New claims for unemployment benefits fell by a sharp 16,000 last week to 193,000 on a seasonally adjusted basis, the fewest since April and well below the market’s forecast, according to government data released Thursday.
The decline comes amid a debate over how many jobs will be sacrificed to tame inflation, and it shows just how resilient the labor market has been despite the Federal Reserve’s aggressive rate hikes.
Seasonal factors may have played a role, though. Last September’s number was disrupted by the delta variant and the expiration of pandemic-related unemployment benefit programs.
Still, that could not fully account for the fact that our preferred measure of initial jobless claims—the 13-week moving average, which accounts for weekly fluctuations—showed a clear break in trend since late August, falling from 240,000 to 232,000 last week.
The economy is slowing down, yet businesses keep holding on to their employees amid a shift in the nature of the workforce. The labor participation rate remains one full percentage point below the pre-pandemic level.
That is one of the most important reasons why the Federal Reserve believes there is a lot more room to raise interest rates without sinking the economy into a deep recession.
While we share a somewhat similar view, we think that the Fed’s projection of a 4.4% unemployment rate next year in its most recent Summary of Economic Projections is a bit too optimistic.
In our view, a 4.6% unemployment rate would be required to bring the Personal Consumption Expenditures Price Index, a key gauge of inflation, down to 3%. For the PCE index to reach 2% would push the unemployment rate to more than 6%, our research shows.
The takeaway
The resilience of the labor market is keeping the economy from descending into a recession. The latest data on initial jobless claims added more reason to believe that a recession won’t happen until next year.
