Jobless claims surprise

Weekly jobless claims in the US have increased significantly to 228,000, a larger than expected jump, with the prior week's claims also revised up to 246,000. This could be an indication that recent layoffs are impacting the overall employment situation, potentially slowing down the labor market, as the Federal Reserve had anticipated. The disappointing data is likely to increase speculation that the Fed will pause rate hikes sooner than expected, with futures traders now pricing in a 60% chance of a pause at the May meeting.

The weak jobless claims data comes on the back of a series of poor economic data readings, including Wednesday's soft Institute for Supply Management (ISM) Services report. Small-cap stocks, which are particularly sensitive to economic weakness in the US, fell on Wednesday, suggesting declining sentiment about the economy. Meanwhile, growth sectors like information technology, industrials, and consumer discretionary also retreated amid the gloomy news.

The job market has been consistently strong, but new seasonally adjusted data suggests that it may not be as tight as previously thought. Over the past few months, weekly jobless claims figures remained below 200,000, indicating a remarkably tight labor market. However, the latest data shows that the situation may not be as exceptional as previously believed. This highlights the challenges of interpreting economic data in the wake of the unprecedented economic disruption caused by the pandemic.

Weekly claims serve as a crucial early warning system for potential problems in the labor market. Typically, the number of people filing for jobless benefits hovers around 200,000 per week in a healthy labor market, and 400,000 or more during a recession. Despite the potential volatility of these figures, they provide valuable insights into the state of the labor market.

What is important to note, however, is that the Department of Labor has just revised how it calculates seasonally adjusted numbers. Starting from the latest Unemployment Insurance (UI) Weekly Claims News Release dated Thursday, April 6, 2023, it has changed the methodology used to seasonally adjust the national initial and continued claims.

The DoL’s seasonal adjustment factors can either be multiplicative or additive, and the choice of adjustment factor is based on the level of the series. In normal times, a multiplicative adjustment is preferred, but in times of economic instability or large level shifts, additive adjustments are better as they track seasonal fluctuations more accurately, leading to smaller revisions. (If you care enough, there is an explanation here).

Before the pandemic, the unemployment insurance claims series was adjusted using multiplicative models. However, starting from March 2020, BLS staff changed the seasonal adjustment models to additive as the pandemic had a large effect on the UI series. As the pandemic's impact lessened, the seasonal adjustment models were changed back to multiplicative models.

During the pandemic period, the UI series will be treated as a hybrid adjustment, with additive adjustments used for the most volatile period, i.e., March 2020 to June 2021, and multiplicative adjustments used before and after that period. The published seasonal factors will be presented as multiplicative, with additive factors converted to implicit multiplicative factors, and will not be subject to revision.

In order to provide a more accurate picture of claims levels and patterns for both initial and continued claims, modifications have been made to the outlier sets in the seasonal adjustment models for both of the claims series. As a result, there have been larger than usual revisions during many weeks over the last five years. These changes, however, should provide a more accurate understanding of claims levels and patterns

For a while, bad economic news was viewed positively by the market as it lowered the outlook for further Fed rate hikes. However, with the end of the Fed's rate increase cycle appearing to be near, investors are once again viewing bad news as simply bad news. It remains to be seen what impact, if any, this latest economic data will have on tomorrow's March jobs report

What to look out for in tomorrow’s jobs report

An unemployment rate below 200,000 would likely be seen as favorable news for the economy, suggesting the Fed may pause interest rate increases in the near future. However, it is important to note that wage growth is another crucial aspect to consider. Higher-than-expected wage increases may reinforce the idea that the labor market could become a source of inflation, as companies may have to raise prices to keep up with increased labor costs.

Looking deeper into tomorrow's job report, it is important to pay attention to any signs of labor participation improvement. If the labor participation rate increases from the February rate of 62.5%, it may suggest that more workers are returning to the job market, potentially reducing the pressure on companies to offer higher wages to attract new employees. This could have a disinflationary effect, to use "Fed-speak."

The February job report showed that the leisure and hospitality, healthcare, and retail trade industries had the most growth, indicating that the services sector is driving the economy. On the other hand, transportation and warehousing lost jobs, while construction jobs only slightly increased. This pace, if it continues, could help keep wage growth in check as the dominant services industries are not high-paying. While everyone deserves fair wages for their work, the Fed has expressed concerns that robust pay growth may fuel inflation and inflation expectations.