The U.S. labor market is clearly coming under extreme pressure as evidenced by the historic and shocking jump in insured unemployment claims. This has economists salivating and predicting likely interest rate cuts. Recent data reveals an unsettling trend in insured unemployment that mirrors patterns observed before past recessions, raising concerns about the current economic trajectory. The four-week moving average of unemployment claims just jumped up to 1.914 million. At the same time, the total number of unemployed persons drawing benefits jumped to 1.956 million.
Historically, almost all previous business-cycle recessions have been foretold by huge spikes in insured unemployment. During the last meaningful recession, in March 2001, that recession led to a peak of 5.6 million unemployed people. By comparison, the 1990 recession drove insured unemployment up to a peak of 4.9 million in July. Likewise, the 2008 recession faced a terrifying spike at 6.4 million unemployed by December.
Currently, unemployment rates are 0.5 to 1.5 percentage points over the ‘neutral’ rate. This $1 trillion level is very important for stabilizing growth, inflation and unemployment. This proud boast puts the spotlight on the Federal Reserve’s monetary policy. It’s an extraordinary time, and cracks in the labor market are emerging by the day.
And now some Congressional economists are starting to warn about the inflationary and employment impacts of these proposed tariffs. Recent tariff policies have raised approximately $23 billion for the U.S. Treasury. Their long-term impacts on inflation and households’ purchasing power have yet to be determined. As one expert noted, “Tariffs represent a one-time boost to the price level,” suggesting that inflation might revert to its pre-tariff trend after a year.
“…. tariffs are already draining money from the economy. And if they do push inflation higher in coming months, they will also cut into purchasing power, aggravating risks to jobs. Though not as out of whack as last September, rates are still roughly 0.5 to 1.5 percentage points above what Fed officials consider ‘neutral,’ the level that keeps growth, inflation and unemployment stable. That restrictive stance makes sense so long as inflation is all the Fed has to worry about. It no longer is.” – Bloomberg
Even with these bumps on the road, experts are claiming that employment in general is still living on the rise. They add that employers are less willing to take back those they’ve laid off. That explanation is written in the rising tide of unemployment claims, which are continuing to hasten past figures last November.
“So it’s not that there is a big wave of job cutting, there isn’t, and employment overall continues to grow. But employers have slowed absorbing the people that have been laid off, and the number of people on Unemployment Insurance has been increasing at an accelerated pace and in early May started exceeding the mid-November level.” – Source unspecified
These contradictory signals from the labor market along with muted tariff-induced inflation present a unique and challenging backdrop for policymakers. Many economists believe that the real impact of the tariffs will take shape over the next several months. They caution that this new-found knowledge isn’t enough to justify holding interest rates there forever.
“Economists think tariff effects will become more apparent in coming months. But that alone isn’t reason enough for the Fed to stay on hold. Tariffs represent a one-time boost to the price level, which means after a year inflation should revert to its pre-tariff trend. The question is whether tariffs push the trend higher.” – Greg Ip
That’s exactly what the Federal Reserve is considering. Analysts argue that the increasing fragility of the labor market has been building a strong argument for rate cuts. The possibility of further rate hikes depends on the Fed’s ability to walk a tightrope between taming inflation and fostering a continued post-pandemic economic recovery.