October, the latest sign of a lack of inflation pressure which helps give the Federal Reserve leeway as it considers when to scale back its bond-buying stimulus.

"Claims and manufacturing activity remain supportive for continued moderate economic growth in the fourth quarter," said Sam Bullard, a senior economist at Wells Fargo Securities (WFC) in Charlotte, N.C.

Initial claims for state unemployment benefits fell 21,000 to a seasonally adjusted 323,000, the Labor Department said. Economists had forecast a drop to just 335,000, and some cautioned that a public holiday last Monday could have contributed to some of the large decline. The department, however, said there were no special factors influencing the data, which covered the survey period for the government's report on employment in November.

A four-week moving average meant to iron out week-to-week volatility fell 6,750 to 338,500.

"There is no evidence of a pickup in layoffs and the latest report on claims should be seen as a neutral to slightly positive reading on payroll growth," said John Ryding, chief economist at RDQ Economics in New York.

Factory Activity Up, Inflation Muted

Separately, a survey of factory purchasing managers showed activity picking up. Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers Index rose to an eight-month high of 54.3 from 51.8 in October.

Respondents linked the rebound from a one-year low touched last month partly to the end of a partial government shutdown and a rise in demand from domestic and overseas customers.

But the optimism over manufacturing was tempered somewhat by a regional factory survey showing a sharp slowdown in activity in the mid-Atlantic region in November. %VIRTUAL-article-sponsoredlinks%Some economists said this was likely a delayed reaction to last month's 16-day government shutdown.

"The manufacturing data suggests there is still some momentum," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York. "I think what you still need to see now is follow-through into job gains."

The data helped lift stocks on Wall Street, while the dollar climbed to a 4½ month high against the yen and U.S. Treasury debt prices rose.

The jobless claims and Markit factory data added to recent reports on nonfarm payrolls and retail sales that have suggested the economy is gaining momentum. Despite the improving growth picture, inflation remains virtually absent.

The Labor Department said its producer price index slipped 0.2 percent last month as gasoline prices tumbled, the largest decline since April.

Excluding volatile food and energy costs, producer prices rose 0.2 percent, boosted by the introduction of new motor vehicle models. Excluding cars and trucks, the core PPI was up only 0.1 percent.

During the last 12 months, overall producer prices have risen just 0.3 percent, with core prices up 1.4 percent. The data follows a report on Wednesday that showed consumer price inflation easing to a four-year low of 1 percent.

"With Europe still in a funk, and China struggling with recovery from a slowdown, there is no spark to get inflation rolling anytime soon," said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Mass.