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US Labor Market Is Robust; Q4 Labor Prices Have Increased

The number of Americans submitting fresh applications for unemployment benefits decreased once more last week, indicating continued resilience in the labor market and escalating concerns on the financial market that the Federal Reserve would continue raising interest rates for longer.

Another data from the Labor Department on Thursday that showed labor expenses rose significantly faster than initially predicted in the fourth quarter added fuel to those concerns. Despite increased recession risks, the labor market remains tight, which keeps inflation high through strong wage growth.

Christopher Rupkey, chief economist at FWDBONDS in New York, stated that the labor market “shows no fresh signs of deterioration with minimal job layoffs despite the news of big tech firings the last several months.” This will strengthen the resolve of Fed officials to slow down economic demand with higher interest rates, he added.

The Labor Department reported that initial claims for state unemployment benefits decreased by 2,000 to a seasonally adjusted 190,000 for the week ending February 25. Claims stayed below 200,000 for the eighth week in a row. 195,000 claims were predicted by economists surveyed by Reuters for the most recent week.

Last week, unadjusted claims decreased by 9,297 to 201,710. California and Kentucky took the lead in the decline. Claims were noticeably down in Texas, Ohio, and Michigan. Massachusetts and Rhode Island reported significant increases in claims.

According to economists and policymakers, these companies hired too many people during the COVID-19 pandemic and were not representative of the overall economy, so there is still no evidence that high-profile layoffs, mostly in the technology sector, have had a significant impact on the labor market.

Economists also hypothesized that certain laid-off employees, most of whom were highly compensated, were being deterred from filing claims due to severance benefits. Those who have lost their jobs may have an easier time obtaining employment in December, when there were 1.9 job vacancies for every unemployed person.

Economists speculate that seasonal adjustment variables, a methodology the government uses to remove seasonal swings from data, may also be keeping claims down. Towards the end of March, the seasonal adjustment variables for 2023 will be revised.
Nonetheless, experts assert that the labor market is still showing tightness even when adopting other seasonal adjustments. With having trouble filling jobs during the pandemic, employers often seem reluctant to fire employees.

According to a study released on Wednesday by the Institute for Supply Management, attitude at respondents’ organizations “still favors trying to hire rather than lowering employee numbers.”

Wall Street stocks were primarily trading lower. Against a basket of currencies, the dollar increased. Treasuries prices dropped.

EXTREME INFLATION

The likelihood that the Fed will raise interest rates at least three more times this year rather than just once has increased due to the labor market’s resilience and persistently high inflation. Since last March, the U.S. central bank has increased its policy rate by 450 basis points, from near zero to the current range of 4.50%-4.75%, with the majority of the hikes occurring between May and December.

It’s possible that inflation will continue to be high. Unit labor costs, or the cost of labor per individual unit of output, increased at an annualized pace of 3.2% last quarter, according to a second Labor Department study. From the 1.1% pace that was recorded last month, that was increased. The third quarter saw a 6.9% increase in labor costs, following two quarters of significant growth.

In 2022, they increased 6.5% rather of the 5.7% that was previously announced. According to economists’ predictions, labor costs were increasing at a rate that was consistent with underlying inflation slowing to 4% by year’s end, double the Fed’s inflation target of 2%.

One of the metrics the Fed tracks for monetary policy, the core personal consumption expenditures price index, rose 4.7% in January.

The hourly wage increased by 4.7% in 2022. It was far higher than the 3% that some policymakers consider to be consistent with the inflation target for the past five years, averaging 5.0%, than that.

Because of higher labor expenses, nonfarm productivity, which gauges the output produced by each employee per hour, rose at a slower 1.7% rate than previously estimated (3.0%).

According to new data, the U.S.’s underlying inflation problem may be worse than previously believed, according to Michael Pearce, the head economist for the United States at Oxford Economics in New York. That contributes to explaining why sticky services price inflation persists, which is mostly a result of domestically driven wage costs.
According to the claims report, during the week ending February 18, there were 1.655 million people getting benefits following the first week of aid, a 5,000-person decrease. The government surveyed households to determine the unemployment rate for February within the time period covered by the so-called continuing claims, which serve as a stand-in for hiring.

Between the survey periods in January and February, continuing claims somewhat decreased. 3.4% was the lowest unemployment rate in more than 53 years in January. Economic experts anticipate significant job growth in February, albeit at a slower rate than January’s record-breaking gain of 517,000 positions.

Stuart Hoffman, senior economic advisor at PNC Bank in Pittsburgh, Pennsylvania, said: “There is no doubt that the job market is quite solid. “We anticipate a gain of over 215,000 jobs on payrolls in February.”

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