Weekly jobless claims rose more than anticipated last week, signaling further signs of a cooling labor market. The latest data from the Department of Labor revealed that 243,000 initial jobless claims were filed in the week ending July 13, an increase from 222,000 the previous week and exceeding the 229,000 economists had forecasted. This figure tied with a weekly jobless claims reading from June, marking the highest level of weekly filings since August 2023.
Additionally, the number of continuing applications for unemployment benefits reached its highest level since November 2021, with nearly 1.87 million claims filed in the week ending July 6, up from 1.85 million the prior week. This steady rise in both initial and continuing claims indicates a notable shift in the labor market dynamics.
Jefferies US economist Thomas Simons suggested that part of the increase in weekly claims might have been influenced by Hurricane Beryl, which displaced workers. However, Simons also noted that the broader trend in recent weeks has shown more pronounced cracks in the labor market. “The data of the past few weeks have been signaling incremental labor market weakness, albeit from a position of extreme strength,” Simons wrote in a research note on Thursday. He further commented, “It is still too early to tell if this is another step in the process of the labor market coming into better balance, or if it is the early stages of building momentum to the downside.”
These signs of labor market weakening have strengthened the case for the Federal Reserve to consider cutting interest rates soon. On Monday, Goldman Sachs chief economist Jan Hatzius wrote in a research note that with inflation slowing, the Fed should consider lowering interest rates as early as July, in light of the recent loosening in the labor market.
In June, the unemployment rate rose for the third consecutive month to 4.1%, up from 4% in May. Hatzius commented, “The bottom line is clear. While layoffs remain subdued, the unemployment rate is gradually trending higher because hiring is not strong enough to absorb all new native- and foreign-born labor force entrants. The updrift in the unemployment rate has been welcomed by Fed officials so far, but we agree with Chair Powell’s assessment that the labor market is now fully back in balance.”
“We may be approaching an inflection point at which further softening in labor demand results in a bigger and much less welcome increase in unemployment,” Hatzius warned.
As of Thursday morning, market sentiment reflected a roughly 98% chance that the Federal Reserve will cut interest rates by the end of its September meeting. Investors were also gauging a nearly 5% chance of a rate cut during the next meeting on July 30-31, according to the CME FedWatch Tool.
The latest unemployment claims data, combined with other economic indicators, suggest that the labor market is experiencing a significant shift. While jobless claims rising to 243,000 in the week ending July 13 points to an emerging weakness, it is crucial to contextualize these figures within the broader economic landscape. The ongoing rise in continuing claims, reaching 1.87 million, further underscores this trend.
Economist Thomas Simons’ analysis that Hurricane Beryl could have displaced workers adds a layer of complexity to the data. Yet, the consistent upward trend in claims reflects deeper underlying issues. His note that these developments signal “incremental labor market weakness” is an important consideration for policymakers and market watchers alike.
Goldman Sachs chief economist Jan Hatzius’ perspective aligns with this analysis, emphasizing the need for the Federal Reserve to reassess its interest rate policy in response to these labor market trends. The increase in the unemployment rate to 4.1% in June, the third consecutive monthly rise, is a clear indication that the labor market is no longer as robust as it once was. Hatzius highlights the crucial point that while layoffs are not yet rampant, the steady increase in the unemployment rate is a sign that hiring is insufficient to keep up with new labor force entrants.
Overall, these developments in the labor market suggest that the Federal Reserve may need to adopt a more accommodative monetary policy sooner rather than later. With markets already pricing in a high probability of rate cuts by September, the upcoming Fed meetings will be closely watched for any signals of a shift in policy direction.
