According to data released on Thursday, U.S. firms have not increased layoffs as many economists had feared. This is the latest sign that the labour market is resolutely resisting the Federal Reserve’s attempts to slow it down.
The Labour Department reported in its weekly reading of layoff activity across the nation that new claims for state unemployment benefits unexpectedly fell last week to the lowest level since February and the ranks of those receiving benefits for more than a week fell the week before that to the lowest level since July.
The employment market has recently showed indications of easing from the exceptionally tight circumstances brought on by the COVID-19 pandemic, but Thursday’s data supports the idea that it is still strong by historical standards.
This could force the Fed, which has aggressively increased interest rates over the past 18 months, to maintain high borrowing costs for a while in order to get inflation back to its target of 2%.
Despite the fact that worker productivity increased by the most in almost three years and labour cost pressures significantly decreased in the second quarter, according to a separate Labour Department report released on Thursday, it is unlikely that these improvements will be sufficient to allow the Fed to relax its guard in the fight against inflation.
According to Michael Pearce, head U.S. economist at Oxford Economics, “the Fed still needs to see labour market conditions weaken further to be confident it is on track to bring inflation back to target.”
The Labour Department said on Thursday that initial claims for state unemployment benefits decreased 13,000 to 216,000 in the week ending September 2 from a revised 229,000 in the previous week. It was the lowest level seen since the week ending February 11 and the fourth consecutive weekly decrease.
According to economists surveyed by Reuters, new claims will increase to 234,000 in the most recent week.
In the meantime, from a revised 1.719 million a week earlier, the rolls of those receiving unemployment benefits past the first week decreased by 40,000 to 1.679 million in the week ended August 26. Since the same level was reached in the week ending July 15, that was the lowest reading.
The number of new claims, which some economists see as a proxy for hiring, had increased significantly from this time last year until early April, when it briefly surpassed 1.85 million. However, since then, they have decreased, and the most recent reading is significantly lower than the 1.9 million average over the five years prior to the pandemic, which was also a time when the employment market was seen as solid.
The U.S. job market is not in immediate risk of contracting, according to the jobless claims data, which also show that even while corporate layoff announcements have recently increased, documented layoff activity is still low.
“The claims data do not show any real evidence of a pickup in layoff activity,” Thomas Simons, a U.S. economist at Jefferies, wrote in a blog post following the data’s release. “During 2023, there have been a few transient spikes in counts, particularly in June, but these spikes have been transient and frequently explainable by special factors.”
The information suggests that laid-off people can find new employment relatively easily or that “realised layoff activity is far less than what is announced by large businesses,” according to Simons. When seen as a whole, the data show that “chances of a soft landing in the labour market seem to be somewhat increasing.”
The Labour Department stated last week that job growth accelerated in August, despite the fact that employment increases for the two months prior had been drastically lowered downward. Unexpectedly, the unemployment rate increased from 3.5% to 3.8%, but the reason for this was a rise in the labour force participation rate to its highest level in more than three years.
Separately, the Labour Department said on Thursday that worker productivity increased in the second quarter, though not to the extent previously anticipated.
Since the third quarter of 2020, nonfarm productivity has improved at an annualised rate of 3.5%, which is higher than the -1.2% estimate from the first three months of the year. Nonfarm productivity is measured as the hourly output per worker. The growth in productivity for the second quarter was initially predicted to be 3.7%.
The report also showed unit labor costs, a key focus of the Fed, rose at a 2.2% annualized rate, a somewhat faster pace than the 1.6% rate initially reported, but softer than the 3.3% rate in the first quarter.
While those developments will be welcome news to the Fed — since improvements in productivity and easing of labor costs both factor favorably in the bid to further lower inflation from the 40-year highs experienced about a year ago — officials at the central bank are unlikely any time soon to relax the pressure they are exerting on the economy.
When policymakers meet in Washington on September 19–20 for their next rate-setting meeting, it does strengthen the case for keeping the policy rate constant at the present range of 5.25% to 5.50%.
“Wage pressures have moderated, which supports the case for holding rates unchanged at forthcoming meetings,” Oxford’s Pearce wrote. This is the pattern over the previous year.