An unexpected jolt disrupted the American labor market landscape recently as the number of individuals filing for unemployment benefits took an alarming leap, marking the highest recorded level in more than one and a half years. However, the apparent urgency of the situation may not be entirely reflective of an accelerating layoff trend as the data includes the Memorial Day holiday period, known for its potential to introduce volatility in labor market metrics.
This sudden rise, characterized as the most significant in nearly two years, found its primary contributors in the states of Ohio, Minnesota, and California. Economists, however, are cautious about jumping to conclusions about this rise, particularly in the aftermath of a recent case of rampant fraud in Massachusetts that temporarily skewed the claims data to a comparable high before corrections were made.
Senior economic advisor at Brean Capital, Conrad DeQuadros, reflected this caution, stating, “The jump in claims could be a sign of a pickup in layoffs, but given the volatility of claims from week-to-week, it is too soon to reach that conclusion.”
He further elaborated on the need for additional confirmation before concluding that layoffs are on the rise, specifically considering the recent fraudulent activity in Massachusetts.
According to the Labor Department’s latest report, initial claims for state unemployment benefits jumped 28,000 to a seasonally adjusted 261,000 for the week ended June 3, marking the highest level since October 2021. This rise significantly surpassed the forecasted 235,000 claims by economists.
Notably, the rise was not uniform across the country. Unadjusted claims increased by just 10,535 to 219,391 last week, with Ohio seeing a surge of 6,345 applications, California witnessing an increase of 5,173 filings, and Minnesota experiencing a growth of 2,746 in claims.
The state of Ohio, which has seen a steady increase in unemployment claims, attributes the trend to layoffs in the manufacturing, automobile, and transportation, and warehousing industries. An interesting factor here is the practice among auto manufacturers of closing plants for retooling during the summer, which introduces additional volatility into the unemployment claims data.
Gisela Hoxha, an economist at Citigroup, highlighted this industry-specific trend, stating, “Some auto plants take temporary breaks during the summer, although the dates change slightly every year, which makes it hard for seasonal factors to capture correctly.” This observation suggests that the coming months may see additional volatility in initial claims.
Despite the week-to-week variations, the four-week moving average of claims — considered a more reliable indicator of labor market trends — rose by just 7,500 to 237,250. This discrepancy between weekly fluctuations and the steadier monthly average underscores the need for caution when interpreting these data.
From a monetary policy perspective, these fluctuations in unemployment claims are unlikely to cause any immediate shifts. The Federal Reserve is expected to maintain its policy rate unchanged in the coming week, which would be the first time since March 2022 when it began an aggressive campaign of interest rate hikes — the fastest since the 1980s. The U.S central bank has since raised its policy rate by a hefty 500 basis points.
As for the broader economy, last week’s report showed an addition of 339,000 jobs in May. Even though the unemployment rate edged up to a seven-month high of 3.7% from 3.4% in April, it remains quite low by historical standards. Driving job growth is the services sector, including the leisure and hospitality category, which is still catching up after struggling to find workers during the last two years. The healthcare and education sectors are also on the rebound, following a spate of retirements during the pandemic.
However, some economists are expressing concerns that layoffs may be spreading from the tech sector and interest-rate sensitive industries, like housing, finance, and manufacturing, to other segments of the economy.
“Headline-grabbing layoff announcements, however, typically take some time to be put into effect,” warned Stuart Hoffman, a senior economic advisor at PNC Financial. He believes that the recent rise in initial claims could hint at an upcoming escalation in layoffs in the coming months.
Overall, employers seem hesitant to let go of workers, especially after the challenges faced in finding labor during the pandemic. The labor market, on the whole, is showing signs of gradual cooling, but the narrative is far from complete. As this chapter unfolds, we must continue to watch and interpret these economic indicators with a discerning eye.
The information provided in this article is based on data from the Malaymail website.