Signs of a slowing US labour market continue to grow

Today’s US initial jobless claims numbers are starting to paint a picture of a slowing labour market. Even though today’s reading rose slightly to print above expectations (221k v 214k), the strong seasonal adjustment applied by the US Labour Department suggests the underlying trend is actually higher than that suggested by today’s report.

This year’s early Easter holiday has led to seasonal adjustment problems that have acted to lower the estimate of initial claims. The seasonally adjusted number is simply calculated by diving the unadjusted number by the seasonal factor, meaning that a higher seasonal factor generates a lower headline print. The seasonal factor used by the Labour Department this year is higher than has typically been used for early Easters, and if the same seasonal factor had been used when Easter Sunday last fell on 31st March – 2013 – then today’s print would have been 232k. As such, today's initial jobless claims number looks too low, while overall the series looks set to rise going forward as these generous seasonal factors are trimmed back.

At the same time as this, other signs of a deteriorating labour market are also growing stronger. The Challenger jobs survey report is showing that US employers planned to cut 287,254 jobs in Q1, up 120% from the 117,163-figure reported for Q4 2023, with the monthly reading for March the highest since January 2023. And a significant number of these job cuts were planned in the tech sector, previously one of the key drivers of US jobs growth. Similarly, compulsory WARN notices, as well as internet searches for job-related terms such as ‘redundancy’ and ‘unemployment benefits’ are also rising, suggesting an increase in the number of unemployed workers filing for social security support going forward, ie rising job losses. And lastly, the regular employment survey conducted by the National Federation of Independent Businesses is showing hiring intentions continuing to fall as companies look to reduce costs in the face of higher borrowing costs, suggesting that workers losing their jobs will find it increasingly difficult to find new employment opportunities quickly.

Overall, the clear picture emerging is that a number of different labour market indicators are all pointing in the same direction and suggesting that the strength that has been seen to date in the US labour market is now dissipating. This was always going to happen as the impact of the Fed’s monetary tightening finally started to be felt in the real economy; the main puzzle has been why it has taken this long to materialise. This conundrum is most likely explained by US consumption remaining significantly stronger than was expected, as both consumers and firms used accumulated excess savings to shield themselves from the Fed’s tightening. But with these funds now largely depleted – as evidenced by US consumption slowing over Q1 and expected to soften further going forward – so the long-expected drag on the labour market is finally being seen.

The US inflation data for 2024 has so far been disappointing in terms of paving the way for the Fed to cut interest rates. But if the current labour market story remains intact, then if the CPI data for April and May shows underlying inflationary pressures once again softening, then the chances of a first cut being delivered as soon as June remains in play.