After more than a month of steady declines in weekly jobless claims, the first signs of weakness are starting to emerge, as a rise in unemployment is once again drawing attention to the disappointing jobs report released last week.
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While the weekly uptick isn't alarming on its own, it came in slightly above expectations, sparking concern that a new and prolonged wave of layoffs could corner the Federal Reserve into a tough decision on interest rates.
Complicating the picture, recent inflation data and business surveys suggest that price pressures resumed their upward climb at the end of the second quarter—and likely persisted in July—posing a direct threat to the Fed's dual mandate of 2% inflation and maximum employment.
Labor Market Shows First Crack As Jobless Benefits Tick Up
Initial jobless claims rose to 226,000 in the week ending Aug. 2, up from a revised 219,000 the previous week and above the 221,000 consensus forecast.
The four-week moving average—a less volatile measure—slightly decreased to 220,750.
Meanwhile, continuing claims—which reflect those who have been receiving unemployment benefits for more than a week—climbed by 38,000 to 1.974 million, the highest level since November 2021, when it stood at 2.041 million.
These numbers indicate that laid-off workers are taking longer to find new jobs, validating market fears of a weakening labor market.
“The rise in continued claims since April – a sign that unemployed persons are finding it tough to find new jobs – makes even more sense after the sharp downward revisions to job growth in May and June,” said Nancy Vanden Houten, economist at Oxford Economics.
Inflation Pressures Add To Fed's Headache
While labor markets are softening, inflationary pressures are reaccelerating, making the Fed's dual mandate increasingly difficult to manage.
Data from June and early July suggest a pickup in prices, particularly in the service sector, where demand remains firm.
Torsten Slok, chief economist at Apollo Global Management, said the stagflation impulse is being driven by a mix of tariffs, deportations and a weakening dollar—factors that simultaneously boost prices and weigh on growth.
"This is a problem for the Fed," Slok said in his latest report, referring to the conflicting economic signals policymakers now face.
"Inflation pressures in the service sector are intensifying, pointing to upside risks to CPI inflation over the coming months," he said, while also noting a clear slowdown in employment growth.
Markets Lean Towards Dovish Fed
Markets continue to bet on upcoming interest rate cuts.
The CME FedWatch Tool shows a 93% probability of a 25 basis point cut at the September Federal Open Market Committee meeting, as traders expect the Fed to shift toward supporting growth.
Markets are pricing in a 61% probability of another rate cut in October, with odds of a December cut standing at 51%.
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