Jobless claims have drifted lower even amid rising fears of an economic downturn, suggesting that layoffs are rare and slightly increasing the odds that Federal Reserve Chairman Jerome Powell will be able to steer the country away from a recession.
The number of new applications for unemployment benefits dropped by 6,000 to 222,000 last week, the lowest since June. Falling jobless claims, a proxy for layoffs, are a sign that the economy is still adding jobs despite the Fed’s efforts to tighten monetary policy to slow economywide spending and rein in inflation.
The four-week moving average of claims fell by 7,500 to 233,000. The Fed has been jacking up interest rates aggressively, and the conventional wisdom is that doing so slows the economy and thus causes job loss. So to see jobless claims not rising steadily bodes well for the economy’s ability to withstand the massive rate hikes.
“Overall, it’s a good sign,” Patrick Gourley, an associate professor of economics at the University of New Haven, told the Washington Examiner on Friday. He said, though, that it is still too early to tell whether this is an indicator that the Fed will be able to pull off a soft landing.
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“Soft landing” means driving down inflation while avoiding the economy falling into a tailspin. Many economists have said it will be a difficult feat for the Fed to do so because it has had to hike rates more aggressively given the hottest inflation in decades.
Indeed, most investors are betting on another 75-basis point hike this month. That follows two other 75-basis point increases in June and July, rate hikes that are so large they haven’t been conducted since the 1990s.
The Bureau of Economic Analysis announced in a revised estimate that U.S. gross domestic product fell at a 0.6% annualized rate in the second quarter. That came after negative 1.6% GDP growth in the first quarter — bad news for the economy, as two quarters of negative GDP growth typically constitutes a recession in the minds of economists.
But the labor market has been the major indicator pushing back on recessionary fears. The economy has averaged 378,000 new jobs over the past three months, a very strong clip.
When job gains start diminishing and jobless claims start to inch upward, it can be a sign of a recession, but so far, the economy has not shown that it is quickly heading that way. Still, indicators like jobless claims are not immediate, so the future of the economy is still very unclear.
Gourley likened the Fed and interest rate changes to moving a train by either increasing or decreasing speed.
“A train can’t just all of the sudden stop and go the opposite direction. The brakes get slammed … but it takes a long time to stop. And same with accelerating a train: It just all the sudden doesn’t start going like a car does,” he said, adding that by the Fed raising rates, it is normal to expect that action to slow the economy, but what isn’t clear is how long that will take.
Gourley said that because the labor market has proven resilient, Powell being able to pull off a soft landing is “within the realm of possibility.” He also said that, compared to a couple of months back, the odds of a soft landing might be “slightly better,” but it is still far too soon to tell.
Powell himself has acknowledged how challenging pulling off a soft landing will be. In May, he suggested that the economy’s landing might not be soft but rather “soft-ish.”
“In principle, it seems as though by moderating demand, we could see [job] vacancies come down as a result … and I think put supply and demand at least closer together than they are and that would give us a chance to get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially,” Powell said.
“So there is a path to that. Now, I would say I think we have a good chance to have a soft, or a soft-ish, landing or outcome, if you will,” he said during a press conference.
More recently, Powell seemed to suggest that the economy might end up taking a whack from the Fed’s rate-hiking. In a hawkish annual speech delivered in Jackson Hole, Wyoming, Powell reaffirmed the central bank’s commitment to crushing inflation, even at the risk of hurting other aspects of the economy, such as the strong labor market.
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“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”
The odds of a recession have been changing all year. Wells Fargo, for instance, expects that the United States will dip into a recession in 2023, with three quarters of negative GDP growth next year. Gourley pegged the odds of recession at more than 50% but said he has a low degree of confidence given all the uncertainty.
