Omicron Could Be Near-Term Drag

• Initial claims for unemployment insurance fell in the week ending December 25. The four-week moving average fell below 200,000, for the first time since 1969.
• Continued claims and its four-week moving average are returning to pre-pandemic levels.
• Job growth is strong in late 2021. However, the omicron variant is a significant downside risk.
• A shortage of workers is weighing on job growth in late 2021; omicron could exacerbate that problem.

Initial claims for unemployment insurance fell by 8,000 in the week ending December 25, to 198,000. This is the third time in the past month that initial claims have been below 200,000; prior to that initial claims had not been below 200,000 since 1969. Claims for the previous week were revised higher by 1,000, to 206,000. 

The four-week moving average of claims, which smooths out some of the volatility, fell by 7,000 in the week ending December 25, to 199,000. This is the lowest level for the four-week moving average of claims since 1969. 

Initial claims jumped to more than 6 million in April of last year as the pandemic came to the U.S. They then fell quickly to around 900,000 per week by early August 2020, then stabilized at between 700,000 and 900,000 between August 2020 and March 2021. Claims fell gradually but steadily this spring before stabilizing at around 400,000 per week and then started to decline again in August, with an especially large decline in the second half of November. 

The plunge in initial UI claims in recent weeks likely overstates the improvement in the labor market. Claims are highly volatile, especially around the winter holidays. And volatility has been even more pronounced with the Viral Recession and swift recovery. That being said, the four-week moving average of initial UI claims has dropped quickly over the past month and is now at its lowest level in more than five decades, a sign of strength in the labor market. 

The total number of people receiving benefits under regular state unemployment insurance programs (continued claims) fell to 1.716 million in the week ending December 18, from 1.856 million the previous week (revised lower from 1.559 million). This is the lowest level for continued claims since early March 2020, before the pandemic disrupted the labor market. The four-week moving average of continued claims fell to 1.860 million, from 1.919 million. The four-week moving average of continued claims has fallen every week but once since late May as unemployed workers leave the rolls, either because their benefits have expired or because they have quickly found a new job. This is the lowest level for the four-week moving average of claims since mid-March 2020, just as the pandemic was coming to the United States. 

State continued claims peaked at more than 23 million in May 2020, and are moving closer to their pre-recession level of around 1.7 million. With most people receiving benefits via pandemic-related programs until recently, continued claims under regular state programs had been less important as a labor market indicator. But those pandemic-related programs expired in September, and regular state continued claims are now more relevant. 

Both initial and continued claims are extremely low at the end of 2021. Some of this improvement is likely overstated due to a combination of the holidays, the seasonal-adjustment process, and the huge swings in the labor market from the recession and recovery. But extremely low initial claims, and the ongoing downward trend in continued claims, demonstrate strength in the labor market at the end of 2021. Headline job growth in November was disappointing, at just 210,000. But that number is likely to be revised substantially higher, especially given that there have been large upward revisions to preliminary topline job growth in recent months. Very low claims also point to strong job growth in December 2021 as well (to be released January 7), although once again the initial headline number, before revisions, could be disappointing. 

Initial claims are extremely low, and continued claims are low and steadily declining. Demand for labor is very strong and workers are in short supply, so businesses are not laying off employees. Those workers who do find themselves unemployed can quickly find new jobs. But the omicron variant is a substantial downside near-term risk to the outlook for job growth. The impact of omicron has yet to show up in UI claims. Omicron is also unlikely to have affected the job numbers for December, given that the data was collected a few weeks ago, just as omicron started to hit the United States. But if consumers change their behavior and pull back on their spending, particularly on services, job growth could slow dramatically in early 2022. 

In addition to the potential impact of omicron, a big problem for the labor market right now is too few workers; there are about 2.5 million fewer people in the labor force now than there were before the pandemic. That being said, the big increase in the labor force in November was encouraging, as almost 600,000 additional people either started working or looking for work over the month. Continued growth in the labor force will be important for job creation in 2022. The expectation was that a fading in the pandemic, reopenings at schools and childcare centers, and the gradual reentrance of people who lost their unemployment insurance benefits in September into the workforce will help relieve labor shortages and allow for continued strong job growth next year. However, rising coronavirus cases due to the omicron could put the labor force recovery on hold, at least over the next couple of months.

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