US Unemployment Claims Remain Low Despite Expectations of Rising Unemployment Rate

Recent data released by the Department of Labor shows that initial filings for unemployment insurance have ticked higher last week but remain low in comparison to the expectations of rising unemployment rate. Jobless claims for the week ended March 25 totaled 198,000, up 7,000 from the previous period and slightly higher than what was estimated. However, companies are slow to lay off workers despite expectations that the unemployment rate will rise through the year.

Low Unemployment Benefits Indicate Economy in Expansion Mode

The four-week moving average of weekly claims has been below 200,000 since mid-January. This comes despite aggressive Federal Reserve efforts to slow down inflation and targeting a labor market with a supply-demand imbalance. Federal Reserve officials expect the unemployment rate to rise to 4.5% this year, which would require the loss of more than 540,000 jobs.

Wall Street closely watches jobless benefits as an indicator of recession. However, the low level of jobless benefits is indicating that the economy is still in expansion mode. The markets have reacted little to this fresh batch of data; futures are pointing to a higher open on Wall Street.

Risks to the US Economy Amid Tight Labor Market and Declining Corporate Profits

Claims for unemployment benefits rose moderately last week, but layoffs remain at very low levels and the labor market remains extremely tight. Corporate profits in the fourth quarter declined by the most in five years, partly due to penalties and fines imposed on several businesses.

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point but indicated it was on the verge of pausing further increases in borrowing costs. Tightening lending standards following the recent collapse of two regional banks could make it harder for households and small businesses to access credit, potentially dampening demand for labor.

Service industries rely heavily on bank lending, and slowing job growth is expected in this sector as diminished loan availability dissuades restaurant operators and other smaller businesses from hiring new workers and opening new establishments. The Commerce Department confirmed the economy grew at a solid clip in the fourth quarter, but much of the increase in output came from inventory accumulation that was mostly unplanned.

National after-tax profits without inventory valuation and capital consumption adjustments, conceptually most similar to S&P 500 profits, dropped by the largest amount since the fourth quarter of 2017. The economy contracted at a 1.1% rate in the last quarter, the worst performance since the second quarter of 2020 when measured from the income side.

Potential for More Slack in Hiring Trends

Despite the low unemployment benefits, senior economist adviser Stuart Hoffman predicts potential for more slack in hiring trends in the spring and summer months due to an expected mild recession in H2 2023. Economists had forecast new claims to total 195,000 in the seven days ending March 25. Thirty of the 53 U.S. states and territories that report jobless claims showed a decrease last week, while 23 posted an increase.

The number of raw or actual claims before seasonal adjustments was notably higher last week compared with the same week a year earlier. The number of people collecting unemployment benefits across the country edged up by 4,000 to 1.69 million in the week ending March 18.

In conclusion, despite some moderate increases in unemployment benefits and risks to the US economy amid tight labor markets and declining corporate profits, low unemployment benefits indicate that the economy is still expanding with little impact on Wall Street markets. However, economists predict potential for more slack in hiring trends during spring and summer months due to an expected mild recession towards H2 2023.

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