WRAPUP 2-US labor market holding steady; worker productivity still strong in Q4

The number of Americans filing ​new applications for unemployment benefits was unchanged last week and layoffs dropped sharply in February, consistent with stable labor market conditions. While other data from ​the Labor Department on Thursday showed worker productivity slowed in the fourth quarter, the trend remained strong, ‌helping ​to curb growth in labor costs in 2025. Labor market stability and rising inflation risks from the U.S.-Israeli war with Iran reinforced economists' views that the Federal Reserve was in no rush to resume cutting interest rates.

"There is nothing in the latest claims data to change our view that the Fed will keep policy steady until June," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "The picture of the labor market gleaned from the claims data and other ‌related statistics is not one of deterioration." Initial claims for state unemployment benefits were flat at a seasonally adjusted 213,000 for the week ended February 28. Economists polled by Reuters had forecast 215,000 claims for the latest week. The unchanged reading was despite unadjusted filings in New York shooting up 17,434 as the state reeled from a massive winter storm. Economists expected the storm to boost claims in the coming weeks. The labor market is regaining its footing after stumbling last year amid what economists said was uncertainty stemming from President Donald Trump's broad tariffs, which he pursued under a law meant for use in national emergencies.

The import duties have since been struck ‌down by the U.S. Supreme Court. Trump responded to the ruling by imposing a 10% global tariff and later announced it would rise to 15%. The U.S. central bank's Beige Book report on Wednesday described employment levels as "generally stable in recent weeks as seven of the 12 districts reported no change ‌in hiring." The report noted that "contacts in several districts cited rising nonlabor input costs, softer demand, or uncertainty about overall economic conditions as reasons for flat or lower employment levels."

Economists are optimistic that the labor market will regain momentum this year as tax cuts stimulate demand. A separate report from global outplacement firm Challenger, Gray & Christmas showed U.S.-based employers announced 48,307 job cuts in February, down 55% from January and 72% from a year ago. Hiring plans soared 140% from January, but they were down 63% compared to last February. Tepid hiring means some people who lose their jobs are experiencing long bouts of unemployment.

The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, increased 46,000 to a seasonally adjusted 1.868 million during the week ended February 21, the ⁠claims report showed. ​The data does not include unemployed recent college graduates, whose lack of or limited work ⁠history disqualifies them from claiming jobless benefits. The claims data have no bearing on February's employment report due on Friday as they fall outside the survey week.

Nonfarm payrolls likely increased by 59,000 jobs last month after accelerating 130,000 in January, a Reuters survey of economists predicted. The unemployment rate is expected to have held steady at 4.3%. Stocks on Wall Street fell as investors worried the ⁠Middle East conflict could stoke inflation. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.

UNIT LABOR COSTS CONTAINED The war has disrupted oil supplies and shipping, boosting crude prices. The Fed is expected to keep its benchmark overnight interest rate in the 3.50%-3.75% range at its March 17-18 meeting. Inflation pressures were steadily building up before the conflict. A third ​report from the Labor Department's Bureau of Labor Statistics showed import prices, excluding the volatile fuel and food components, increased 0.5% in January. These so-called core import prices rose 0.3% in December. They were boosted by imported capital goods, whose prices increased 0.4%, mostly driven by a 0.5% jump ⁠in nonelectrical machinery.

In the 12 months through January, core import prices advanced 1.6%, partly reflecting the dollar's weakness against the currencies of the main U.S. trade partners. The trade-weighted dollar declined 7.37% in 2025 and is down about 1.61% so far this year. "Recent events in the Middle East point to upward pressure on imported fuel prices in coming reports, whereas past U.S. dollar weakness generally, and perhaps strong demand ⁠for imported ​tech products specifically, are likely to impart continued upside pressure on non-fuel import prices," said Michael Hanson, an economist at JPMorgan.

Though government data last month showed a marginal increase in consumer prices in January, producer inflation accelerated. Economists continued to estimate the core Personal Consumption Expenditures price index increased by as much as 0.5% in January, which would translate into a year-on-year increase of 3.1%. Core PCE inflation increased 0.4% in December and advanced 3.0% year-on-year. It is one of the PCE inflation measures tracked by the Fed for its 2% target.

The government will release the delayed PCE inflation data for January next Friday. But a fourth report ⁠from the BLS offered a benign view of wage inflation. Nonfarm productivity, which measures hourly output per worker, increased at a 2.8% annualized rate in the fourth quarter.

Productivity growth in the third quarter was revised up to a 5.2% rate from the previously reported 4.9% pace. It grew at a 2.8% rate ⁠from a year ago, and increased 2.2% in 2025. Economists expect the rapid adoption ⁠of artificial intelligence will boost productivity and rein in labor costs. Unit labor costs - the price of labor per single unit of output - increased at a 2.8% rate last quarter after declining at a 1.8% pace in the third quarter. Labor costs grew at a 1.3% rate from a year ago. They increased 1.9% in 2025.

"While the spike in oil prices and recent signs of strengthening goods price inflation will lead to caution at the Fed in the near term, ‌the low rate of unit labor costs growth lends ‌support to the view that there is further disinflation ahead for services, provided oil prices do not rise much further," said Stephen Brown, deputy chief North America economist ​at Capital Economics.