Labor Market Still “Too Hot to Handle” for the Fed

• Initial claims for unemployment insurance fell by 20K in the week ending December 10 to 211K, their lowest level since late-September. Initial claims are often volatile around the holidays.
• Continuing claims rose modestly to 1,671 million in the week ending December 3 and are at their highest level since mid-January.
• The FOMC raised the fed funds rate by 50 basis points yesterday as widely expected in an attempt to slow economic growth and cool off inflation; the job market is too tight from the Fed’s perspective.
• PNC’s baseline forecast is for a mild recession next year.

Initial claims for unemployment insurance fell by 20,000 to 211,000 in the week ending December 10. This was the lowest level for initial claims since late-September. Claims for the prior week were revised up by 1,000 to 231,000. The four-week moving average of claims was 227,000, down from 230,000 the previous week. The four-week moving average bottomed out at around 206,000 in late September, and has gradually moved higher since then, but remains well below its 250,000 level in the summer. The four-week moving average smooths out some of the volatility in claims.

Continuing claims rose to 1.671 million in the week ending December 3, up from 1.670 million the prior week. The four-week moving average of continuing claims was 1.625 million in the week ending December 3, up from 1.582 million the previous week. Continuing claims have increased somewhat in recent weeks, but still remain near their lowest level in more than 50 years. With the job market very strong, laid-off workers are getting quickly rehired.

Federal Reserve officials are expecting a slowing in the job market given the big increase in interest rates this year; the hope is that this will bring down inflation that is well above the central bank’s 2% objective. But the labor market remains very strong. Although job growth has slowed over the course of 2022, it remains well above its pre-pandemic pace, and the labor market is extremely tight.

The Fed would welcome a more substantial slowing in job growth. Right now, the labor market is too tight for the Fed, and job growth is too strong, with average monthly gains of 272,000 in the three months through November. Given continued strength in the labor market and inflation running near its fastest pace in four decades, the Federal Open Market Committee raised the federal funds rate by 50 basis points to a range of 4.25% to 4.50% at yesterday’s meeting and repeated that “ongoing increases will be appropriate.”  

The fed funds rate started this year close to zero, so there has been a massive amount of monetary tightening this year with more to come in the first quarter of 2023. Given the big increases in both short-term and long-term interest rates in 2022, with the fed funds rate expected to move higher into next year, PNC now expects the U.S. economy to experience a mild recession in 2023, with a modest increase in unemployment.