Dive Brief:
- Initial claims for unemployment insurance during the week ended Aug. 3 totaled a lower-than-forecast 233,000, or 17,000 less than the prior week, the Labor Department said Thursday, offering a bright spot of data amid concerns that a rise in unemployment last month foreshadows layoffs and a recession.
- “Initial claims remain more consistent with a mild slowdown than a brewing recession for now,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said Thursday in a note to clients. Still, “the recent increase in the unemployment rate likely will gain some self-reinforcing momentum, as businesses respond to improving labor availability and more cautious consumer spending behavior by laying off underutilized staff.”
- Indeed, the four-week moving average of jobless claims rose 7,000 to 1.86 million, the highest level since November 2021 based on a revision of the prior week’s average, the Labor Department said.
Dive Insight:
The report on initial jobless claims and data released Monday highlighting strength in the service sector spurred a rebound in equity markets this week after a slump triggered by news on Aug. 2 that payrolls last month grew less than expected.
Total employment rose only 114,000 in July in the lowest monthly increase this year, while unemployment increased to 4.3% from 4.1% in June.
“The rise in the unemployment rate probably overstates labor market weakness,” JPMorgan Chase analysts said in a report. The possibility of recession “is a risk worth monitoring, but note that much of the rise [in unemployment] was attributable to a surge in labor force participation and rise in temporary, not permanent, layoffs,” they said.
“Other labor market data sets aren’t showing signs of downward spiral,” the analysts said, “and few companies are mentioning plans for layoffs on earnings calls.”
Still, jobless claims will likely increase in the coming weeks, Shepherdson predicted, noting that the Federal Reserve Bank of Cleveland calculated that in June the number of jobs included in layoff announcements hit the highest level since December 2020, excluding the collapse of Yellow Corp in August 2023.
Data signaling weakness in the labor market will likely “make a strong case for large easings in at the Fed’s September, November and December meetings, though the speed of deterioration likely will not be rapid enough to prompt [Fed Chair Jerome] Powell to call an emergency meeting,” Shepherdson said.
Following release on Thursday about jobless claims, traders in interest rate futures reduced the probability that the Fed will cut its main interest rate by a half point next month to 54% from 69% on Wednesday, according to the CME FedWatch Tool.
On Aug. 1 — before the Aug. 2 payrolls report — the market saw just 22% odds of a reduction of that size from the current range of 5.25% to 5.5%.
“Our own view calls for three cuts of 25 basis points [0.25 percentage points] through the end of the year,” JP Morgan analysts said.
“We don’t think conditions are deteriorating so rapidly that the Fed won’t be able to avoid recession with rate cuts,” they said, predicting policymakers will cool inflation without causing a downturn.
Richmond Fed President Tom Barkin said Thursday he believes that policymakers need not rush their decision on when to trim borrowing costs.
“I think you have got some time in a healthy economy to figure out whether this is an economy that is gently moving into a normalizing state that will allow you in a steady, deliberate way to normalize rates,” he said in an interview webcast by the National Association for Business Economics. “Or is this one where you really do have to lean into it.”
