U.S. Jobless Claims Fall as Inflation Rises

Prices are going up and unemployment is going down, but companies are still struggling to pay their debts.  Jobless claims fell 7,000 to 262,000, below the 275,000 expected and beneath the 269,000 prior reading, according to a new report by the U.S. Department of Labor.

Prices are going up and unemployment is going down, but companies are still struggling to pay their debts.  Jobless claims fell 7,000 to 262,000, below the 275,000 expected and beneath the 269,000 prior reading, according to a new report by the U.S. Department of Labor.

The decline in jobless claims comes just at a time when investors are fretting about recessionary trends, driving stock prices down, and fears of weak economic conditions worsening as Americans pull back on spending. However, the unexpected decline in jobless claims could indicate that Americans will have more money in their pockets, which in turn will bolster aggregate demand and lift corporate revenues and profits after over a year of struggling.

The weakness in corporate sales has also lifted default rates, which has caused debt rating agency Moody’s Analytics to warn that companies have lower access to cash and short-term assets that they can use to pay back debts. The firm’s Liquidity Stress Index rose to 8.1% in the middle of February, up from 7.9% in January. The increase was largely a result of oil and gas liquidity stress soaring to 24.4%, almost as high as at the height of the global financial crisis.

Weak growth in America and Europe is also part of the problem, according to Moody’s. “Liquidity strains from soft developing-market growth, widening credit spreads and weaker issuance are affecting some low-rated non-commodity issuers,” the firm said in its report.

Higher Inflation

The weakness in corporate revenues and in aggregate demand have driven yields for U.S. Treasuries lower, as more investors seek to park their money in a safe haven. The fear of low demand and declining prices for both consumers and producers had driven price indices lower; however, the Bureau of Labor Statistics reported in February that consumer prices rose 0.3% for all items except food and energy, often excluded due to their volatility. Including those, the total CPI was flat, versus expectations of a 0.1% decline.

The total CPI and core CPI’s numbers were also above expectations, indicating that an inflationary trend may be appearing as a result of strength in labor markets and a near bottoming of energy prices.

Many analysts are now turning their attention to the Federal Reserve, after strong numbers indicate that it may have regained enough confidence in macro conditions to resume increasing interest rates. Noting that the American consumer is gaining confidence, Cleveland Federal Reserve head Lorette Mester recently said in a public speech in Sarasota, Florida that a gradual increase of interest rates is likely, as macroeconomic improvements cause inflation to increase. “I still think a reasonable forecast is that inflation will gradually return to 2 percent over the medium run,” she said.