With most of the seasonal fluctuations in the weekly jobs data having eased, new filings for unemployment benefits have returned to a healthier level over the past three weeks.
Initial claims last week rose by only 4,000, to 232,000, on a seasonally adjusted basis, according to government data released Thursday. Similarly, continuing claims for the week ending Aug. 8 increased by 4,000, to 1.863 million.
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As a proxy for layoffs, the jobless claims data should point to a labor market that has performed much better in August than it did in July.
This is encouraging news, given the recent sharp downward revisions to job gains through March released by the Bureau of Labor Statistics on Wednesday.
Even with the revision, the economy added 174,000 net jobs each month on average in the 12-month period through March, a strong showing no matter how one slices it.
Based on the jobless claims data, we should expect a strong enough month of job gains for August to not only alleviate concerns over growth tipping over, but also to not add much to inflation pressure.
Those conditions will clear the path for the Federal Reserve to announce that we have achieved a soft landing and begin cutting its policy rate starting next month.
While we think the Fed missed a golden opportunity for a rate cut in July, given the recent softer-than-expected data, the Fed, with a policy rate between 5.25% to 5.50%, has plenty of room to cut rates and spur growth.
Once the rate cuts begin, it will not be the journey but the destination that is most important to gauge where the economy is heading in the medium- and long-term.
There remains enough time for the Fed to bring its rate down to between 3% and 3.5% by the end of next year, which is our base case forecast for the new neutral rate.
The takeaway
Jobless claims data will continue to be an important indicator in the coming months. We expect more volatility in the claims data until Labor Day. Once we get to the end of September, we should have a much better picture of what the layoffs trend will look like.
