Unemployment Appears Poised to Increase

May 18, 2023 |
2 minute read
|

Other than the impending recession, one of 2023’s most anticipated economic changes has been a labor market slowdown, with both economists and investors expecting a deceleration in economic activity and higher unemployment by the end of 2023.

However, despite the commonly held expectations of imminent labor market weakness, the economic data has been slow to respond. Nonfarm payrolls continue to beat expectations (most recently beating the median estimate for the 12th straight month), and the unemployment rate remains at multi-decade lows in line with the muted jobless claims data. Although the labor market has been largely unresponsive to the significant monetary tightening that has occurred, there are signs that this could shift in the coming months. 

This chart of the month depicts the seasonally adjusted four-week moving average (which is a better indication of trend than the weekly release) of initial jobless claims throughout 2018, 2019, 2022, and thus far into 2023.1 After months of anticipation, there appear to be initial signs of weakness (albeit small) in the labor market. Despite having a lower starting point than each of the prior years, jobless claims have trended higher in the first 19 weeks of this year and are poised to break above 250,000, a level not seen since late 2021. On percentage terms, the four-week moving average has increased just short of 18 percent year-to-date. Additionally, the weekly initial claims level of 264,000 was the highest since October 2021 and continued claims (which measures those who have filed an additional claim for a second week of unemployment insurance) have begun to trend upward from late-2022 lows. After months of job cuts in the most interest rate-sensitive sectors, it seems that historically tight monetary policy has just begun to transmit to the broad labor market. 

Other indicators support incoming labor market weakness. While nonfarm payroll growth has beaten consensus expectations, there has been a clear downward trend towards 100,000 new jobs per month since the second half of 2022 and expectations have guided down commensurately. Job openings have largely returned to pre-pandemic trend off staggering levels, and the quits rate has come down from its cyclical high of 3 percent. As indicators that tend to lead the headline unemployment rate, the combination of negative trends suggest that 4.5 percent unemployment at year-end outlined in the Federal Reserve’s Summary of Economic Projections may be closer than we think. 

That said, there are reasons to believe that employment could have continued resilience. The vacancies to unemployed ratio is about 1.7, which is significantly higher than historical average (albeit trending downward from an all-time high of 2). In addition, wage growth is elevated primarily for job switchers and those in the service sector, which suggests that the lion’s share of bargaining power remains with laborers. Whether the Federal Reserve can engineer sufficient unemployment to suppress wage growth to cool inflation towards the key 2 percent target will remain hotly debated throughout 2023. 

Chart-InitialJoblessClaims-May2023

 

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  1. 2020 and 2021 were omitted due to the significantly higher levels of unemployment claims following the COVID-19 shock.

Cameron Dyer

Author

Cameron Dyer

Analyst

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.