By the numbers
- Initial jobless claims dipped last week to 219,000 for the week ended September 14, a decline of 12,000 from the prior week’s upwardly revised total.
- Weekly claims remain very low and in a range that is comparable to year ago numbers, signaling limited change in the pace of layoffs despite notable slippage in the pace of job creation and moderation in the pace of economic momentum.
- Continuing claims were also virtually unchanged for the week ended September 7, edging down to 1.83 million from 1.84 million.
Labor market soft landing narrative still intact
- Despite the significant uptick in the unemployment rate since early 2023, the relative steadiness in claims data validates the argument that the rise in joblessness is a byproduct of an influx of workers into the labor force, not a surge in layoffs.
- As labor market conditions have come off the boil, the pace of job creation has slowed considerably – a development that was to be expected and necessary to relieve the surge in demand for workers as the economy boomed. A rebalancing in labor force dynamics was also necessary to relieve wage pressures as a component to the inflation picture.
- Even so, the recent pace of job creation has slowed to a point that now trails its monthly range in 2019, when a record-breaking ten-year expansion was in its final innings. The next few monthly jobs reports will be critical. A further deterioration in monthly nonfarm payrolls would raise serious doubts, whereas signs of stabilization or even a moderate uptick in job creation would ease concerns about the loss of momentum.
- For now, the balance between slower job creation with no discernable increase in layoffs is consistent with a soft landing for the economy.
Federal Reserve reaction
- Yesterday’s announcement by the Federal Reserve (Fed) that its first step into policy easing would be a half-point cut would have been a big surprise not that long ago. Expectations shifted meaningfully over the course of the last two weeks, setting policymakers up to deliver a more forceful statement as they move away from the tight policy stance adopted to beat back inflation.
- The significant progress that has been made in returning inflation to the central bank’s 2% goal allowed policymakers to shift their focus more firmly toward labor conditions – the second pillar in the Fed’s dual policy mandate.
- Fed Chair Powell’s tone and words yesterday emphasized that the decision reflected a recalibration of their assessment of conditions. That reassessment was also clearly reflected in the Fed’s updated economic projections. Inflation has fallen faster than expected, while the rise in unemployment has gone further than was baked into their forecast as recently as June.
- Whether or not the central bank will get the timing right and stick the landing remains to be seen, but the message that policymakers and the glidepath for interest rates isn’t already locked in was an important one for markets.
- The Fed remains data dependent and yesterday reaffirmed a willingness to adjust as economic data and underlying conditions change.
- Whether the Fed’s measured forecast for rate cuts through 2025 proves to be accurate or the market’s more aggressive slashing of rates proves to be necessary remains to be seen.
The bottom line
- Labor market conditions have cooled but aren’t cold. Job creation has slowed but there are no signs of a surge in layoffs that would be cause for alarm. The next several months of jobs data – particularly nonfarm payrolls – will provide important insight on the degree to which labor demand is continuing to soften.
- For now, the balance between weaker job creation and stable layoffs is consistent with a soft landing.
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