U.S. Weekly Jobless Claims Dropped To 9-Month Low; Productivity Gains Accelerate

Summary

• Weekly jobless claims fall 3,000 to 183,000
• Continuing claims drop 11,000 to 1.655 million
• Productivity accelerates at 3.0% rate in fourth quarter
• Unit labor costs rise at 1.1% pace

The number of Americans filing new claims for jobless benefits fell to a nine-month low last week as the labor market continues to be resilient despite rising borrowing costs and growing fears of a recession this year.

This surprise drop in weekly unemployment claims made public by the Labor Department on Thursday lifted cautious optimism that the economy could avoid a recession or just experience a shallow and brief downturn. Federal Reserve Chair Jerome Powell told reporters on Wednesday that “the economy can return to 2% inflation without a really significant downturn or a really big increase in unemployment.”

“Someday soon economists will have to take down those calls for a recession in 2023 because the labor market refuses to budge from the lowest unemployment rate in decades,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Initial claims for state unemployment benefits fell 3,000 to a seasonally adjusted 183,000 for the week ended Jan. 28, the weakest level since April last year. It was the third consecutive weekly drop in applications. Economists surveyed by Reuters had predicted 200,000 claims for the latest week.

Unadjusted claims slid 872 to 224,356 last week. There were significant declines in applications in Ohio, Kentucky, and California, which offset rises in Georgia and New York.

Claims have been declining this year, reflecting a persistently tight labor market. The government revealed on Wednesday that there were 11 million job vacancies at the end of December, with 1.9 vacancies for every jobless person.

“The labor market has yet to respond meaningfully to a rapid increase in interest rates,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

Outside the technology industry and interest-rate-sensitive sectors like finance and housing, employers have been hesitant to fire workers after struggling to obtain labor during the pandemic, and because they are confident economic conditions will improve later in 2023.

An Institute for Supply Management report on Wednesday said manufacturers “are indicating that they are not going to substantially reduce headcounts as they are positive about the second half of the year.”

Stocks on Wall Street were trading higher. The dollar surged against a basket of currencies. U.S. Treasury yields slipped.

Tight Labor Market

The U.S. central bank on Wednesday lifted its policy rate by 25 basis points to the 4.50%-4.75% range, and vowed “ongoing increases” in borrowing costs.

The claims report indicated the number of people getting benefits after an initial week of aid, a proxy for hiring, dropped 11,000 to 1.655 million during the week ending Jan. 21. That partially revised the rises recorded in the previous two weeks in the so-called continuing claims.

Notably, the claims data has no impact on January’s employment report, due for release on Friday, as it falls outside the survey period. According to a Reuters survey of economists, nonfarm payrolls likely rose by 185,000 jobs in January.

The economy generated 223,000 jobs in December. The jobless rate is seen climbing to 3.6% from a more than the five-decade low of 3.5% in December.

In that context, the raft of layoffs in the technology sector increased job cuts last month. A different report on Thursday from global outplacement firm Challenger, Gray & Christmas showed layoffs announced by U.S.-based employers rose 136% to 102,943. That was the largest January total since 2009.

The technology sector formed 41% of the job cuts, with 41,829 layoffs. Retailers reported 13,000 job cuts, while financial firms prepared to gut 10,603 workers.

“It is difficult to completely square the seemingly contrasting messages from the jobless claims data and the Challenger job cuts data,” said Daniel Silver, an economist at JPMorgan in New York.

“One possible explanation for the recent divergence is that people are getting laid off, but they are not filing for unemployment insurance. This may be because people are easily able to find new work or because severance payments are delaying eligibility for unemployment benefits.”

Despite labor market tightness, wage inflation is declining and could keep doing so as a third report from the Labor Department showed worker productivity rising at a 3.0% annualized rate in the December quarter, the fastest in a year, after increasing at a 1.4% pace in the third quarter.

Productivity decreased at a 1.5% rate from a year earlier and fell 1.3% last year. But that was mainly because of distortions caused by the COVID-19 pandemic. Productivity rose 5.1% from the fourth quarter of 2019.

As result, unit labor costs – the price of labor per single unit of output – rose at a 1.1% rate. That was the most negligible gain since the first quarter of 2021 and came after a 2.0 percentage point pace of growth in the third quarter. Though unit labor costs surged at a 4.5% rate from a year earlier, they were below their peak of 7.0% over the 12 months through the second quarter of last year.

“The upshot is that, even without a rise in the unemployment rate and with job openings suspiciously resilient, the labor market no longer appears to be a significant source of inflationary pressure,” said Paul Ashworth, chief North America economist at Capital Economics in Toronto.