The number of Americans filing new claims for unemployment benefits fell to a two-month low last week while layoffs dropped in August, suggesting the Federal Reserve would need to continue aggressively raising interest rates to slow the labor market.
The weekly unemployment claims report from the Labor Department on Thursday, the most timely data on the economy’s health, also showed fewer people applied for jobless benefits in the prior week than initially estimated.
Strong demand for workers was reinforced by an Institute for Supply Management (ISM) survey on Thursday that showed a sharp rebound in manufacturing employment in August after three straight months of contraction.
The ISM survey found that “companies continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition.”
The Fed has been delivering hefty rate hikes to tame inflation by dampening demand in the overall economy.
“Employers remain in a mad scramble to fill open positions and are likely holding onto staff despite ebbs in demand,” said Matt Colyar, an economist at Moody’s Analytics in West Chester, Pennsylvania. “The experience of the past year, an extremely competitive labor market and a fast-moving business cycle, leave businesses loath to let workers go.”
Initial claims for state unemployment benefits decreased 5,000 to a seasonally adjusted 232,000 for the week ended Aug. 27, the lowest level since late June. Data for the prior week was revised to show 6,000 fewer applications filed than previously reported. Economists polled by Reuters had forecast 248,000 applications for the latest week.
Unadjusted jobless claims slipped 2,492 to 176,793 last week. There were notable declines in Connecticut, Missouri, Oklahoma and Georgia. Those drops offset big increases in Massachusetts and New York.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 26,000 to 1.438 million in the week ending Aug. 20.
Aggressive rate increases by the U.S. central bank have raised the risk of a recession. The Fed has hiked its policy rate by 225 basis points since March. So far, there are few signs that higher borrowing costs are cooling demand for labor.
The government reported this week that there were 11.2 million job openings at the end of July, with two jobs for every unemployed person. Labor market resilience continues to dispel fears that the economy is in recession after gross domestic product contracted in the first half of the year.
Signs that the economy continues to expand were bolstered by the ISM survey, whose manufacturing PMI was unchanged at 52.8 last month. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.
Five of the biggest six manufacturing industries, including machinery, transportation equipment, and computer and electronic products, registered moderate-to-strong growth.
Makers of computer and electronic products reported “demand from customers is still strong.” Manufacturers of transportation equipment said “strong sales continue.”
While there were signs that supply bottlenecks were easing, helping to slow inflation pressures at the factory gate, shortages persisted for machinery makers.
“The feared recession does not seem to be imminent,” said Scott Murray, an economist at Nationwide in Columbus, Ohio.
U.S. factories are outperforming their global peers, with manufacturing contracting in Europe and Asia this month.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
The claims data has no bearing on August’s employment report, which is scheduled to be released on Friday, as it falls outside the survey week. According to a Reuters survey of economists, nonfarm payrolls likely increased by 300,000 jobs last month after surging by 528,000 in July. While job growth is slowing, labor market conditions remain tight.
A separate report from global outplacement firm Challenger, Gray & Christmas on Thursday showed job cuts announced by U.S.-based employers fell 21% to 20,485 in August. Though layoffs rose 30% from a year ago, they were down 27% in the first eight months of this year compared to the same period in 2021.
The technology industry accounted for nearly a quarter of the job cuts announced in August. Technology companies have announced 14,408 layoffs so far this year, a 70% surge from the same period last year. Overall, employers announced plans to hire 41,985 workers in August, up 65% from July.
Economists still expect job growth to slow, especially with worker productivity continuing to plummet at unsustainable rates,putting upward pressure on labor costs.
Weak productivity could also make it harder for the Fed to steer inflation back to its 2% target.
Another report from the Labor Department showed nonfarm productivity dropped at a 4.1% annualized rate last quarter, revised up from the previously reported 4.6% pace of contraction reported last month.
It tumbled at a 7.4% rate in the first quarter. Productivity fell at 2.4% rate from a year ago, instead of the 2.5% pace estimated last month. It was still the biggest year-on-year decline since the government started tracking the series in the first quarter of 1948.
“The degree of the drop in productivity looks implausible to us,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. “If productivity is not growing, this represents serious cost pressures to corporations. This is not an encouraging picture for a return towards 2% inflation in a timely fashion.”