U.S. jobless claims fall to 193,000, its lowest point since April

Fed policymakers may have their collective foot to the floor, spiking the monetary brakes to try to slow down the economy, but the limited effect seen in labor market data has to be a growing source of frustration.

Initial jobless claims fell sharply to just 193,000 for the week ended September 24, well below the consensus forecast of 215,000. That total was down 16,000 from a revised 209,000 in the prior week. Similarly, the four-week moving average continued its recent downward trend, affirming that the weekly drop wasn’t merely an anomaly. Continuing claims also edged lower — its lowest level since early July.

Weekly claims fell to their lowest point since April: a period in which GDP had turned negative, the yield curve had briefly inverted, and whispers of recession had started to emerge. Nearly six months and several interest rate hikes later, and the jobs market appears to be regathering some of its lost momentum.

Also, on the data docket this morning was the Commerce Department’s third estimate of Q2 GDP, which was reconfirmed at -0.6%, consistent with the prior estimate. The economy clearly softened in the first half of the year coming off of a brisk expansionary pace in 2021. Still, the negative GDP prints for the first two quarters likely understated the underlying trend in the economy, skewed by inventory and import data that reflected the challenges of unkinking global supply chains.

Underlying consumer spending firmed moderately to 2.0% during the quarter, although the divide between spending on goods and services widened. Consumer spending on goods declined by 2.6%, reflecting a bit of a hangover from their stimulus-fueled buying binge that started in 2020 when mobility — and spending on services — was severely limited.

Conversely, services spending expanded at a brisk 4.6% pace in the second quarter. That surge speaks directly to the changing nature of consumer spending and more than offset the slowdown in household spending on goods.

Consumers were feeling the pinch from inflation, creating a headwind to stronger consumption growth in real terms, but it wasn’t enough to snuff it out.

Coming nearly three months after the end of the measurement period, the revised GDP data isn’t terribly meaningful at this point. But weekly jobless claims data is a good, relatively “real-time” indication of the direction and overall strength of the labor market.

The Fed has given strong indications that it hopes and expects its collective tightening efforts to loosen up the jobs market over the coming year, projecting unemployment to rise by nearly 1% from its 2022 low. A sustained increase in layoffs would be one early indication that labor conditions are cooling, creating some of the “pain” that Fed Chair Jay Powell has referenced. Claims have been choppy in recent months and had shown signs of weakness. Layoffs had risen throughout the summer but have been steadily declining since early August. It’s just one data point, but a key one that’s not going to reassure Fed policymakers that they have done enough to cool the economy and make sustained, tangible progress in bringing down inflation toward their goal. To that end, policymakers aren’t going to be satisfied with what they’ve seen thus far.

Perhaps the greatest challenge is the fact that monetary policy affects the economy with a lag, but one that’s imprecise and variable. There’s no reliable formula for policymakers that dictates what, when, or how much should be done to create a desired outcome. Much of the tightening that has already occurred hasn’t yet been fully reflected in the economy. How much? That remains to be seen.

Not knowing what the full impact of what’s already been done will only complicate the Fed’s analysis of how much additional tightening might be needed to achieve it policy mandate and tame inflation.

For investors, lower jobless claims will reinforce expectations that the Fed isn’t likely to back down from its plans to raise interest rates further in the months ahead. The interplay between inflation risk, rising interest rates, and the growing potential for a recession appears likely to keep the economic outlook muddy for now, creating the potential for capital market volatility to continue.

The bottom line? The recent decline in layoffs flies in the face of the Fed’s efforts to soften up labor market conditions and knock inflation back down toward its 2.0% target. The capital markets have heard the Fed, and investors are feeling the pain. But the jobs market? For now, at least, it’s not listening.

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