The number of new applications for unemployment benefits increased by 7,000 last week to 251,000, the highest number in eight months.
Rising jobless claims, a proxy for layoffs, is a sign that the labor market may be facing some turbulence, although the figure is still somewhat low in a historical sense.
Around this time in July 2021, new claims were averaging over 400,000 per week. The number of jobless claims bottomed out at the 166,000 tallied in mid-March, the lowest figure since 1968.
Still, the fact that jobless claims keep ticking up each week shows that the tight labor market may be slowing in response to the Federal Reserve raising interest rates. Many economists believe the United States may slip into a recession, and a few believe the country is already enmeshed in one.
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“The recession storm clouds offshore moved in closer this week,” said Chris Rupkey, chief economist at FWDBONDS. “You can forget that picnic on the beach. Every time weekly jobless claims rise by this magnitude, the result has been a recession: 251 thousand in the July 16 week up from 166 thousand in the March 19 week. This is a dream come true for those analysts saying we were already in recession because now they have the data in hand to back up those early, wild claims.”
Last month, the central bank hiked its interest rate target by a whopping three-fourths of a percentage point for the first time since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike was equivalent to three simultaneous rate increases.
The Fed is set to meet next week and will likely conduct another big hike. As the meeting looms large, investors are now pegging the odds of a three-fourths-point hike at just over 71% and are pricing in a 28.5% chance of a full percentage point hike, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
“There is still uncertainty whether the layoffs will keep rising, showing the downturn is worsening, but at the moment, the first signs of deterioration in the labor market should be enough to keep the Fed on track for a 75 bps rate hike to 2.5% next week. A 2.5% rate is supposed to be neutral for the economy, but instead, the economy is sitting at the edge of a cliff,” said Rupkey.
Inflation has also been plaguing workers.
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Inflation accelerated to an excruciating 9.1% for the 12 months ending in June, the highest level in four decades, according to the recently released consumer price index report.
As a result, inflation-adjusted hourly earnings decreased by 1% from May to June alone, according to the Bureau of Labor Statistics. In the past year, from last June to this June, the hourly earnings of workers declined by 3.6%.
