The labor market remains tight as jobless claims fall unexpectedly

Initial jobless claims fell unexpectedly last week to 190,000, well below the consensus forecast of 213,500 and a decline from the revised total of 205,000 for the week ended January 7.

Despite the accumulation of data that points to a sharp slowdown in production and consumption late last year, a growing chorus of layoffs in the tech sector, and a Federal Reserve policy aimed at meaningfully softening up labor conditions, the jobs market continues to grind forward.

It’s possible that last week’s claims data is somewhat anomalous, skewed to the downside because of weather or other factors. Skewed by one-time factors or not, it was the first print below 200,000 since late September and extends a gradual downtrend in weekly claims over the last two months. It’s also confirmed by the four-week average that dipped to 206,000 — a level that’s very much consistent with a tight labor market.

With some notable exceptions, perhaps employers are taking a more cautious approach to trimming their workforce until they see the proverbial “whites of the eyes” of recession, recalling the incredibly challenging hiring environment of the past year. If that’s the case, it could be a matter of time before the dam breaks and a surge of layoffs sends claims much higher. But when? That’s anyone’s guess.

In the meantime, the preliminary steps toward “right-sizing” are already apparent in a reduction in average weekly hours worked over the past year and an acceleration in cuts to temporary help in recent months.

Further complicating decisions around hiring and firing is the ambiguity around the near-term outlook for the economy. By most estimates, fourth quarter GDP was likely brisk, although activity slowed over the period. Even if this is the most widely anticipated recession in memory, it’s not a lock that it’s at the doorstep, and a convincing case can be made that a temporary resurgence in consumer spending growth could push the time horizon out to the latter half of the year.

One key question is how quickly inflation pressures will dissipate in the coming months and what that could mean for real household income. Coupled with a shrinking, but still sizable, reservoir of cash, stronger inflation-adjusted income could fuel a resurgence in real consumption in the coming months, at least temporarily delaying the onset of recession.

Against that backdrop, a hesitation by employers in prematurely trimming their workforce is understandable.

For the Fed, receding inflation is a positive development that reinforces progress made toward its price stability goal, but labor market conditions that have yet to loosen meaningfully will prevent any near-term policy pivot.

The bottom line? Despite growing evidence of deceleration in the economy and a growing chorus of layoff announcements, it’s not yet apparent in jobless claims data. For now, the data points to a labor market that’s grinding ahead against the weight of slowing demand.