Or the Start of a Softening in Labor Market

• Initial claims for unemployment insurance rose in the week ending November 19, to their highest level since late summer. Initial claims are often volatile around the holidays.
• Continuing claims rose modestly in the week ending November 12 but remain near decades-long lows.
• PNC expects the FOMC to raise the fed funds rate by 60 basis points in a few weeks in an attempt to slow economic growth and cool off inflation; the job market is too tight from the Fed’s perspective.
• PNC’s baseline forecast is for a mild recession next year.

Initial claims for unemployment insurance rose by 17,000 to 240,000 in the week ending November 19. This was the highest level for initial claims since August. Claims for the prior week were revised up by 1,000 to 223,000. The four-week moving average of claims was 227,000, up from 221,000 the previous week. This was the highest value for the four-week moving average since early September. The four-week moving average bottomed out at around 206,000 in late September, and has gradually moved higher since then, but remains well below its 250,000 level in the summer. The four-week moving average smooths out some of the volatility in claims.

Continuing claims rose to 1.551 million in the week ending November 12, up from 1.503 million the prior week (revised slightly lower from 1.507 million). The four-week moving average of continuing claims was 1.510 million in the week ending November 12, up from 1.482 million the previous week. Continuing claims have increased somewhat in recent weeks but still remain near their lowest level in more than 50 years. With the job market very strong, laid-off workers are getting quickly rehired.

Federal Reserve officials are expecting a slowing in the job market given the big increase in interest rates this year; the hope is that this will bring down inflation that is well above the central bank’s 2% objective. But the labor market remains very strong. Although job growth has slowed over the course of 2022, it remains well above its pre-pandemic pace, and the labor market is extremely tight.

The increase in claims for the week of November 19 could be an indication that the job market is starting to slow, but claims can be volatile week-to-week, especially around the holidays. And claims moved somewhat higher in the summer for a couple of months, and then promptly declined in September to very low levels. Not seasonally adjusted initial claims rose by 5,000 for California for the week ending November 19, perhaps because of tech layoffs. But a one-week jump of claims proves nothing and it will take multiple weeks of rising claims and much weaker monthly job growth to confirm a meaningful slowing in the labor market.

The Fed would welcome a more substantial slowing in job growth. Right now, the labor market is too tight for the Fed, and job growth is too strong, with average gains of close to 300,000 in the three months through October.

Given continued strength in the labor market and inflation running near its fastest pace in four decades, PNC expects the Federal Open Market Committee to raise the federal funds rate by 50 basis points when it meets in mid-December, to a range of 4.25% to 4.50%. The fed funds rate started this year close to zero, so there has been a massive amount of monetary tightening this year. Given the big increases in both short-term and long-term interest rates in 2022, with the fed funds rate expected to move higher into next year, PNC now expects the U.S. economy to experience a mild recession in 2023, with a modest increase in unemployment.