Weekly jobless claims unexpectedly falls to 216,000
Initial jobless claims declined last week, dipping to 216,000 from a revised 229,000 for the week ended August 26. Against a gradual uptrend in first-time claims, the decline came as a bit of a surprise; economists had forecast a modest increase to 233,000. It’s a single data point, and one that’s subject to adjustment, but for those looking for evidence of a continued easing in labor market conditions, it will raise an eyebrow.
Moreover, the decline in first-time claims was paired with a decline of 40,000 recurring claims, which dropped from 1.719 to 1.679 million.
The overall picture for the labor economy remains nuanced. A single-week decline may not mean much against the recent trend of gradual slackening since last year. Job openings have declined sharply since their peak — a clear sign of lower demand for workers and one that’s reinforced by a marked slowdown in the pace of job creation. The pace of layoffs has also risen over the past year.
At the same time, questions persist about whether labor conditions have weakened enough for the Fed to stand pat on further rate hikes or begin to reverse course next year. Inflation pressures have abated significantly and are expected to continue to ease, but tight labor market conditions will make the Fed’s 2% inflation target a tougher goal to reach.
The fact that unemployment rose in August to 3.8% provides some relief, particularly in the way that it was achieved. It wasn’t a surge of job losses but the return of over 700,000 sidelined workers to the labor force that raised the jobless rate in August. The availability of more workers, coupled with cooler hiring demand, should help to restore some of the balance that policymakers want to see.
The question — and the risk for investors — is that the downtick in claims isn’t a one-week aberration, but a sign that labor conditions could remain tighter for longer than Fed policymakers would ideally like to see. What happens if consumer spending growth persists or reaccelerates and the economy continues to grind forward despite the Fed’s efforts to slow it down?
Recent equity market volatility and a renewed uptick in long-term Treasury yields in the past week suggest that the door is still open to further Fed tightening, or at least a more protracted period of holding rates steady before policymakers can be comfortable trimming. That may be good news for savers but raises the risk of a hard landing for an economy grappling with a transition from a decade of ultra-low interest rates to a new normal in which the cost of borrowing is higher.
The bottom line? Don’t read too much into a single week’s worth of data. Even so, for a market looking for constant reassurance that the Fed’s cumulative rate increases are having the desired effect, any signs of labor market resilience will raise questions. For now, the Fed appears poised to stand pat this month. Whether or not they can afford to do so again in November is a coin toss.
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