The Labor Market Remains “Too Hot to Handle” for the Fed 

• Initial claims for unemployment insurance fell by 19,000 in the week ending December 31 to 204,000. The four-week moving average fell by 7,000 to 214,000.
• Continuing claim fell by 24,000 to 1,694 million in the week ending December 24.
• PNC’s baseline forecast is for a mild recession starting in the spring of 2023.

Initial claims for unemployment insurance fell by 19,000 to 204,000 in the week ending December 31, from a downward revised 223,000 (was 225,000) in the previous week. The four-week moving average of claims for December 31, which smooths out some of the volatility in weekly claims especially during holiday times, was 214,000 down from 221,000 the previous week. The four-week moving average is back down to its lowest level since mid-October.

Continuing claims fell by24,000 to 1.694 million in the week ending December 24 from an upward revised 1.718 million (was 1.710 million) the previous week. The four-week moving average of continuing claims was 1.688 million in the week ending December 24, up 6,000 from 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. The insured unemployment rate held steady at 1.2% in the week ending December 24.  

Federal Reserve officials are expecting a slowing in the job market given the big increase in interest rates last 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 their December 2022 meeting and repeated that “ongoing increases will be appropriate” signally more rate hikes are coming 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 in the first quarter of this year, PNC expects the U.S. economy to experience a mild recession in 2023, with a modest increase in the unemployment rate to near 5.5 percent.