First-time unemployment claims drop to 9-month low

What will it take for the labor market to slow? That’s the question that policymakers are likely asking themselves after a spate of recent data that suggests that despite aggressive Fed policy tightening — the jobs market refuses to break.

Initial jobless claims dropped unexpectedly last week to 198,000 from an upwardly revised 211,000 in the preceding week. That was the lowest weekly total — and the first reading below 200,000 — since January. Continuing claims edged higher to 1,734,000 — up about 50,000 in recent months but still in line with the range early this year.

The news comes on the heels of much stronger-than-expected job creation in September and a recent uptick in job openings.

Perhaps the most surprising aspect of the decline is that it comes against a backdrop of multiple labor strikes, most notably the UAW strike that started in mid-September. Beyond the direct impact of workers voluntarily going to the picket lines, the effect can ripple to other workers or businesses that are impacted by work stoppages. Thus far, that impact has seemingly been contained and is not readily apparent in the form of a discernable negative effect on unemployment claims.

Although one of the best real-time, high-frequency data points on the state of the labor economy, initial claims can be subject to some volatility and anomalies that can skew the week-to-week results. A recent rise in Worker Adjustment and Retraining Notification Act notices also suggest that there could be more layoffs to come. Some may not ultimately come to fruition though, and given an abundance of job openings, many of those that may be displaced could find another job without taking unemployment benefits.

The decline in claims will be one more thing for the Fed to consider as policymakers evaluate their progress toward their employment and inflation goals and assess the need to do more. Given the speed and magnitude of interest rate hikes since early 2022, much of the impact of that tightening has not yet been fully absorbed by the economy.

Even if the Fed decides to stand pat, the lagged effect of prior rate hikes will continue to materialize as further tightening in financial conditions in the coming months. The quandary for policymakers is whether there’s enough tightening already in the pipeline to return inflation to the Fed’s 2% goal or whether more will be needed to get the job done. It’ll be a tough call that the Fed has grappled with many times in the past and frequently gotten wrong.

The bottom line? The labor market remains on a surprisingly solid footing. It’s good news for workers, but a continuing challenge for policymakers looking to thread the needle to loosen labor conditions enough to bring inflation back into check without pushing the economy into recession.

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