Initial jobless claims dropped by 5,000 last week to 238,000 yet remained elevated near a 10-month high. For now, the spike in new claims in the previous weeks looks a lot more like a seasonal issue than a deterioration in labor market conditions.
In contrast, housing starts fell in May to the lowest level since June 2020, another sign of the impact that high interest rates have had on builders and the housing market in general.
There were only 1.277 million starts in May on a seasonally adjusted basis, far below what we estimate to be the sustainable level of 1.7 million annually.
As the economy continues to normalize, it is harder to spot where the economy is heading with all the mixed signals, magnifying the difficult job that the Federal Reserve faces.
Inside the data
For initial jobless claims, we saw a similar surge last summer, when new claims exceeded 240,000 from June to August. If there is a seasonal distortion—likely because of new government policies allowing teachers to claim unemployment benefits or increasing minimum wages—we should expect a large decline in new claims once September comes around like last year.
That said, new claims have been rising since January, which has aligned with the gradual increase in unemployment rates. The labor market is cooling, and elevated initial jobless claims, if they persist, should raise some more eyebrows.
With the recent data on new claims, most models will point toward slower job creation in June, which will be released on July 5.
But we do not expect a major drop-off in job gains or a sharp increase in unemployment that could alter the Fed’s decision in July. But if that continues in August’s report while inflation remains subdued, we think the Fed will move to cut rates in September.
Regarding housing, permits also dropped in May, falling by 3.8%. That was the fourth drop in five months, signaling further weakness when it comes to future supply. With mortgage rates still elevated, the demand for new homes has been lower while price growth has not been as high as it was two or three years ago.
Read more of RSM’s insights on the economy and the middle market.
Instead of breaking more ground, builders have switched their focus to completing existing projects. Completions remained high, staying at 1.5 million in May, consistently above the number of starts and permits in recent months.
