Jobless claims edged modestly higher last week

Initial jobless claims edged modestly higher last week, rising to 196,000 for the week ended February 4 from 183,000 the week prior. That topped the forecast for a more moderate uptick to 190,000 but remains below the 200,000 threshold for the fourth consecutive week, sufficient for the four-week moving average to ease modestly to 189,250.

Continuing claims also rose by 38,000 to 1.688 million after a modest downward revision to the preceding week’s tally.

Notwithstanding the fact that both first-time and ongoing claims rose, the modest uptick suggests that any weakening in labor conditions has been limited.

In recent months, a sizable increase in job cut announcements has reflected a broader softening in economic expectations in response to Fed tightening and a weaker outlook overseas. Thus far, the impact of those announced cuts has been muted in actual unemployment claims, likely a result of multiple mitigating factors in the near term. Some of those cuts may be achieved via gradual attrition, smoothing the effect. Moreover, the abundance of job openings should provide opportunities for some terminated workers to quickly land on their feet elsewhere. Others benefited from healthy severance packages that would provide a bridge until they’re able to land their next job. Regardless of the specific reasons on a case-by-case basis, the macro picture has changed little thus far this year.

For the Fed, the disconnect creates little confidence that their job is done. January’s strong employment report may have been skewed by seasonal factors or other muddiness in the data, but even accounting for that possibility, it still painted a picture of a solid jobs market that hasn’t begun to show the meaningful signs of loosening up that the Fed is looking for.

An increase in announced job cuts may give policymakers some reason to believe that there are nascent signs that policy tightening is starting to have an effect, but they’ll need to see more — a lot more — in terms of an easing in labor market conditions before they seriously contemplate stepping back from their tight policy bias.

With unemployment at a half-century low of 3.4% and job openings still quite high, the recent uptick in job cuts is barely the tip of the iceberg for what will be needed to push the jobless rate toward the Fed’s forecast of 4.6% by year-end.

The challenge will be whether that target can be achieved without a more severe outcome. History suggests that any increase in the unemployment rate of 1% ultimately leads to a more significant increase of 2% or more. Once negative momentum starts and the outlook darkens, employers tend to continue to trim payrolls until there’s a light at the end of the tunnel. The Fed is trying to thread the policy needle but doing so will not be easy.

There are strong indications that the Fed’s first policy goal — price stability — is heading in the right direction, with inflation edging lower in recent months and expected to remain on a downward path to the central bank’s 2% target. The second goal — maximum employment — is more challenging to define, but with labor markets so tight, the interplay between the two creates the need to create some slack in labor conditions to reduce the risk that wage pressure creates an undesirably high floor under inflation gauges.

The bottom line? Job cut announcements have picked up, but thus far, the flow-through to actual jobless claims has been a trickle compared to what will be needed to lift the unemployment rate and create the slack that the Fed is seeking. Until then, we should expect the Fed to continue to jawbone about the need for more rate hikes whenever they can and to actually deliver them in the months ahead.