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March 6, 2017

Chart of the Week: US jobless claims at new 43-year low – what it means

by Fathom Consulting.

The ongoing decline in US jobless claims is striking, but they are not as useful as a barometer for the US labour market as they once were.

US unemployment insurance is capped at 26 weeks and with long-term unemployment still elevated, the unemployment benefits of many have simply expired. This might explain why the ratio of continuing claims to total unemployment is close to the lowest on record, as highlighted by the chart below.

March 6

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Short-term unemployment, by contrast, is close to a 40-year low, explaining the impressive declines in initial jobless claims. If structural unemployment has risen, those already in work should be able to command higher salaries. With wages rising, business and consumer confidence high, and a fiscal splurge on the horizon, we think that the Trump reflation trade still has legs.

In a speech on Friday evening, Janet Yellen gave a very clear signal that the Federal Open Market Committee would raise the fed funds rate when it meets next week. With this in mind, we now expect three 25 basis point increases in the fed funds rate this year, compared to our previous forecast of two. We still expect four 25 basis point increases next year.

Although the Committee now appears set to tighten sooner than we had previously imagined, one additional 25 basis point increase will not have a material impact on GDP growth or inflation. In other words, we still think that the Fed will let the economy run a little hot. Indeed, based on our revised forecast, real economic growth and inflation will still exceed 3% in 2017 and 2018, and the real fed funds rate will remain negative for the foreseeable future.

On this basis, we still anticipate further increases in the US dollar, US Treasury yields and US equities. It would take a shockingly weak payrolls figure this Friday — much lower than our forecast of 210,000 — for the FOMC to hold fire next week.


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