Jobless claims jump to highest level since 2021

The number of Americans filing new claims for unemployment benefits jumped to a 1-1/2-year high last week, pointing to widening cracks in the labor market, which together with subsiding inflation could allow the Federal Reserve to halt further interest rate increases next month.

Cooling price pressures were underscored by other data from the Labor Department on Thursday showing producer prices rebounding modestly in April, leading to the smallest annual increase in producer inflation in more than two years.

The reports suggested that demand was slowing and raised the risks of a recession later this year.

“The Fed looks closer to winning the war on inflation today, but it risks losing the war on keeping the economy afloat and away from the shoals of recession,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Initial claims for state unemployment benefits increased by 22,000 to a seasonally adjusted 264,000 for the week ended May 6, the highest reading since October 2021. Economists polled by Reuters had forecast 245,000 claims for the latest week.

Though claims remain below the 270,000-300,000 level that economists said would signal a deterioration in the labor market, last week’s increase could mark the start of an upward trend as the cumulative and lagged effects of the Fed’s rate hikes broaden out in the economy.

“While the claims series can always be volatile from week to week, there are no obvious distortions to today’s number,” said Michael Feroli, chief US economist at JPMorgan in New York.

“Business labor demand has been gradually cooling and today’s initial claims reading hints at potentially a more abrupt slowing.”

Unadjusted claims increased 13,969 to 234,084 last week. There was a surge in applications in Massachusetts as well as significant increases in California, Missouri, and New York. That offset notable declines in Colorado, Georgia, and Kentucky.

The labor market remains tight, with 1.6 job openings for every unemployed person in March, well above the 1.0-1.2 range which is consistent with a jobs market that is not generating too much inflation.

The Fed has raised its benchmark overnight interest rate by 500 basis points to the 5%-5.25% range since March 2022 and last week signaled it could pause its fastest monetary policy tightening campaign since the 1980s.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 12,000 to 1.813 million during the week ending April 29, the claims report showed.

The so-called continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment.