Why News of a Surge in Unemployment Insurance Claims Isn’t Cause For Alarm

The number of people applying for unemployment insurance for the first time surged last week, nearly twice the pace economists expected.

Some 20,000 more people applied for unemployment insurance last week, growing to 243,000 total. That’s far more than the 229,000 total economists surveyed by the Wall Street Journal and Dow Jones Newswires expected.

Total new claims matched the highest number reported so far this year, which was first reported early last month.

The jump comes as the Federal Reserve is starting to keep a particular eye on the labor market. As inflation comes down and the labor market softens, central bankers want to ensure that unemployment doesn’t jump.

“Jobless claims came in higher than expected and that’s a reminder of the main risk to the current economic expansion and bull market,” wrote Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.

Labor Market is Softening But Not Sinking

However, the weekly jobless claim number is highly volatile and prone to large swings. Economists typically use a rolling average of initial jobless claims to get a more stable measure. The four-week moving average was up 1,000 from the previous week to 234,750.

“Recent data are indicative of a modest softening in the labor market, but there is no cause for alarm just yet,” wrote Moody’s Analytic Economist Dante DeAntonio. “Despite the recent volatility, the four-week moving average of initial claims was essentially unchanged from the June payroll reference period to that for July.”

Most of the labor market’s recent slowdown has been in hiring, DeAntonio wrote, which is exactly what the Federal Reserve intended when it set out to fight inflation. The central bank has set its influential fed funds rate at a 23-year high for the past 12 months to make borrowing more costly for businesses and consumers. As borrowing is discouraged, so is spending, which brings down inflation, the Fed theory goes.

“To the extent that the job market remains robust and unemployment levels remain low, the economy will continue to expand – albeit at a slowing pace – and that is what will continue to propel this bull market to new heights, even if there is some volatility and pullbacks along the way,” Zaccarelli wrote.