WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits hovered around 1 million last week, suggesting the labor market recovery was stalling as the COVID-19 pandemic drags on and financial aid from the government dries up.

The government also confirmed on Thursday that the economy suffered its sharpest contraction in at least 73 years in the second quarter because of the disruptions from the coronavirus, with corporate profits sinking deeper.

Though new COVID-19 infections have subsided after a broad resurgence through the summer, many hot spots remain, especially at college campuses that have reopened for in-person learning. With the fiscal stimulus ebbing, signs are growing that the economy’s recovery is slowing. Economists still expect a sharp rebound in growth this quarter, but they are dialing back estimates for the fourth quarter.

“This economy is not out of the woods yet,” said Chris Rupkey, chief economist at MUFG in New York. “Without federal government assistance it will take years for the services-based economy to generate employment opportunities for the workers unable to return to thousands of closed and bankrupt restaurants and bars and retail shops and malls across America.”

Initial claims for state unemployment benefits fell 98,000 to a seasonally adjusted 1.006 million for the week ended Aug. 22, the Labor Department said. Economists polled by Reuters had forecast 1.0 million applications in the latest week.

The reopening of businesses in May pulled down claims from a record 6.867 million in March, when establishments were shuttered in an effort to slow the spread of the coronavirus. Claims fell below 1 million early this month for the first time since the pandemic started in the United States.

“The snail’s pace of improvement in claims suggests that the next leg of the labor market’s recovery will be much slower going,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte North Carolina.

The COVID-19 crisis has altered the economic landscape and widened income inequality. The Federal Reserve on Thursday rolled out an aggressive new strategy to restore the nation to full employment and lift inflation back to healthier levels.

Stocks on Wall Street rose as investors cheered the Fed’s new focus. The dollar gained versus a basket of currencies. U.S. Treasury prices fell.

MILLIONS UNEMPLOYED

Americans in low-wage occupations have borne the brunt of the recession, which started in February. A government-funded program offering businesses loans to help with wages has lapsed and a $600 weekly unemployment supplement expired on July 31.

Though President Donald Trump extended the supplement, the payout was cut to $300 per week and economists expect funding for the program to be depleted by September. A few states are offering the extra unemployment benefit.

Economists estimate the loss of the $600 could cut $50 billion from retail sales in August.

“The spending made possible by the $600 was supporting 5.1 million jobs,” said Heidi Shierholz, director of policy at the Economic Policy Institute in Washington.

The claims report also showed the number of people receiving benefits after an initial week of aid dropped 223,000 to 14.535 million in the week ending Aug. 15. The so-called continuing claims data covered the week during which the government surveyed households for August’s unemployment rate.

Though continuing claims declined between the July and August survey periods, economists expect the unemployment rate remained above 10% this month. Part of the decrease in continuing claims was likely because of people exhausting eligibility for benefits.

At least 27 million people were receiving unemployment benefits under all programs in the week ended Aug. 8.

In a separate report on Thursday, the Commerce Department said gross domestic product plunged at a 31.7% annualized rate last quarter, the deepest drop in output since the government started keeping records in 1947. That was revised from the 32.9% pace reported last month and reflected less steep declines in consumer spending and inventory accumulation than initially estimated.

Graphic: Consumer spending contribution to U.S. GDP here

After-tax profits without inventory valuation and capital consumption adjustment dropped at a rate of 11.7%. Profits decreased at a pace of 13.1% in the first quarter. They fell 20.8% year-on-year.

Profits of domestic financial corporations rebounded $39.5 billion last quarter. Domestic non-financial corporations’ profits fell $170.1 billion and profits from the rest of the world dropped $96.2 billion.

When measured from the income side, the economy contracted at a 33.1% rate in the last quarter. Gross domestic income (GDI) declined at a rate of 2.5% in the January-March period.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, decreased at a 32.4% rate last quarter. That compared to a 3.7% pace of decline in the first three months of the year.

“With a health solution still out of reach and the economic rebound looking fragile, fiscal stimulus is urgently needed to prevent the economy from sliding back into a downturn,” said Lydia Boussour, a senior U.S. economist at Oxford Economics in New York.

Graphic: U.S. GDP interactive here

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