Jobless claims data shows ‘warning sign’ for US labor market

The number of ongoing applications for unemployment benefits hit its highest level since November 2021 last week, adding to signs that the labor market is cooling as unemployed workers struggle to find new jobs.

New data from the Labor Department showed that about 1.84 million claims were filed in the week ending June 22, up from 1.82 million a week earlier. Meanwhile, the 4-week moving average of weekly jobless claims rose 3,000 to 236,000, the highest rate since September 2023.

LPL chief financial economist Jeffrey Roach reasoned that the data “is sending a warning sign that the labor market may be softening”.

The main question for the Federal Reserve is whether this easing is another sign of normalization in the labor market or an indication that high interest rates could seriously damage the US economy.

A growing number of economists believe the risks are tilted toward a painful outcome.

Oxford Economics chief economist Nancy Vanden Houten cautioned against reading too much into the claims data, which can be volatile from week to week, but noted that a further move higher in the weekly claims trend unemployment would definitely be a point of concern.

“A sustained increase in initial claims would signal more weakness in the labor market and a larger increase in the unemployment rate than we currently expect and would add more support to our case for the Fed to start cutting rates in September,” Vanden Houten wrote in. a note on Thursday.

The Fed has remained largely steadfast in its argument that it needs to gain “greater confidence” in the path to lower inflation before cutting interest rates. In his most recent press conference on June 12, Fed Chairman Jerome Powell noted that the labor market continues to normalize and, from the Fed’s perspective, has not yet shown any real signs of concern.

“We see gradual cooling — gradual movement toward better balance. We’re monitoring it carefully for signs of … something more than that, but we really don’t see that,” Powell said.

But some economists argue that trends in the labor market are not promising.

“[Taken] Together, the hiring and firing indicators point to a trend below 100,000 in private payrolls growth over the next three months, which would give a further boost to the unemployment rate and leave the Fed to looked seriously behind the curve,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients on Thursday.

Renaissance Macro chief economist Neil Dutta recently told Yahoo Finance that with inflation falling and the labor market weakening, the Fed should cut rates soon.

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Investors currently expect the Fed to cut rates twice this year, according to Bloomberg data. Fed forecasts released earlier this month suggested the central bank would cut rates just once this year.

With the rate of job openings returning to its pre-pandemic rate, Dutta is concerned that any further decline in job openings will come with a rise in unemployment.

“I just don’t think the Fed wants to really push the weakening of job demand much further,” Dutta said.

He added, “It’s not that the risk at this point is that the unemployment rate will suddenly drop. The more likely outcome distribution is that it’s stable or goes higher.”

From a markets perspective, this has led strategists to tell Yahoo Finance that they believe the labor market may be the most important economic indicator to watch right now, not inflation.

“The labor market for us is the key to the markets,” Cit’s head of equity trading strategy Stuart Kaiser told Yahoo Finance.

“Our overall view is that you want to go long in your US equity portfolio unless or until you get a significant slowdown in payrolls.”

Josh Schafer is a reporter for Yahoo Finance. Follow him to X @_joshschafer.

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