The number of Americans filing new applications for unemployment benefits declined more than anticipated last week, allaying fears about the unraveling of the labor market and reinforcing the notion of a gradual softening.Â
Initial claims for state unemployment benefits decreased by 17,000 to a seasonally adjusted 233,000 for the week ending August 3, according to the Labor Department’s recent report. This represented the largest drop in around 11 months. Economists surveyed by Reuters had projected 240,000 claims for the most recent week.
Reversal of previous week’s jump
This reversal came after the previous week’s unexpected sharp jump in jobless claims, and is most likely a reflection of the fading impact from temporary motor vehicle plant shutdowns and Hurricane Beryl. The prior week’s count was revised slightly upward to 250,000 from the previously reported 249,000.
What are the implications for the labor market?Â
This data also adds further evidence to the possibility that the severity of last month’s worse-than-expected payrolls report for July was partly an outsized anomaly due to the record number of people unable to work because of inclement weather.
How did the market react?Â
Following the release, U.S. stocks gained, while benchmark Treasury yields rose back above 4 percent. The U.S. dollar also strengthened against a basket of currencies.
“The talk of an imminent recession seems wide of the mark,” commented Marc Chandler, chief market strategist at Bannockburn Global Forex.
Implications for Fed policy
Investors in interest rate futures contracts scaled back bets that the Federal Reserve will start cutting borrowing costs next month with a larger-than-usual 50-basis-point reduction, from around 70 percent before the release to about 58 percent probability.
What are the factors affecting claims?
Claims have been on a roughly upward trend since June, with part of the rise attributed to volatility related to the motor vehicle plant shutdowns for retooling and disruptions caused by Hurricane Beryl in Texas. Unadjusted claims dropped 13,589 to 203,054 last week.
The claims fell sharply in Michigan and Missouri, states with a heavy presence of motor vehicle assembly plants, which had seen claims rise the prior week. Auto makers typically idle assembly lines in July to retool for new models.
Overall labor market conditions
Over the past few weeks, overall claims have been hovering near the high end of the range this year, but layoffs remain generally low. Government data last week showed the layoffs rate in June was the lowest in more than two years. The slowdown in the labor market is being driven by less aggressive hiring as the Fed’s interest rate hikes in 2022 and 2023 dampen demand.
Fed’s monitoring of the labor market
The Fed also closely monitors how jobless rolls compare to the size of the labor force to gauge the health of the jobs market. Growth in the labor force has largely kept pace with the gradual rise of those claiming jobless relief and is about where it was before the coronavirus pandemic.
The U.S. central bank last week maintained its benchmark overnight interest rate in the 5.25 percent-5.50 percent range, where it has been since last July, but policymakers signaled their intent to reduce borrowing costs at their next policy meeting in September.
Read more: Billion-dollar losses: What’s behind the unprecedented stock market collapse?
Concerns about the labor market
However, the government’s monthly nonfarm payrolls report last Friday showed job gains slowed markedly in July, and the unemployment rate rose to 4.3 percent, alarming markets that the labor market may be deteriorating at a pace that would call for strong action from the Fed.
“Investors have to be careful not to read too much into one report like they did recently with the last payroll report,” said Jeffrey Roach, chief economist at LPL Financial. “If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by a half of a percent.”
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