Rising Unemployment Claims Signal 'Rapid Deterioration' In Job Market—But Here's Why The Data May Be Misleading

Topline

New jobless claims rose to the highest level in nine months last week as a growing number of firms continue to announce layoffs, but analysts aren’t so sure the seemingly rapid deterioration in the labor market may signal broader unease—at least not yet.

Corporations are laying off thousands of workers, but experts say that’s not necessarily indicative … [+] of the job market’s overall standing.

Key Facts

About 262,000 people filed initial jobless claims in the week ending Saturday, falling in line with economist projections but climbing by 14,000 from the previous week and hitting the highest level since mid-November, according to the weekly data released Thursday.

The latest data comes as a wave of giant corporations—including Microsoft, Walmart and Robinhood—have announced a growing number of layoffs this summer, with CEOs citing concerns that decades-high inflation could tip the economy into a recession.

After the Thursday report, economist Robert Frick of Navy Federal Credit Union explained the claims “form a barometer of how big companies… are preparing for an eventual recession” but aren’t actually a reliable measure of weakness in the overall labor market, which he points out posted twice the job gains economists were projecting last month.

In a Wednesday note, Goldman Sachs chief economist Jan Hatzius pointed out initial jobless claims have increased by nearly 100,000 since their March low of 166,000—signaling a “rapid deterioration” that has convinced some experts that the labor market has slowed by more than other indicators might suggest.

However, Goldman also isn’t sure the rising jobless claims signal a broader labor market slowdown: Hatzius calls the recent data “misleading” due in part to “outsized” increases over the past month in states like Massachusetts, which again led increases last week, and Connecticut, where claims actually halved on a weekly basis.

Adjusting for distortions, which Goldman says should “eventually go away,” jobless claims appear to be “much more stable” this year—as corroborated by other labor market data, including Challenger’s job cuts report which, showed U.S. employers announced 21% fewer job cuts in July (versus June), and the Labor Department’s monthly turnover survey, the economist wrote.

Key Background

After losing more than 20 million jobs at the height of pandemic uncertainty in 2020, the labor market quickly and forcefully led the economic recovery, recouping all the lost jobs as of last month’s data. However, the Federal Reserve’s inflation-fighting interest rate hikes, which tend to hurt company earnings, have sparked fears of a looming recession. This summer, corporations including Amazon and Walmart have both signaled a slowdown in their hiring needs, with Walmart executives pointing to “overstaffing” as a drag on disappointing profits last quarter. On the other hand, the broader labor market, at least as signaled by the monthly jobs report, has remained strong.

Crucial Quote

The pickup in jobless claims “may lend credence to the idea that the job market is cooling off,” but “the idea that peak inflation has passed is gaining steam,” says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, who still cautions that the Fed’s policy could push the economy into a recession. “We will continue to watch the data—just as the Fed will be watching closely—to keep tabs on the competing narratives that inflation is cooling and the job market is weakening, and that the economy may be headed toward a traditional recession.”

Tangent

Hatzius explains that the higher unemployment claims in Connecticut and Massachusetts appear questionable given that the increases aren’t backed up by state-specific reports such as WARN notices (which corporations file in the event of big layoffs) or continued claims (which remain low). He also points out that in Connecticut, at least part of the rise “appears to be the result of fraudulent filings.”

Surprising Fact

Not all areas of the global labor market have recovered so quickly: Though a slight improvement from last year, the number of unemployed young people around the world is set to hit 73 million in 2022—still well above global youth unemployment rates before the Covid-19 pandemic, according to the United Nations.

Rising Unemployment Claims Signal ‘Rapid Deterioration’ In Job Market—But Here’s Why The Data May Be Misleading