WASHINGTON, 4 April 2003 — The US labor market weakened unexpectedly last week amid reports of battlefield setbacks in the US war with Iraq, suggesting the conflict took a surprising early toll on business confidence.
First-time applications for unemployment benefits surged to an 11-month high of 445,000 in the week of March 29, rising by 38,000, the Labor Department said yesterday. Wall Street had expected an increase of just 8,000, according to a consensus forecast of economists surveyed by Dow Jones Newswires and CNBC.
“The labor market has gone from weak-but-stagnant to weak-and-deteriorating,” said Cary Leahey, an economist with Deutsche Bank in New York.
He said the report implied businesses trimmed payrolls more sharply than previously thought in March. The government is scheduled to report today on employment levels in March. Leahey said he expects the report to show 100,000 job cuts.
A Labor Department spokesman said yesterday he had no explanation for the increase in claims, although he said winter storms in some Western states accounted for a small portion of the rise. But Leahey and other economists said the war and the uncertainties surrounding it appeared to have played a big role.
“There may be more going on here than just the war, but looking at the fundamentals, it’s hard to figure why businesses are so reluctant to hire given the level of inventories on hand and the improvement in corporate profits,” he said. “I expected consumer spending to be hurt by the war, but I didn’t expect businesses to pull in their horns as much as they did.”
The increase in claims last week coincided with a public reappraisal of just how long a war with Iraq might last. The US military campaign slowed last week as Iraqi resistance proved to be stiffer than expected. Stock prices slumped, although subsequent progress in the war has since caused them to rise.
Leahey said the weakness of business confidence reflected in the jobs market suggests the US economy isn’t likely to gain steam anytime soon. “It looks as if the weakness of the first quarter may be followed by a weaker second quarter,” particularly if the war is protracted. Still, he said, the Fed is likely to wait for the uncertainties to pass before making changes to interest rates.
“The best thing for the Fed to do right now is to wait and watch,” he said.
In its report yesterday, the Labor Department said the number of workers drawing unemployment benefits for more than a week surged in the week that ended March 22, the latest period for which the number is available. Continuing claims rose by 107,000 to 3,608,000 — the highest level since Nov. 16, 2002. The unemployment rate for workers with unemployment insurance held steady at 2.8 percent.
Only one state — Kansas — reported an increase of more than 1,000 initial claims for the week of March 22, the Labor Department said. The state said claims increased by 1,525 because of layoffs in the service, information, public administration and manufacturing industries. Michigan reported the biggest decrease of any state that week, saying claims dropped by 7,885 because of fewer layoffs in the automobile industry.
