March 16, 2023

Initial unemployment claims fell 20 thousand in the week ending March 11 to 192 thousand after having risen 22 thousand in the previous week.  Thus far, in the face of rising interest rates and the fear of a recession, employers are reluctant to lay off workers.  They have been short-staffed for so long and find adding to staff so challenging that they seem unwilling to lay off people.  .

The number of people receiving unemployment benefits declined 29 thousand in the week ending March 4 to 1,684 thousand, after having risen 64 thousand in the previous week.  It  appears that many of those workers who do lose their jobs are getting snapped up by other employers and, as a result, the labor market is not weakening much.  Many jobs are just being shifted from one company or sector to another.

Even with the sizable drop in the number of people receiving unemployment benefits  the insured unemployment rate was unchanged in the most recent week at 1.2% after having risen 0.1% in the previous week  Before the shutdown started in 2020 it was steady at 1.2% so it is still at its pre-pandemic level.   At 1.2% it remains close to the lowest level on record for this series that has been around since 1971.  When the labor market begins to shift gears, this rate will start to rise.  That is going to happen at some point, but, thus far, the increase has been slow and gradual.  We will see what happens in the weeks ahead.

The insured unemployment rate tracks closely  the unemployment rate.   Given the level of  the insured unemployment rate we expect the unemployment rate to be unchanged in March at 3.6%.  We also expect payroll employment to increase 225 thousand in March  The Fed needs the unemployment rate to climb from 3.6% currently not just to the 4.0% full employment level but to about 4.5%.  That means that the insured unemployment rate needs to climb from its current level of 1.2% to 1.8% or somewhat higher.

Inflation has peaked and is slowing gradually, and  we expect the Fed  to lift the funds rate  to the 6.0% mark by September of this year.  That means that short-term real interest rates will be negative for the next several months and then rise to 1.4% or so by the fall.  Negative real rates are unlikely to slow the U.S. economy appreciably, but a 1.4% positive real rate by September might finally produce slower growth.  As a result,  we expect GDP to rise 1.5% in 2022 even if the Fed lifts the funds rate to 6.0%.  However, we do anticipate the economy slipping into recession in the first two quarters of 2024.

Stephen Slifer


Charleston, SC