US weekly jobless claims, housing data point to softening economic activity

Initial jobless claims decreased by 5,000 to 245,000 last week, yet remain near an eight-month high, signaling a potential softening in the labor market and economic activity; the four-week moving average also hit its highest level since August 2023. Separately, single-family housing permits fell to a two-year low in May, down 2.7% to 898,000 units, with overall building permits at the lowest since June 2020, reflecting higher borrowing costs and construction material costs due to tariffs, contributing to increased inventory and builder hesitancy.

Analysis

Recent U.S. economic data indicates a continued softening in both the labor market and housing sector, contributing to a strongly negative sentiment. Initial jobless claims, while falling by 5,000 to 245,000 for the week ended June 14, remained near an eight-month high, with the prior week's figures revised upwards to the highest since October. The four-week moving average of claims rose to 245,500, its highest since August 2023, suggesting a sustained upward trend in layoffs, which economists attribute partly to President Trump's tariffs creating a challenging business environment. This economic strain is further evidenced in the housing market, where permits for future single-family construction dropped 2.7% in May to 898,000 units, a two-year low. Overall building permits declined 2.0% to 1.393 million units, the lowest since June 2020. These declines are linked to higher material costs from tariffs on lumber, steel, and aluminum, as well as increased borrowing costs due to the Federal Reserve's pause in its interest rate cutting cycle, maintaining the benchmark rate at 4.25%-4.50%. While nonfarm payrolls increased by 139,000 in May, this was a deceleration from the 193,000 gain a year prior. Overall housing starts plunged 9.8% to a 1.256 million unit rate, a five-year low, despite a 0.4% gain in single-family starts, as multi-family starts slumped 30.4%. The confluence of these factors points towards an economy potentially slowing into a contraction, as highlighted by some economists, despite differing views on the seasonality of claims data.

Key Decisions for Investors

• Investors should monitor upcoming labor market data, particularly continuing claims, for further signs of weakening employment conditions which could precede a broader economic slowdown.
• Given the negative impact of tariffs and higher borrowing costs on the housing sector, exposure to homebuilders and related industries should be reviewed cautiously.
• Consider the implications of a prolonged period of elevated interest rates and persistent trade tensions on corporate earnings and overall market sentiment, potentially warranting a more defensive portfolio posture.