Initial jobless claims underwent a significant downward revision after a spike in fraudulent claims led to a distortion in the data.
New filings for jobless benefits released by the Labor Department on Thursday increased slightly by 4,000 last week, but the more noteworthy change was a significant downward revision in the previous two reports.
The number of new claims was adjusted down by a total of 50,000 claims for these weeks. This adjustment came as a result of a surge in fraudulent claims from Massachusetts, which had garnered significant market attention in recent weeks.
To get a more accurate reading of the labor market, we rely on the 13-week moving average to filter out the weekly fluctuations in the data. This metric indicates an upward trend in new claims that has persisted since November.
The underlying trend reached 235,000 last week, exceeding the pre-pandemic level for nine consecutive weeks. But the rate of increase has slowed noticeably over the past three weeks.
There’s no denying that the labor market has acted as a bulwark against a recession and has been far more resilient than anticipated.
As the economy has consistently added more than 200,000 jobs a month recently, it’s hard to envision a scenario, barring any economic shocks, in which the labor market abruptly collapses, as has happened during past recessions.
But there are reasons to remain cautious.
First, there is no shortage of potential shocks that could cause the economy to plummet, whether moderately or severely, such as the debt-ceiling crisis or continued turmoil in banking.
Second, we have been experiencing a shock of comparable magnitude for about a year now, in the form of higher interest rates.
The rate hikes have been anything but gradual, so we can expect the softening of the labor market to come to a halt soon.
The only scenario that combines a gradually slowing labor market and an economy that avoids recession is when the economy achieves a soft landing.
But we continue to believe that there is only a 25% chance of a soft landing. New claims data is pointing to a strong labor market that should favor no rate cuts until next year, if not more rate hikes. And if rates remain this high for longer, the economy more likely than not will tip into a recession.