New filings for unemployment benefits in the US fell below 400,000 for the first time since the start of the pandemic, reflecting a slowdown in lay-offs as the economy rebounds and businesses struggle to find workers.

The labour department on Thursday reported 385,000 initial jobless claims last week on a seasonally adjusted basis, down from the 405,000 claims tallied during the previous week.

The number of continuing claims, which is reported with a one-week lag, rose to 3.77m for the week ended May 22, up from 3.6m a week earlier.

The number of Americans seeking unemployment aid has steadily declined this year, as the economic recovery from the coronavirus-fuelled downturn has picked up steam amid a sharp drop in Covid-19 cases and an increase in vaccinations.

Still, there has been a “discouraging disconnect between initial jobless claims and continuing claims”, said Thomas Simons, money market economist at Jefferies. “While the former has been falling steadily, the latter has been sticky. Lay-off activity has slowed significantly, but people collecting the enhanced unemployment benefits have been reticent to return to work.”

Line chart of Claims (millions) showing US initial jobless claims fall to fresh pandemic low

Also on Thursday, a report from the payroll processor ADP showed the private sector created jobs in May at the fastest pace in nearly a year, driven by strong gains in leisure and hospitality.

Non-farm private employers added 978,000 jobs in the month, the report said, the biggest month for jobs since June 2020 and topping expectations for 650,000 new positions.

As the US pushes further with its reopening, demand is shifting from goods to service-oriented industries and the ADP report showed the service sector drove the bulk of last month’s increase. It added 850,000 jobs, with the biggest gains in leisure and hospitality, and education and health services.

Economists cautioned against over-interpreting the ADP report, “given its more erratic than usual record versus the initially reported official data since the onset of the pandemic”, said Joshua Shapiro, economist at MFR.

The next official labour market report is due on Friday and forecasters expect it to show that employers added 650,000 jobs last month. That would be a strong rebound from the 266,000 recorded in April — a disappointing number that set off a debate about whether high unemployment benefits were keeping people from filling a record number of job openings.

The Federal Reserve said this week that businesses reported labour shortages in April and May that limited output and in some cases led to a reduction in operating hours.

“Contacts expected that labour demand will remain strong, but supply constrained, in the months ahead,” according to the central bank’s Beige Book report published on Wednesday.



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