US labor market cooling; leading indicator flashes recession
WASHINGTON – The number of Americans filing new claims for unemployment benefits increased moderately last week, suggesting the labor market was gradually slowing as the Federal Reserve’s year-long interest rate hiking campaign dampens demand.
Though measured, the loss of labor market momentum added to slumping retail sales and manufacturing activity in heightening the risks of a recession as soon as the second half of the year.
Banks have tightened lending, which could make it harder for households and small businesses to access credit. A measure of future economic activity plunged to the lowest level in nearly 2-1/2 years in March, other data showed on Thursday.
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“After months and months of watching, for the first time we can say we see a recession coming and it will be a miracle if we don’t have a downturn in the economy,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 245,000 for the week ended April 15, the Labor Department said. Economists polled by Reuters had forecast 240,000 claims for the latest week.
The combination of spring breaks and people who have exhausted their severance packages following a rush of layoffs in the technology sector and other areas of the economy sensitive to interest rates, could account for part of the rise in claims last week.
Economists also noted that the seasonal adjustment factors, the model that the government uses to strip seasonal fluctuations from the data, were less favorable last week.
“This may be the high point for initial claims over the near term,” said Lou Crandall, chief economist at Wrightson ICAP. “The seasonal adjustment factors for the next couple of weeks appear to have a more generous bias, which is likely to pull the published level below the recent average.”
Unadjusted claims dropped 7,021 to 228,216 last week as a surge of 6,703 in applications in New York and an increase of 3,079 in Georgia as well as notable rises in Connecticut and Rhode Island were offset by decreases in California, Texas, Pennsylvania, Indiana and Ohio.
Despite the second straight weekly increase, adjusted claims at current levels suggest employment growth remains strong, which should allow the U.S. central bank to raise rates next month before possibly halting its fastest monetary policy tightening cycle since the 1980s.
Nevertheless, the labor market is fraying around the edges.
US job growth expected to moderate but remain at brisk pace in March
The Fed’s “Beige Book” report on Wednesday described job gains as having “moderated somewhat” in early April “as several districts reported a slower pace of growth” than in recent reports. It also said contacts reported the labor market becoming less tight, noting “a small number of firms reported mass layoffs,” which were “centered at a subset of the largest companies.”
Though the report said several districts noted that banks had tightened lending standards, the impact has not yet been visible in most economic data, including claims. Tighter credit conditions generally act with a lag on the economy.
In a separate report on Thursday, the Conference Board said its Leading Economic Index (LEI) dropped 1.2 percent in March to the lowest level since November of 2020.
“Weakness is starting to spread and the LEI suggests a slowdown is ahead,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.
Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.
Weakness broadening
The housing market remains mired in recession. A third report from the National Association of Realtors showed existing home sales dropped 2.4 percent to a seasonally adjusted annual rate of 4.44 million units in March.
Manufacturing is also feeling the heat of higher borrowing costs, with a fourth report from the Philadelphia Fed showing its measure of factory activity in the mid–Atlantic region plunging to the lowest level in nearly three years in April.
Despite cracks in the labor market, economists did not expect widespread job losses. As such, most anticipated a short and mild recession.
The claims data covered the period during which the government surveyed business establishments for the nonfarm payrolls portion of April’s employment report.
Claims were little changed between the March and April survey weeks. The economy created 236,000 jobs in March, more than double what is needed to keep up with growth in the working-age population.
Data next week on people receiving benefits after an initial week of aid, a proxy for hiring, will offer more clues on the state of the labor market in April.
The so-called continuing claims increased 61,000 to 1.865 million during the week ending April 8, the highest since November 2021, the claims report showed.
Still, continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment. There were 1.7 job openings for every unemployed person in February.
“Overall demand for workers remains robust, and this should keep the pool of unemployed workers from expanding sharply,” said Matthew Martin, a U.S. economist at Oxford Economics.
