The impact of two major hurricanes and labor strikes in the past two months on initial jobless claim data has completely faded, as the metric fell to 217,000 last week, lower than the pre-pandemic average.
The continued drop in new filings for unemployment benefits, a proxy for layoffs, should suggest a strong rebound in payroll gains this month, which would reaffirm that the disappointing October jobs report was a one-time shock.
Read more of RSM’s insights into the economy and the middle market.
As the economy shows further signs of upside risks on growth and spending, we do not expect layoffs to be a problem next year.
The increase in real wages over the past 18 straight months, coupled with stronger demand for consumption in anticipation of higher tariffs on imported goods, should keep demand on labor high next year.
In addition, tighter immigration policies should prompt businesses to retain their employees even more than they have been, keeping layoffs much lower in our estimate.
Producer prices
The pressure from firmer overall demand also showed through the higher producer inflation prints in October, which rose faster than expected. The producer price index increased by 0.2% on the month and by 2.4% annually, the highest rate since June.
Based on the data from the consumer price index and the producer price index, the Fed’s main gauge for inflation, the personal consumption expenditures price index, should grow by 0.2% on the month, bringing the 12-month top line to 2.3%, reversing some of the disinflation of the past three months.
The takeaway
We don’t see a strong enough reason for the Fed to pause its rate cuts in December given the most recent economic data on jobs and inflation. But the probability that the Fed will slow its pace of rate cuts next year should now increase materially.
With potentially higher tariffs and tighter immigration policy, goods inflation, wage inflation and a growing economy should mean it will take longer for the Fed to get to its destination of a 2.9% policy rate as it forecast in September.
