September 14, 2023

Initial unemployment claims fell 20 thousand in the week ending  September 16 to 201 thousand after rising 4 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 fell 21 thousand in the week ending September 9 to 1,662 thousand, after having fallen 1 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 weakening some but not a lot.  Many jobs are just being shifted from one company or sector to another.

With a sizable decline in the number of people receiving unemployment benefits  the insured unemployment rate was unchanged in the most recent week at 1.1% after having been unchanged in the previous week  Before the shutdown started in 2020 it was at 1.2% so it is still slightly below its pre-pandemic level.   When the labor market begins to shift gears, this rate will start to rise.  Thus far, the increase has been slow and gradual.

The insured unemployment rate tracks closely  the unemployment rate.   Given the level of  the insured unemployment rate we expect the unemployment rate to decline 0.1% in September to 3.7%.  We also expect payroll employment to increase 180 thousand..  The Fed needs the unemployment rate to climb from 3.8% currently to somewhere between 4.0-4.5% to generate a bit of slack in the labor market.  That means that the insured unemployment rate needs to climb from its current level of 1.1% to 2.0% or somewhat higher.

Inflation has peaked and is slowing gradually, and  we expect the Fed  to lift the funds rate  to the 5.75% mark by the end of this year.  That means that short-term real interest rates will rise to 1.8% or so by yearend (5.75%- 4.0% inflation) which might finally produce slower growth.  As a result,  we expect GDP to rise 3.5% in the third quarter and 1.7% in the fourth quarter.  We then expect the higher real rates to weaken the economy in the first two quarters of 2024 with GDP growth of about 1.0% in each quarter.

Stephen Slifer


Charleston, SC