Jobless claims and producer prices point to a further slowdown

REAL ECONOMY BLOG | April 13, 2023

Authored by RSM US LLP

New data on the labor market and inflation released on Thursday continued to show a slowing economy as it heads to a likely recession. For the Federal Reserve, that data bolstered the case that it will pause its rate increases after one final hike in this cycle on May 3.

Whether to have that final increase will depend upon the next batch of critical data, which includes the employment cost index to be released on April 28.

Initial jobless claims increased by 11,000 to 239,000 last week, above forecasts following a significant methodology adjustment by the Labor Department. Continuing claims inched down slightly to 1.8 million, which is close the 2019 average before the pandemic.

The Labor Department’s adjustment helped to align the claims data with recent increases in layoffs and hiring freeze announcements, and with data from the job openings survey. The large jump in California’s new claims number, for example, might be attributed to recent layoff announcements by technology companies.

While claims numbers have increased by quite a margin compared to a year ago, they have leveled off in recent weeks.

Our forecast for a recession in the second half of the year implies that a spike in new claims will take place, but not until a recession is evident. After all, the labor market, which has been robust, remains one of the last lines of defense against a recession.

Because of the nonlinearity of labor data, it is likely that the increase in new claims—a proxy for layoffs—will remain slow in the second quarter before taking off in the second half of the year.

The probability of that scenario has increased following the adjustment in claims data last week that brought the top-line number closer to our rule-of-thumb threshold of 350,000 in new claims that signals a contraction.

Producer inflation

In a separate report from the Bureau of Labor Statistics released Thursday, producer inflation dropped by 0.5% in March, the biggest decline since April 2020. That cut the top-line year-ago figure for final demand to 2.7% from 4.9% in February, though the comparisons were affected by the start of the war in Ukraine last year that spurred a surge in prices.

The downshift was driven largely by a 6.4% monthly decline in energy prices, while services also posted a monthly decline for the first time since 2020.

Trade services—a proxy for retail and wholesale profit margins—shrank again by 0.9% from a month ago, highlighting the margin compression that has been driven by the pullback in spending demand.

Inflation inside the pipeline came down even more significantly as supply chain bottlenecks have faded while inventory buildups have been robust since last year. Price growth for intermediate demand at all stages declined by 0.5% to 2.7% on the month.

The takeaway

All the signs have aligned for a recession to begin in the second half of the year as our forecast has suggested. While disinflation will continue, the path will be bumpy. The wildcard is energy prices following the recent cut in output announced by OPEC+.