First-time applications for U.S. unemployment benefits saw an uptick last week, and the number of individuals on jobless claims reached a 2-1/2 year high by the end of June, indicating a gradual cooling of the labor market.
The slowing momentum in the labor market, coupled with decreasing inflation pressures, keeps the Federal Reserve on track to start cutting interest rates this year. Financial markets are hopeful that the easing cycle could begin as early as September.
Fed Chair Jerome Powell stated on Tuesday that the economy was back on a “disinflationary path,” but emphasized that policymakers needed more data before making a decision to cut rates.
“The labor market is still historically strong, but not quite as strong as it was in 2022 and early 2023,” said Gus Faucher, chief economist at PNC Financial.
Rise in Unemployment Claims
Initial claims for state unemployment benefits rose by 4,000 to a seasonally adjusted 238,000 for the week ended June 29, according to the Labor Department’s report released on Wednesday, a day earlier than usual due to the Independence Day holiday. Economists polled by Reuters had forecast 235,000 claims for the latest week. Unadjusted claims increased by 13,049 to 238,149.
A significant rise in applications was observed in New York, likely related to school holidays. Other states, including California, New Jersey, Georgia, Illinois, Iowa, Kentucky, and Michigan, also reported notable increases, offsetting declines in Connecticut and Maryland.
Claims have been moving toward the upper end of their 194,000-243,000 range this year, partly due to a rise in layoffs as higher interest rates dampen demand. Seasonal adjustments during holidays also add to the volatility.
Seasonal Volatility and Layoffs
Volatility in claims could persist after the July 4 holiday. Auto manufacturers typically idle assembly plants for retooling in the summer, but the exact timing is uncertain.
The labor market is steadily cooling, evidenced by a government report on Tuesday that showed 1.22 job openings for every unemployed person in May, a ratio close to its 2019 average of 1.19.
On Wednesday, the ADP Employment report revealed that private payrolls increased by 150,000 jobs in June after a rise of 157,000 in May. Economists had forecast an increase of 160,000 jobs.
Federal Reserve’s Policy
The Federal Reserve has maintained its benchmark overnight interest rate in the 5.25%-5.50% range since last July. The Fed has raised its policy rate by 525 basis points since 2022 to combat inflation.
The number of people receiving benefits after an initial week of aid, seen as a proxy for hiring, increased by 26,000 to a seasonally adjusted 1.858 million during the week ending June 22, the highest level since late November 2021. This increase in continuing claims has been influenced by a policy change in Minnesota allowing non-teaching educational staff to file for unemployment benefits during the summer break. This bump is expected to fade when schools reopen for the new academic year in the fall.
Job Cuts and Future Employment Reports
A third report on Wednesday from the global outplacement firm Challenger, Gray & Christmas showed that U.S.-based employers announced 48,786 job cuts in June, down 23.6% from May. However, planned layoffs were 19.8% higher compared to June of the previous year.
Looking ahead, the government is expected to report on Friday that nonfarm payrolls increased by 190,000 jobs in June, following a rise of 272,000 in May, according to a Reuters survey of economists. The unemployment rate is forecast to remain unchanged at 4.0%.
Conclusion
The recent increase in unemployment claims and the rise in jobless rolls suggest that the labor market is gradually cooling. While the labor market remains historically strong, the easing inflation pressures and the Federal Reserve’s cautious stance indicate a potential shift in monetary policy. As policymakers await more data, the coming months will be crucial in determining the trajectory of interest rates and the overall economic outlook.
