U.S. Rate Risks Rise as Jobless Claims Fall Again, 2Q GDP Revised Higher

By Geoffrey Smith

Investing.com -- The chances of another 75 basis-point increase in U.S. interest rates strengthened on Thursday, as weekly labor market data again turned out stronger than expected.

At the same time, revised statistics showed that the economy shrank less than initially reported in the second quarter.

The Labor Department said initial claims for jobless benefits fell to 243,000 last week, their fourth decline in the last five weeks, in a fresh show of strength from the labor market. The numbers suggest that there are still more than enough job openings in the economy to absorb a pickup in the rate of lay-offs. Continuing claims also fell by 19,000 to 1.415 million.

At the same time, the Bureau of Economic Analysis revised up its estimates for gross domestic product in the second quarter to show an annualized drop of 0.6%, rather than the 0.9% initially reported.

Greg Daco, chief economist with EY, suggested via Twitter that the GDP figures may still be understating the actual strength of the economy in the period. He noted that Gross Domestic Income and Gross Domestic Output, two economic accounting measures largely comparable to GDP, were both in positive territory, rising at an annualized rate of 1.4% and 0.4%, respectively.

"In simple terms, the economy is cooling but not as fast as GDP indicates," Daco said.

The GDP figures were affected to a large degree by aggressive inventory reduction, as retailers, in particular, scrambled to adjust their stock levels having failed to anticipate the slowdown in demand that rapid price increases would cause. Inventories shaved a chunky 1.8 percentage points off the quarterly growth numbers.

Despite isolated problems with inventory buildups, U.S. corporate profitability still rose to a historic high in the quarter. According to the Bureau of Economic Analysis data, non-financial corporate profits as a share of gross value added rose to 15.5%, the highest level since 1950.

The numbers come hours after The Wall Street Journal published an interview with Atlanta Federal Reserve President Raphael Bostic saying that it may be necessary to raise the Fed Funds target range by another 75 basis points in September if economic data stay strong.

Bostic pointed to the upcoming September labor market report and August inflation numbers, both of which will be published before the Fed next meets. If data remains strong and inflation doesn’t clearly soften, “then it may make a case for, you know, another 75 basis point move," the WSJ quoted him as saying.