Recent jobless claims data have raised concerns about the U.S. labor market. The number of people continuing to claim unemployment benefits reached its highest level since November 2021 last week, indicating unemployed individuals are struggling to find new jobs.

Rising Jobless Claims

New data from the showed nearly 1.84 million jobless claims were filed in the week ending June 22, up from 1.82 million the week prior. The 4-week moving average of weekly jobless claims also increased by 3,000 to 236,000, the highest rate since September 2023. LPL Financial chief economist Jeffrey Roach commented that the data is “sending a warning sign that the labor market could be softening.”

The key question for the Federal Reserve is whether this softening indicates normalization in the labor market or a sign that higher interest rates could seriously harm the U.S. economy. An increasing number of economists believe the risks lean toward a painful outcome.

Economist Perspectives on Jobless Claims

Oxford Economics lead U.S. economist Nancy Vanden Houten cautioned against reading too much into claims data, which can be volatile from week to week. However, she noted that a further increase in the trend of weekly jobless claims would undoubtedly be a concern. “A persistent rise in initial claims would signal more weakness in the labor market and a larger rise in the unemployment rate than we currently expect,” she wrote.

The Federal Reserve has maintained that it needs “greater confidence” in the downward path of inflation before cutting interest rates. In his most recent press conference on June 12, Fed Chair Jerome Powell mentioned the labor market keeps normalizing and has not yet shown significant signs of weakness. “We see gradual cooling — gradual moving toward better balance. We’re monitoring it carefully for signs of…something more than that, but we really don’t see that,” Powell said.

Implications for the Federal Reserve

Some economists argue that the trends in the labor market are not promising. Pantheon Macroeconomics chief economist Ian Shepherdson wrote that indicators point to a sub-100K trend in private payrolls growth over the next three months, which would increase the unemployment rate and leave the Fed behind the curve. Renaissance Macro head of economics Neil Dutta told Yahoo Finance that with inflation falling and the labor market weakening, the Fed should consider cutting rates soon.

Investors currently expect the Fed to reduce rates two times this year, in line with Bloomberg data. However, forecasts from the Fed suggested the central bank would cut rates just once this year. With the job openings rate back to its pre-pandemic rate, Dutta expressed concern that further declines in job openings would lead to a rise in unemployment. “I just don’t think the Fed wants to really push the weakening in labor demand that much more,” Dutta said.

Market Perspectives on Jobless Claims

From a market perspective, some strategists believe the labor market might be the most important economic indicator to watch right now, not inflation. Citigroup’s head of equity trading strategy Stuart Kaiser told Yahoo Finance, “The labor market for us is the key to the markets. Our general view is you want to run your U.S. equity portfolio unless or until you get a significant slowdown in payrolls.”

Conclusion

The latest jobless claims data indicate a potential softening in the U.S. labor market, raising concerns among economists and market strategists. As the Federal Reserve continues to monitor these trends, the future direction of interest rates and the broader economic outlook will be closely tied to the labor market’s performance.