New claims for U.S. jobless benefits rose 5.6% in the first week of August to 262,000 as layoffs continued to pick up, according to Labor Department data released on Thursday. While there has been a clear upward trend in new unemployment claims, the number remained relatively low compared to the historical standard, especially with significant downward revisions to data for the last two weeks of July.
Together with last week’s positive employment report for July, the overall slowdown in the labor market might not be as bad as expected. One indication of that strength in the market was continued strong labor demand, mainly from smaller businesses that are still struggling to keep their workers from quitting.
Stripping out the weekly volatility of the series, the four-week moving average showed new claims above 250,000 for the first time since December 2021. At this pace, it will take another six months for the trend to reach the critical level of 350,000, which would be cause for alarms to go off.
Continuing jobless claims rose slightly for the week ending July 30, up 8,000 to 1.428 million. This again shows strong labor demand as workers transitioned off unemployment benefits as jobs became available.
Producer price index
In a separate report from the Bureau of Labor Statistics, inflation showed another sign of significant relief in July after the better-than-expected consumer price report released on Wednesday.
The producer price index—a proxy for producer inflation—deflated for the first time since April 2020 when the pandemic first hit the U.S. economy. The index for final demand fell 0.5% on a month-over-month basis, much lower than the median forecast of a 0.2% increase. That brought the year-over-year figure down from 11.3% in June to 9.8% in July.
The main factor was the sharp drop in energy prices, down 9% on the month. Food prices were up 1%, while prices for core goods and core services were up 0.2% and 0.1%, respectively.
The impact of lower energy prices and commodity prices also showed up in production costs as declines in prices in the earlier stages of production were broad-based. Most noticeably was the substantial drop in costs for unprocessed goods for intermediate demand, which fell 12.36% on the month.
Trade services—a proxy for retail and wholesale margins—were up 0.3% on the month from 0.5% previously, continuing to slow down as elevated inflation ate into profit margins.
The takeaway
While there are signs of an overall economic slowdown, we believe the U.S. economy has clearly not entered a recession and won’t be in one until at least 2023. The gradual climb in layoffs and the easing of inflation are showing that rate hikes do make significant impacts. Still, it is not the time to speculate on when the Fed will pivot from its current hawkish stance to a more dovish position and potentially cut rates, as inflation remains far away from the target of 2% annually.
