Despite signs of a contraction in manufacturing and housing and a weakening consumer following the Federal Reserve’s rate hikes, the number of Americans filing new claims for unemployment benefits fell again last week.
Initial claims for unemployment benefits dropped 15,000 to a seasonally adjusted 190,000 for the week ended January 14, the Labor Department said on Thursday. The median forecast of analysts polled by Econoday had the claims number rising from 205,000 to 215,000.
Federal Reserve Chairman Jerome Powell has said that softening demand for labor is a necessary step in bringing down inflation. The Fed last year raised its benchmark interest rate target from a range of zero to 0.25 percent to a range of 4.25 to 4.50, a very rapid rate of increases. Powell and other Fed officials have said that economic growth will have to fall below trend to bring inflation in line with the Fed’s two percent target, although officials remain publicly hopeful that an outright recession could be avoided.
The housing market, the most interest rate-sensitive sector of the economy, has fallen into a recession. Data released this week by the Federal Reserve Board indicated that manufacturing contracted in November and December. Surveys from the New York Fed and the Philadelphia Fed suggest that manufacturing has continued to contract in the new year.
Yet the appetite for workers remains very strong and layoffs remain very low. The economy added 223,000 jobs in December, far above the 75,000 to 100,000 required to keep unemployment from rising. The unemployment rate fell to the lowest level in 50 years. Jobless claims, which are a proxy for layoffs, have been extremely low and have now fallen to the lowest level since September. The ratio of job vacancies to unemployed persons is 1.7 to one, indicating an extremely unbalanced labor market.
In short, the part of the economy the Fed is most focused on—the labor market—is continuing to defy the Fed.
The Fed has focused on the labor market because it fears that an unbalanced labor market will push wages up much more than productivity can increase and that spending this increased income will push up prices, fueling an inflationary wage-price spiral. Fed officials believe that long periods of high inflation encourage workers to seek higher wages to compensate for future expected inflation, a phenomenon they refer to as inflation expectations becoming unanchored.
Economists say companies may be engaging in “labor hoarding”—holding on to workers even though demand for products and services has sagged and the economy is expected to slow—after they had so much trouble rebuilding payrolls following the pandemic layoffs. Most economists say jobless claims are likely to stay low until some period after payroll growth drops significantly.
On Wednesday, the Federal Reserve’s Beige Book said that “many firms hesitated to lay off employees even as demand for their goods and services slowed and planned to reduce headcount through attrition if needed.”
Jobless claims can be volatile week-to-week, so economists like to look at the four-week moving average. This fell from 212,500 to 206,000.
Continuing claims, those made after the first week on unemployment benefits, rose 17,000 to 1,647,000. That is a very low level by historical standards, amounting to just 1.1 percent of the workforce.
Many prominent tech companies—including Microsoft and Amazon—have announced layoffs in recent weeks but these have been small in comparison to their own workforce and minuscule compared with the national labor market. Outside of tech, there are few signs of employers showing workers the door.
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