Fed Eyes Maximum Employed and Jobless Claims Jump
Americans filed more initial applications for unemployment benefits last week, but still claims data remains “extremely encouraging,” High Frequency Economics chief U.S. economist Jim O’Sullivan told Bloomberg in a recent interview. Employers are “signaling that the net slowing in payrolls gains in the last few months is weather related and temporary, and we’re due for some catch-up in payrolls over the next couple months,” he added, referring to the chilling grip winter had on the U.S. economy, which kept employment gains low in December and January. The latest jobless claims report spanned the survey week used by the U.S. Department of Labor to calculate monthly employment growth for March, meaning last week’s jobless claims data suggests that job creation may have been higher in March than in the first two months of the year.
Data released by the Labor Department on Thursday showed that initial jobless claims increased by 5,000 to a seasonally adjusted 320,000 new applications in the week ended March 15. Not only was the increase less than expected, but at this level, claims are running near a four-month low and at a roughly similar pace to the number of claims that were filed on a weekly basis before the recession. The smaller-than-expected increase in initial jobless claims recorded last week confirms one trend; businesses remain confident enough to keep workers even if they have not been inclined to increase payrolls significantly in recent months.
What is clear is that initial claims for unemployment benefits — which serve as a proxy for layoffs — paint a picture of a strengthening and resilient labor market. If initial claims for unemployment benefits defined the whole labor market story, then the narrative of the jobs recovery would be easy to summarize: progress is steady, or at least, the labor market situation is not worsening.
Confirming that thesis is the fact that the underlying trends in jobless claims remained positive as well in the past week. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends. After all, according to Mesirow Financial Chief Economist Diane Swonk, it is “the trend in employment that matters.” That average dropped to the lowest level recorded since late last November in the week ended March 15 — dropping by 3,500 to 327,000.
However, the number of people continuing to receive jobless benefits jumped 2.89 million in the week ended March 8, a 41,000-claim increase from the 2.86 million continuing claims filed in the previous period, which was the lowest level recorded since December.
But while the downtick in jobless claims can be termed as a positive sign for the labor market, it is important to remember that jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the other piece of the labor market story. While “inroads” into unemployment are being made, progress is still slow. In other words, job growth may no longer be bad, but it is still sluggish. February’s job growth of 175,000 is approximately just enough to keep pace with the growing population, and job growth has yet to return to the average of 200,000 jobs per month added from June through November. Economists say that 200,000 jobs per month must be added in order to attain sustainable job growth. Factoring in population growth, economists have calculated it will still take years for the job market to return to pre-recession health, when the unemployment rate was between 4 percent and 5 percent.
Still, “the labor market continues to improve,”according to Société Générale economist Brian Jones. “We’re likely to get eye-popping numbers for March payrolls. The economy is not in a soft patch.” Further, employers — who have generally been cutting back on layoffs as the jobless claims numbers confirm — will be encouraged to hire more workers once consumer demand picks up. But, it is important to remember, that because consumer demand is intimately connected to the health of the labor market, consumers also needed greater employment gains to feel confident enough to increase their outlays.
Maximum employment is one of the dual mandates of the Federal Reserve — the other being stable prices. With a nod to that first task, in December of 2012, the central bank made an unemployment rate of 6.5 percent one of its thresholds for hiking the benchmark interest rate, or federal funds rate, which has remained near zero since late 2008. But Fed officials now believe the headline unemployment rate is too limited an indicator of the health of the labor market; the rate of joblessness has fallen to 6.7 percent in recent months, meaning it is extremely close to the Fed’s targeted rate.
Yet, Fed Chair Janet Yellen things the economy is still far too weak to increase rates. Declines have come in a large part because many Americans out of work have become discouraged and stopped looking for work, which means they are no longer part of the labor force and no longer counted as unemployed. As of February, 3.8 million Americans were unemployed for at least six months, and 7.2 million workers were stuck in part-time jobs even though they would prefer full-time employment. That reality pushed the Fed to find new language to define the forward guidance on interest rates. Yellen indicated that data on labor force participation and job churn will supplement her view on the health of the jobs market. But despite her caution, “if you ask about my dashboard, the dial on virtually all of those things is moving in a direction of improvement,” Yellen said at press conference after the conclusion of the Federal Open Market Committee meeting.
The benchmark interest rate will stay near zero “well past” the time unemployment hits 6.5 percent. Fed policymakers said in a statement released Wednesday after the conclusion of the March Federal Open Market Committee that instead of targeting a 6.5 percent unemployment rate the central bank would “assess progress … toward its objectives of maximum employment and 2 [percent] inflation” in deciding when to raise rates from near zero. To make that assessment, the Fed will take into account “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” the statement read. This marked the first time that the Fed has said explicitly that short-term interests rates will be held lower than normal even after inflation and employment return to their pre-recession trends.
On Wednesday, as expected, the Fed also lowered the central bank’s monthly monetary stimulus by another $10 billion a month — which places bond purchases at $55 billion in April.
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