Jobless claims surged unexpectedly last week

Initial jobless claims surged in the week ending June 3, rising to 261,000. The consensus forecast had called for a more measured increase to about 235,000. The total for the prior week was virtually unchanged at 233,000. The four-week moving average, while smoothing out some of the week-to-week volatility in the data, also rose by 7,500 to 237,250.

The unexpected surge lifted initial claims to its highest point since October 2021, when the labor economy was still gradually recovering from the COVID-19 pandemic that shut down a large portion of the economy and sent millions of workers to the unemployment line.

Initial claims bottomed below 200,000 late last summer before edging higher on the back of an increase in layoff announcements. They had remained range-bound below 220,000 for some time before stairstepping higher in recent months.

The most recent uptick in claims represents another sizable upward move from the cyclical low. Whether it will ultimately be a one-off anomaly or the next step in a more pronounced and prolonged uptrend in claims remains to be seen. Recent labor market data has been decidedly mixed. The May jobs report was a mixed bag, coupling an increase in the unemployment rate to 3.7% with an acceleration in the pace of job creation to 339,000. Despite slowing considerably since early 2022, job creation, remains fairly robust — certainly well above the range needed to keep pace with labor force growth or to maintain a relatively steady unemployment rate.

The sustained increase in weekly jobless claims from last year’s cyclical low is meaningful, clearly illustrating a softening in conditions. That’s encouraging news for Fed policymakers who have been looking for evidence that the aggressive rate hikes of the past year are having an impact. While displacing workers isn’t specifically the Fed’s goal, it’s a direct byproduct of the need to bring inflation under control. The Fed’s previously released projections had pointed to an expectation that unemployment could rise to about 4.5% by the end of the year. Given the relatively resilience of the labor market to this point, it’s possible that policymakers could rein in that forecast coming out of next week’s FOMC meeting. Even if that’s the case, it’s unlikely that the Fed will move away from their message that further loosening in labor market conditions will be needed to bring inflation back down toward the central bank’s 2% target. That means more job losses ahead and a continued uptrend in the jobless rate. It also means that further rate hikes are still on the table until the Fed is confident that enough has been done to bring inflation and employment back into balance.

The bottom line? Whether last week’s sizable increase in claims was a one-off anomaly or the next leg in a sustained uptrend remains to be seen, but it will be a trend to watch closely for clues about the near-term direction of economic momentum and the near-term path for Fed policy and interest rates.