The Week in Review: Higher Unemployment, Lower Productivity, and a Dovish Fed

Unemployment claims rose and productivity weakened in the United States while the Federal Reserve announced falling growth expectations were encouraging it to maintain a loose monetary policy.

Unemployment claims rose and productivity weakened in the United States while the Federal Reserve announced falling growth expectations were encouraging it to maintain a loose monetary policy.

Federal Reserve Chairwoman Janet Yellen said in a press conference that economic growth has moderated in the United States, causing the Federal Open Market Committee to lower their GDP growth expectations to 2.3% to 2.7%, down from 2.6% to 3% growth estimates from the September and December meetings. The FOMC’s lower outlook has bolstered the Fed’s dovish monetary policy, leading the Fed Chair to hint that an interest rate hike may not come in June.

Despite the weakness, Yellen noted that economic indicators were still pointing to an improvement, albeit the economic gains were coming at a very slow pace. “We continue to project above-trend growth, we continue to project improvement in the labor market,” she said in a statement, adding that a strong dollar was hurting parts of the economy, particularly exports.

Unemployment Rises

After the Federal Reserve announced its lower expectations, the Department of Labor reported unemployment claims rose to 291,000, up slightly from the previous week and helping the 4-week average stay above 300,000. After a steep fall in unemployment claims throughout 2013 and 2014, the average for total claims has steadily risen since December of last year, and some analysts expect it to rise further.

While the growth in unemployment is worrying, the number of claims remains below the historical average throughout the last two decades, and is at the lowest point since 2007. Some analysts believe the rise in unemployment claims is only temporary, and more job growth thanks to a strengthening economy will cause claims to fall later in the year.

Productivity Falls

In addition to rising joblessness, one indicator of manufacturing strength has fallen far short of expectations, indicating factory output could stall later in the year.

According to the Philadelphia Federal Reserve’s March manufacturing survey, current activity fell from a 5.2 reading in February to 5.0 in March. The employment index stagnated at 3.5, which the Fed notes is “well below its average reading of about 14 over the second half of last year.”

With less manufacturing activity and employment, the Fed also saw more signs of deflation. “The prices paid index fell 8 points to -3.0 in March, its first negative reading since the summer of 2009,” the Fed noted, indicating that weak demand for goods could lead to future declines in production.

The Philly Fed also noted that most future indicators are positive, “but are at lower levels than last year,” suggesting that manufacturing growth is decelerating.