The number of Americans filing new applications for unemployment benefits rose less than expected last week, pointing to a still-tight labor market, while the economy recovered faster in the third quarter than previously estimated.
Labor market strength, which was also underscored by a certain drop in unemployment figures in early December, after much of it had risen since October, increased the risk that the Federal Reserve could raise interest rates further to higher levels and keep them there for a while to combat inflation. The US central bank is trying to cool demand for everything from homes to workers to bring inflation back down to its 2 percent target.
“The economy isn’t quite as close to death as the markets thought,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed may need to raise interest rates even further in 2023 because the economy is not slowing down, so upward price pressure could persist.”
Initial applications for government unemployment benefits rose by 2,000 to a seasonally adjusted 216,000 in the week ending Dec. 17, leaving most of the previous week’s decline intact, Labor Department data showed on Thursday.
Economists surveyed by Reuters had forecast 222,000 applications for the last week. The number of applications has risen and fallen in recent weeks, but is below the 270,000 threshold, which economists believe would be a warning sign for the labor market.
A wide range of layoffs in the technology sector and interest-sensitive sectors such as residential construction have had no significant impact on receivables so far. The unadjusted applications fell by 4,064 to 247,867 last week, due to sharp declines in California, Indiana, Ohio and Texas, which offset a sharp increase in Massachusetts.
Fed Chair Jerome Powell said last week that “it feels like we have a structural labor shortage out there.” The Fed raised its policy rate by 50 basis points last Wednesday to a range of 4.25 to 4.5 percent, the highest since the end of 2007. Fed officials expect the rate to rise to between 5 and 5.25 percent next year.
Stocks on Wall Street fell. The dollar gained against a basket of currencies. US government bond yields rose.
The application data covered the period in which the government surveyed corporate institutions for the non-agricultural payroll portion in the December employment report.
Applications fell moderately between the November and December survey weeks, pointing to another month of solid employment gains. Employment growth this year averaged 392,000 per month. Data on the number of people on unemployment lists next week will provide further clues about the state of hiring in December.
Hoarding workers
Economists believe that companies are likely to reduce the number of new hires before they start layoffs. Employers were generally reluctant to fire workers after struggling to find workers during the COVID-19 pandemic.
The
report shows that the number of people receiving benefits after a first week of aid fell by 6,000 to 1.672 million in the week ending December 10, falling from a 10-month high. The so-called “continued demands,” an indicator of new hires, had tended to rise since the beginning of October.
Despite the recent increase, ongoing applications are around 150,000 fewer than at this time in 2019, which, according to some economists, suggests that the labor market is far from easing.
“Because the number of ongoing applications is so low, there is a much smaller pool of “potential” workers who can be hired for jobs,” said Isfar Munir, an economist at Citigroup in New York.
“While this could only indicate that a larger number of people have discontinued the unemployment benefits program than usual, it doesn’t ultimately help to ease up the labor market unless those people choose to return to work.”
Other economists, however, thought that the unemployment rate of people receiving unemployment benefits remained at an eight-month high of 1.2 percent was a sign of companies’ caution in hiring new workers as they prepared for a dreaded recession next year.
Yet the strength of the labor market is helping to support the economy by leading to solid wage gains that contribute to higher consumer spending.
GDP upward adjustment
A second report from the Commerce Department on Thursday confirmed that the economy recovered in the third quarter after shrinking in the first half of the year.
Gross domestic product (GDP) rose by 3.2 percent on an annual basis in the past quarter, the government announced in its third GDP estimate. This was revised upwards from the 2.9 percent rate reported last month. The economy contracted by 0.6 percent in the second quarter.
The upward revision of GDP in the last quarter reflected increases in consumer spending, business investment, and state and local spending. Domestic demand was also revised upwards, meaning that growth was moderate rather than weak.
However, the decline in the real estate market was stronger than previously assumed, as residential investment shrank for six quarters in a row, the longest period of its kind since the real estate market collapse in 2006.
Sixteen out of 22 sectors contributed to the GDP recovery, in particular information, professional, scientific and technical services, as well as mining, retail and real estate, rental and leasing. The construction sector was deducted the most from GDP, followed by the utilities sector and the financial and insurance sectors.
Growth estimates for the fourth quarter are up to 2.7 percent, with consumers doing the heavy lifting, which is also supported by savings accumulated during the pandemic.
Inflation-adjusted household income rose in the third quarter for the first time in some time as price pressures abated. Corporate spending on equipment has also remained robust.
Yet a recession is most likely next year, as labor market strength raises the prospect of further interest rate hikes and further reduces household wealth, which is being put under pressure by falling stock market and real estate prices. Consumers are also using up their savings and a strong dollar will hurt exports.
A third report showed that the Conference Board’s leading indicator, an indicator of future US economic activity, fell for the ninth time in a row in November.
“We expect a slight recession starting in spring 2023,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.