The number of new applications for unemployment benefits dropped by 5,000 to 213,000 last week, the lowest since June, the Labor Department reported Thursday, defying fears of a recession.
Falling jobless claims, a proxy for layoffs, are a sign the economy is still adding jobs despite the Federal Reserve’s efforts to tighten monetary policy to slow economywide spending and bring down inflation.
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The number of new claims for unemployment isn’t anywhere near where it was during most of the pandemic and has not risen to a rate that would suggest an imminent recession. Still, some economists are predicting that a recession is on the horizon.
Rising jobless claims would be a clue that the tight labor market may be slowing in response to the Federal Reserve aggressively jacking up interest rates. Driving up interest rates slows demand and can result in recessionary conditions.
In order to fight explosive inflation, the Fed has been hiking rates at a historic rate and in June and July conducted two 75-basis-point hikes, which are akin to six typical rate hikes in just two months.
Thursday’s jobless claims report comes just days after the August consumer price index report came through and rattled investors. The CPI report was hotter-than-expected, raising fears that the Fed will be forced to hike rates even more in order to drive down the explosively rising prices.
Following the CPI report, the Dow Jones Industrial Average suffered its seventh biggest decline in points in U.S. history. The tech-heavy Nasdaq composite fell by more than 5%, and the S&P 500 declined by 4.3%.
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In other news this week, inflation as measured by the producer price index slowed to 8.7% for the year ending in July. On a month-to-month basis, the producer price index declined by 0.1%, on par with forecast expectations.
“The longer inflation stays high, the more the Fed will raise rates, and the more likely the Fed is to push the economy into a recession,” said Bill Adams, chief economist for Comerica Bank.
