The number of new applications for unemployment benefits unexpectedly dropped by 13,000 to 216,000 last week, the Labor Department reported on Thursday.
The reading marks the lowest number of jobless claims since February and shows the labor market is still hot, even as the Federal Reserve keeps interest rates high and teases another upward rate revision.
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Jobless claims are seen as a proxy for layoffs — if few people are claiming unemployment insurance, it suggests not many workers are getting laid off. The new numbers are at odds with expectations the labor market will soften, particularly given that the unemployment rate leaped three-tenths of a percentage point last month to 3.8%.
“Net, net, applications for unemployment benefits have tumbled in recent weeks, showing the labor market is even further away from rebalancing,” said Chris Rupkey, chief economist at FWDBONDS. “We do not know if this is enough for Fed Chair Powell to pull the trigger on another rate hike later this year, but it sure calls into question that three-tenths jump in the unemployment rate to 3.8% in last week’s report, which showed the sky was falling for the economy.”
The Fed has raised its interest rate target to 5.25% to 5.50%, the highest since the dot-com bubble at the turn of the century. The biggest question now is whether the Fed will hike rates one more time this year or pause and start cutting sometime down the line.
Rate hikes are meant to cool the labor market, and proponents of another rate hike argue the labor market hasn’t sufficiently loosened enough to bring down inflation permanently. Others argue the Fed shouldn’t overstep because it could cause a recession and millions of lost jobs.
The prevailing thought among investors is that the central bank won’t raise rates again at its meeting later this month, although it might opt to hike again later this year if the data show inflation is still stubbornly sticky.
After the Thursday report, investors assigned a 93% chance that the Fed will hold rates steady in September, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the jobless claims continue to “defy expectations” amid the rate hikes and that the latest report makes the odds of a recession in 2023 less likely.
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“We still believe the initial premise that sharply higher interest rates will slow economic growth and that higher unemployment and lower corporate profits are likely in the near future, but the big surprise is how long it is taking for the normal process to happen,” Zaccarelli said.
The latest employment report, released last week for August, showed the economy added 187,000 jobs, more than most economists anticipated. Still, the report was mixed, given that the unemployment rate ticked up.