Overview
The number of Americans filing new claims for unemployment benefits fell more than expected last week, hitting the lowest level in nearly three months and underscoring the economy’s enduring strength (Reuters). Initial claims for state unemployment benefits decreased 18,000 to a seasonally adjusted 202,000 for the week ended Dec. 24, from a downwardly revised 220,000 the prior week, the Labor Department said on Thursday (MarketWatch).
This marked the third straight weekly decline in applications and was the lowest level since mid-September. Economists polled by Reuters had forecast 215,000 claims for the latest week. nevertheless represent a historically low number of layoffs and indicate ongoing labor market resilience despite higher borrowing costs. The positive news on the labor market follows a survey on Wednesday that showed U.S. job openings rising more than expected in November (Kitco).
Jobless claims over time. Source: MarketWatch
The Federal Reserve last month projected a rise in the unemployment rate to 4.6% this year from its current 3.7%. While layoffs remain low amid an acute labor shortage, some companies like technology giant Amazon have retrenched as they brace for a possible economic downturn. Activity in the manufacturing and services sectors contracted in December for the first time since 2020.
Details and Analysis
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Claims had risen for two straight weeks after edging up in the week leading up to Christmas. But last week marked a return to the downward trend that has persisted for most of 2022. “Initial claims for unemployment insurance continue their gradual trend lower after that small holiday spike over the past two weeks, indicating still-strong labor market conditions,” said AnnElizabeth Konkel, senior economist of Indeed Hiring Lab (The Hill).
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The four-week moving average of claims, which helps iron out week-to-week volatility, fell by 2,500 to 228,500 last week. It has declined from a three-month high of 247,000 reached during December. With job openings still way above pre-pandemic levels and small businesses reporting difficulties finding workers, layoffs are likely to remain low for now. The unemployment rate remains at a five-decade low of 3.7% (Livemint).
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The claims report showed the number of people receiving benefits after an initial week of aid increased 62,000 to 1.728 million during the week ended Dec. 17. Still, that partly reflected seasonal volatility around the holidays. The so-called continuing claims, a proxy for hiring, covered the period during which the government surveyed households for December’s unemployment rate. Continuing claims increased 135,000 between the November and December household survey weeks. The modest gain boosted confidence that the unemployment rate remained at 3.7% in December. The steady labor market conditions left the gap between job openings and unemployment huge at 3.7 million as of October 31, indicating no signs of demand for labor easing in the near term.
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“The U.S. labor market resilience keeps the economy afloat as the year ends,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. With claims near pre-recession levels, she said job growth will continue and could put some upward pressure on wages, though higher interest rates led by an aggressive Fed were cooling demand. Most economists do not believe the economy will tip into a recession in 2023.
Impact and Outlook
While jobless claims remain low historically, there are some signs of cooling in pockets of the labor market:
- New jobless benefit claims have risen for two straight weeks in late December, albeit from very low levels. This indicates some softening after extraordinary strength through most of 2022.
- Job cuts surged in November across technology, interest rate-sensitive sectors like housing and finance, and transportation and warehousing.
- Online retailer Amazon said this month it plans to lay off more than 18,000 workers.
- Facebook parent Meta Platforms Inc is cutting 11,000 jobs, while Elon Musk’s takeover of Twitter also resulted in layoffs across the company.
Nevertheless, with 10.7 million job openings at the end of November, the labor market remains extremely tight. This will likely keep layoffs low for the foreseeable future.
The Fed seeks to cool demand for workers by raising borrowing costs. While economists generally expect the unemployment rate to rise this year and next as higher rates slow the economy, they see it only rising to about 4.6% – not high by historical standards. Most see a recession as likely but mild.
“We expect layoffs will increase in coming quarters as demand softens in response to more expensive credit,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.
Rubeela Farooqi of High Frequency Economics said that even if unemployment rises by half a percentage point to one percentage point due to Fed rate hikes, “job growth will remain positive given relatively healthy small business sentiment and still fairly robust job openings.”
This story will continue to develop in the coming weeks and months. Key data reports to monitor include monthly nonfarm payrolls, consumer spending figures, and additional jobless claims readings. The strength or cooling of the labor market will be a crucial indicator for the direction of Fed policy and the overall U.S. economy.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
