US job market demonstrates robustness ahead of June's employment findings

People walk through the Times Square section of New York City, U.S., January 18, 2023. REUTERS/Shannon Stapleton

Summary

• Weekly jobless claims increase 12,000 to 248,000
• Continuing claims drop 13,000 to 1.720 million
• Private payrolls jump 497,000 in June
• Job openings decline 496,000 to 9.824 million in May

'WASHINGTON, July 6 (Reuters) - The volume of fresh unemployment benefit claims filed by Americans witnessed a moderate rise last week, while private payrolls experienced a significant surge in June. These indicators indicate that the labor market continues to stand firm, even in the face of mounting recession risks.

The reports unveiled on Thursday further suggested that jobless individuals were encountering shorter periods of unemployment, increasing the likelihood of the Federal Reserve resuming interest rate hikes this month following a pause in June.'

Despite a decline in job openings to a two-year low in May, they remained significantly higher than pre-pandemic levels, with 1.6 available positions per unemployed individual. Additionally, a growing number of people are voluntarily leaving their jobs, indicating confidence in the labor market.

These data paint a positive picture of the labor market as the highly anticipated employment report for June is set to be released on Friday. They also bolster the outlook of the economy evading the feared downturn later this year.

Nick Bunker, the research director at Indeed Hiring Lab, stated, "Demand for new hires remains strong, and employers are retaining their existing workforce. This data increasingly supports the possibility of a smooth transition scenario."

According to the Labor Department, initial claims for state unemployment benefits rose by 12,000 to a seasonally adjusted 248,000 for the week ending July 1. However, the previous week's data was revised to indicate 3,000 fewer applications than initially reported.

Economists surveyed by Reuters had projected 245,000 claims for the latest week. Claims reached a 20-month high of approximately 265,000 in the first three weeks of June, suggesting that layoffs were extending beyond the technology sector and industries sensitive to interest rates, such as housing and finance.

The surge in filings was partially driven by Minnesota's recent extension of eligibility for state unemployment benefits to tens of thousands of hourly paid school workers during the summer break. However, as the month progressed, this surge subsided.

Unadjusted claims rose by 20,838 to 250,556 last week. Several states, including Michigan, New York, Kentucky, and Ohio, experienced significant increases in filings, potentially linked to automobile manufacturers temporarily halting production while retooling for new models. These increases offset declines in Texas and New Jersey.

Claims, relative to the size of the labor market, remain below the threshold of 280,000 that economists suggest would indicate a significant slowdown in job growth. So far this year, employment growth has averaged 314,000 jobs per month.

Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York, commented, "The expected rise in layoffs resulting from more restrictive monetary policy has not yet manifested in the data. As long as the labor market remains tight, the rate path will continue to move upward until policymakers observe a substantial rebalancing of supply and demand."

Stocks on Wall Street were trading lower, while the dollar remained relatively stable against a basket of currencies. U.S. Treasury prices experienced a decline.

WORKERS STILL IN DEMAND

Despite the Federal Reserve implementing a series of interest rate hikes totaling 500 basis points since March 2022, marking the most rapid tightening campaign in over four decades to combat inflation, the labor market has displayed remarkable resilience. A recent survey revealed that consumers' perception of the labor market in June was more optimistic compared to May.

Based on CME Group's FedWatch tool, financial markets have already factored in a 25 basis point rate increase at the upcoming July 25-26 meeting of the Federal Reserve.

According to the claims report, the number of individuals receiving benefits after the initial week of aid, which serves as an indicator of hiring activity, decreased by 13,000 to reach a four-month low of 1.720 million during the week ending June 24. These continuing claims are considerably lower than historical averages, suggesting that some individuals who were laid off were able to swiftly secure new employment opportunities.

This trend was further supported by a second report from the Labor Department, which indicated a decline of 496,000 job openings, reflecting labor demand, bringing the total to 9.824 million by the end of May.

Although the latest figure represented the lowest level since April 2021, job vacancies still significantly surpass the approximately 7 million level seen prior to the COVID-19 pandemic. There were 1.6 available job openings for every unemployed individual. The decline in job openings primarily affected businesses with one to nine employees.

In May, layoffs decreased while the number of people voluntarily resigning from their jobs increased by 250,000 compared to April, reaching a total of 4.0 million resignations.

The employment situation in the services sector experienced improvement in June, contributing to a rise in the Institute for Supply Management's non-manufacturing Purchasing Managers' Index (PMI) from 50.3 in May to 53.9. Several companies reported challenges in finding qualified candidates for certain positions, but also mentioned successfully filling some long-standing vacancies.

These positive indicators, coupled with the ADP National Employment report revealing a significant increase of 497,000 jobs in private payrolls last month (following a rise of 267,000 in May), present a promising outlook for June's employment report.

According to a Reuters survey of economists, nonfarm payrolls are expected to have grown by approximately 225,000 jobs in the previous month, following an increase of 339,000 jobs in May. The unemployment rate is forecasted to decline to 3.6% from May's 3.7%.

Additionally, a fourth report from global outplacement firm Challenger, Gray & Christmas displayed a notable decrease in job cuts announced by U.S.-based employers in June. The figure stood at 40,709, marking a 49% decline from May. Furthermore, planned layoffs for the second quarter totaled 187,793, reflecting a 31% decrease compared to the tally for the January-March period.

Andrew Challenger, Senior Vice President at Challenger, Gray & Christmas, expressed the possibility that the anticipated severe job losses resulting from inflation and interest rates may not materialize.

This report was filed by Lucia Mutikani, with additional reporting by Safiyah Riddle. The editing was conducted by Chizu Nomiyama and Andrea Ricci.

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