The count of U.S. employees receiving jobless benefits has surged to its peak level since 2021, indicating a slowdown in the labor market as the Federal Reserve contemplates when to decrease interest rates after maintaining them at a 23-year high.
The number of ongoing jobless claims, which represents the individuals still receiving unemployment benefits after initially filing a claim, climbed to 1.87 million for the week ending July 6, based on data released by the Department of Labor on Thursday. This figure marks the highest level since Nov. 27, 2021, when it was at 1.89 million.
Market analysts view this increase as a sign of the labor market losing momentum, which strengthens the argument for a rate cut by the Fed.
MacroMicro, a data analytics company, highlighted that “U.S. continuing jobless claims have risen by 40 percent from their three-year low, indicating a softer job market.” They suggested that this could push the Fed to lower rates as early as September.
Although few analysts anticipate a rate cut at the upcoming July policy meeting, investors are heavily betting on a decrease at the September meeting. The likelihood of a 0.25 percentage point rate reduction in September, as implied by futures contracts, is at 93.5 percent, with an additional 4.6 percent expecting a 0.5 percentage point reduction.
Higher interest rates lead to increased borrowing costs, resulting in decreased spending and demand. Reduced consumer spending prompts businesses to scale back investments and hiring, thereby impacting the job market negatively.
In response to the highest inflation rates in decades in 2022, the Fed raised rates at the fastest pace since the 1980s, bringing them to the current range of 5.25â5.50 percent in just over a year. This level of benchmark interest rates was last seen around 23 years ago.
Federal Reserve Chair Jerome Powell expressed concerns about labor market risks as the Fed contemplates rate cuts. He mentioned that labor market conditions have significantly cooled since the central bank began its rate-hiking cycle two years ago, during his testimony before Congress in early July.
Another indication of a softening job market is the initial unemployment claims, which reached 243,000 for the week ending July 13, as per data from the Labor Department. This figure is a 20,000 increase from the previous week and higher than analyst expectations.
Weekly jobless claims have been on a gradual increase since the start of the year, with the four-week moving average, which smoothens out weekly fluctuations, showing a clear upward trend.
While some economists interpret the recent data as a sign of a weakening labor market, they don’t foresee a major breakdown.
Gregory Daco, chief economist at consulting firm Ernst & Young, stated that “The labor market is cooling, not retrenching,” in a post on X.
Economists are closely monitoring labor market dynamics in light of the current high-interest rate environment, which has dampened both inflation and economic activity, including hiring.
Mohamed El-Erian, president of Queensâ College, Cambridge University, pointed out that “The just-announced US weekly jobless claims were notably higher than expected: 243,000 versus the consensus forecast of 229,000.” He emphasized the importance of determining whether this is just noise or an indication of a rapid weakening of the labor market.
The unemployment rate has steadily increased over the past four months, rising from 3.8 percent in March to 4.1 percent in June. Although 4.1 percent is historically low, it represents the highest level since November 2021.
MacroMicro highlighted in a blog post on labor market indicators that labor demand has regressed to pre-pandemic levels, as evidenced by the ratio of job vacancies to unemployed individuals. The analytics firm also mentioned the Sahm Rule Recession Indicator, which signals the onset of a recession.
âThe Sahm Rule Recession Indicator is at 0.43 percent, nearing the recession signal of 0.5 percent,â the firm mentioned in a post on X, suggesting that this indicator is approaching a âtrigger point.â
Economists are debating whether the Fed’s monetary policies will lead to a recession or if the U.S. economy will achieve a “soft landing,” characterized by a controlled cooling that brings inflation back to the Fed’s 2 percent target without causing significant harm to the labor market.
