U.S. Jobless Claims Rise to 2-1/2-Year High as Labor Market Cools

Claims have reached the upper end of their 194,000-243,000 range this year, partly due to higher interest rates reducing demand and seasonal adjustment difficulties during holidays.

First-time applications for U.S. unemployment benefits rose last week, and the number of people on jobless rolls reached a 2-1/2-year high at the end of June, reflecting a gradual cooling in the labor market.

June saw weekly jobless claims increase, initially attributed to seasonal adjustment issues following the Memorial Day holiday and policy changes allowing non-teaching staff to claim benefits in some states.

However, economists now suggest the labor market is softening.

Combined with decreasing inflation, this trend supports the Federal Reserve’s potential interest rate cuts later this year, with financial markets hopeful for a September start.

“While layoffs for now remain low, we think the rise in claims reflects more workers applying for benefits because they are finding it more difficult to find jobs as the pace of hiring has slowed,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

The Labor Department reported that initial claims for state unemployment benefits increased by 4,000 to a seasonally adjusted 238,000 for the week ending June 29.

This report was released early due to the Independence Day holiday. Economists had forecast 235,000 claims for the latest week.

The four-week moving average of claims rose by 2,250 to 238,500, the highest level since last August. Unadjusted claims increased by 13,049 to 238,149, with significant jumps in New York, California, New Jersey, Georgia, Illinois, Iowa, Kentucky, and Michigan, offsetting declines in Connecticut and Maryland.

Claims have reached the upper end of their 194,000-243,000 range this year, partly due to higher interest rates reducing demand and seasonal adjustment difficulties during holidays.

Volatility could continue post-July 4, as auto manufacturers’ summer retooling schedules are uncertain.

On Tuesday, the government reported 1.22 job openings for every unemployed person in May, nearing the 2019 average of 1.19. Stock markets rose, the dollar fell, and U.S. Treasury prices increased.

ADP’s report showed private payrolls grew by 150,000 jobs in June, slightly below expectations. Fed Chair Jerome Powell noted the economy’s return to a “disinflationary path” but emphasized the need for more data before rate cuts.

The Fed’s benchmark overnight interest rate has been stable at 5.25%-5.50% since last July.

Continuing claims rose by 26,000 to 1.858 million for the week ending June 22, the highest since November 2021.

This rise is partly due to Minnesota’s policy change allowing non-teaching educational staff to file for summer benefits, expected to decrease in the fall.

“While both upward trajectories bear watching, the levels and rates of increase to date still appear consistent with a gradually cooling labor market,” said Michael Hanson, an economist at JPMorgan.

The Institute for Supply Management reported a decline in services employment for the sixth time in seven months, suggesting slowing labor market momentum.

Despite this, nonfarm payrolls are expected to have increased by 190,000 jobs in June, with the unemployment rate steady at 4.0%.

The ISM’s services PMI hit a four-year low in June, indicating possible economic slowdown at the end of Q2.

A widening trade deficit further hindered growth, with the Commerce Department reporting a 0.8% increase in the deficit to $75.1 billion in May.

Adjusted for inflation, the goods trade gap rose 0.5% to $94.5 billion, impacting GDP growth, which was 1.4% in Q1.

“All of this creates mood music that is conducive to a modest easing in the degree of restraint in monetary policy later in the year and we still expect two quarter-point cuts in September and December,” said Conrad DeQuadros, senior economic advisor at Brean Capital.