US Labor Market Eases as First-Time Unemployment Claims Reach 261,000

Despite the sudden increase in jobless applications, the overall level remains consistent with a tight labor market. In May, the government reported the addition of 339,000 jobs to the economy. Although the unemployment rate rose to a seven-month high of 3.7% from April’s 3.4%, it still stands at historically low levels.

Services Sector Drives Job Growth

The services sector, including leisure and hospitality, primarily drives the growth in employment, compensating for the labor shortages experienced in recent years.Additionally, industries such as healthcare and education faced an uptick in retirements during the COVID-19 pandemic.

Labor Market Vulnerabilities Exposed

The recent surge in unemployment claims signifies the growing vulnerabilities in the labor market. Moreover, the Institute for Supply Management (ISM) reported a decline in its services PMI for May, primarily linked to employment weakness. Services businesses voiced concerns, ranging from attempting to maximize productivity with existing staff to implementing hiring freezes until there is better clarity about the economic outlook.

Economists Foresee Impact of Interest Rate Hike

Economists anticipate that the economy will soon experience the consequences of the Federal Reserve’s 500 basis points interest rate hike. Since March 2022, this measure has been aimed at curbing inflation. Consequently, this aligns with the ISM’s report, which reveals that the manufacturing PMI remained below 50 for seven consecutive months in May, marking the longest stretch since the Great Recession.

Decline in Continued Benefits Claims

The number of people receiving benefits after the initial week of aid decreased by 37,000 to 1.757 million. This decline is a positive sign and serves as a proxy for hiring. The data is based on the claims report for the week ending May 27.