Rising unemployment points to weakening economy. Or does it?

By Jeffry Bartash

Jobless claims are up, but increase might be temporary

Are rising jobless claims a sign of emerging weakness in the economy? Don't bet on it - at least not yet.

The number of people applying for unemployment benefits rose in the first week of June to a 10-month high of 243,000. Just a month and a half earlier, they were sitting under 210,000.

The increase in the past month in jobless claims - a proxy for layoffs - caught the eye of several top officials at the Federal Reserve, including Chicago Fed President Austan Goolsbee.

He cited the uptick in claims in a CNBC interview on Monday as a potential sign of stress on the economy that could suggest the Fed is keeping interest rates too high.

But are claims really rising? It's far from clear.

For one thing, the increase in unemployment filings since the end of April may have been exaggerated by a statistical formula the government uses to adjust for seasonal swings in employment. Employment can fall at the end of the school year, for instance, and increase when school begins again.

If the adjustments are omitted, the rise in new jobless claims doesn't appear quite as worrisome. Raw, or actual, claims totaled just 227,213 in the most recent week - historically a very low number.

Not only that, but actual U.S. jobless claims registered less than 200,000 for four straight weeks, from the first week of May to the first week of June. That's only happened a handful of times since the 1960s.

What's more, both actual and seasonally adjusted jobless claims are notably lower now than they were a year ago.

But what's to say things aren't getting worse?

Economists say it will take at least several more weeks to determine if layoffs are really on the rise - or whether the latest spike in claims will quickly fade, like prior ones.

Consider June 2023, when jobless claims saw a similar surge. They jumped to as high as 261,000 from as low as 209,000 two months earlier - only to subside again to around 200,000 by early last fall.

"For now, the spike in new claims in the previous weeks looks a lot more like a seasonal issue than a deterioration in labor-market conditions," economist Tuan Nguyen of RSM wrote in a note to clients.

Other reports also suggest layoffs remain exceedingly low.

The government's so-called JOLTS survey of job openings showed that layoffs in April remained close to the lowest level on record. They were also unchanged from one year earlier.

State-level data paints a similar picture.

Some 24 of the 53 states and territories that report jobless claims to the federal government showed a net decline last week in new unemployment filings vs. a year earlier.

Of the rest, 22 states showed minor increases in new claims compared to a year ago - in most cases 500 or less.

Only six states registered increases of 1,000 or more new claims vs. a year ago: California, Massachusetts, Michigan, Minnesota, New Jersey and Florida.

Five of the six are Democratic-run and have more lenient rules on who can collect benefits. Minnesota, for example, recently made certain education workers such as janitors, bus drivers and cafeteria workers eligible to file for benefits when the school year ends.

That's not to say claims won't rise.

The Fed has kept a key short-term interest rate at a 23-year high since last year to try to slow the economy and curb high inflation. Higher borrowing costs have hurt home sales and crimped business investment, depressing demand for labor.

Job openings sagged in April to the lowest level in three years and the unemployment rate rose in May to 4% for the first time in 28 months.

Hence the reason Goolsbee questioned whether the Fed is keeping rates too high.

Still, the U.S. added a much larger-than-expected 272,000 new jobs in May and another sizable increase is forecast for June. It's going to take more signs of economic weakness or slowing inflation to get the Fed to cut rates.

So pay attention to jobless claims. If they keep rising through August and beyond, it's probably a sign of trouble.

Yet if recent history repeats itself, they could subside again to exceedingly low levels consistent with an ultra-tight labor market and a stable economy.

"We are cautiously watching the next few weeks' worth of data to see if a trend is emerging," said U.S. economist Thomas Simons of Jefferies.

-Jeffry Bartash

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06-25-24 1305ET

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