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Claims fall sharply

February 26, 2021

Graph depicting Pandemic Emergency Unemployment Compensation Claims

Source: Department of Labor

Initial unemployment claims were much better than expected last week, falling by 111,000 to a three-month low 730,000. The caution here is that this has been an extremely volatile and revision-prone series of late, but these numbers ring true against a backdrop of a falling COVID infection rate, loosening government restrictions, and improvements in other high-frequency labor market metrics. Online job postings, for example, have recently soared, rising by more than 30 percent since the end of 2020, while the number of respondents to the Census Bureau’s household survey expecting a loss of employment income has plunged by close to 25 percent over roughly the same time frame. The soft patch in the both the labor market and the economy at large looks very much to be at an end.

At the same time, there continues to be an undercurrent of sclerosis among some segments of the unemployed population. The number of claimants under the Pandemic Emergency Unemployment Compensation program, which extends benefits for those who have exhausted their regular payments, rose by more than one million in the latest weekly data and now stands above the five million mark for the first time. Some of this is simply a function of the recent extension of PEUC benefits and some represents lingering dislocations in the service sector that will be resolved as the economy more fully reopens, but some is also very likely the emergence of a cohort of longer-term unemployed as is typical in the early stages of expansions (consider that it typically takes nearly three years for nonfarm payrolls to fully retrace their recessionary declines even though real GDP recovers in just a year and a half on average). Chronic unemployment is an undeniable weight on the economy, but this setup should also prove very favorable for the financial markets: while cyclical factors are likely to be healthy enough to drive earnings higher, structural mismatches in the labor market should at the same time remain sufficiently entrenched to keep the Fed on hold.

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