US labour market continues to be strong

Labour market resilience and stubbornly high inflation have increased the odds the US Federal Reserve will continue to raise interest rates.

A restaurant advertising jobs looks to attract workers in Oceanside, California, U.S.
The United States labour market remains tight despite rising risks of a recession, contributing to keeping inflation high [File: Mike Blake/Reuters]

The number of Americans filing new claims for unemployment fell again last week, pointing to sustained labour market strength and adding to financial market fears that the United States Federal Reserve could keep hiking interest rates for longer.

Those worries were further heightened by another report from the US Department of Labor on Thursday showing labour costs grew much faster than previously estimated in the fourth quarter. The labour market remains tight despite rising risks of a recession, contributing to keeping inflation elevated via solid wage gains.

“The labour market shows no fresh signs of deterioration with minimal job layoffs despite the news of big tech firings the last several months, and this will harden the resolve of Fed officials to slow economic demand down with higher interest rates,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 190,000 for the week ended February 25, the Labor Department said. It was the seventh straight week that claims remained below 200,000. Economists polled by Reuters had forecast 195,000 claims for the latest week.

Unadjusted claims dropped 9,297 to 201,710 last week. The decline was led by the US states of California and Kentucky. There were notable decreases in claims in Michigan, Ohio and Texas. Big increases in claims were reported in Massachusetts and Rhode Island.

There is still no sign that high-profile layoffs, mostly in the technology sector, have had a material impact on the labour market, with economists and policymakers saying these companies hired too many workers during the COVID-19 pandemic and were not representative of the overall economy. Economists also speculate that severance packages were keeping some laid-off workers from filing claims.

“It is possible that initial claims might not be fully capturing layoffs of higher-paid workers who might not qualify for unemployment benefits based on severance or might not file for benefits for some other reason,” said Veronica Clark, an economist at Citigroup in New York.

Economists also believed that seasonal adjustment factors, the model the government uses to strip out seasonal fluctuations from the data, were keeping claims lower. The seasonal adjustment factors for 2023 will be updated at the end of March.

US stocks opened lower. The dollar rose against a basket of currencies. US Treasury prices fell.

High inflation

Labour market resilience and stubbornly high inflation have increased the odds the Fed will raise interest rates at least three more times this year instead of twice. The US central bank has hiked its policy rate by 450 basis points since last March from the near-zero level to the current 4.5 percent to 4.75 percent range, with the bulk of the increases coming between May and December.

Inflation could remain high. A second report from the Labor Department showed unit labour costs – the price of labour per single unit of output – increased at a 3.2 percent annualised rate last quarter. That was revised up from the 1.1 percent pace reported last month.

Labour costs rose at a 6.9 percent rate in the third quarter, and notched hefty gains in the prior two quarters. They surged 6.5 percent in 2022, instead of 5.7 percent as reported last month, too fast to be consistent with the Fed’s 2 percent inflation target.

The claims report showed the number of people receiving benefits after an initial week of aid fell 5,000 to 1.655 million during the week ending February 18. The so-called continuing claims, a proxy for hiring, covered the period during which the government surveyed households for February’s unemployment rate.

Continuing claims fell modestly between the January and February survey periods. The unemployment rate at 3.4 percent in January was the lowest in more than 53 years. Economists expect strong employment growth in February, though the pace probably slowed from January’s blockbuster gain of 517,000 jobs.

Source: Reuters