REAL ECONOMY BLOG | January 18, 2024

Filings for jobless benefits fell last week to their lowest level in 16 months, a testament for how resilient the labor market continues to be.

Initial claims declined to 187,000 from 203,000 in the previous week, the Labor Department reported on Thursday. That was much lower than the pre-pandemic average of 218,000 in 2019.

Seasonal factors from the COVID years might explain some of the downside surprises, but the underlying strength of the market is undeniable. Given that claims data is often a good indicator for the jobs data, we are likely going to see another strong month of job gains in January.

Such strength does not support a March rate cut by the Federal Reserve, as many investors are anticipating. Instead, the timing of rate cuts should be pushed back further, to around June.

We don’t see many reasons to believe that the labor market will show significant declines until the summer once the excess savings built up by households are most likely depleted.

Continuing claims also dropped to 1.8 million for the week ending Jan. 6, the fewest since October.

Housing data

In a separate report on Thursday, housing starts and building permits showed upside surprises for December.

The number of starts dropped by 4.3% on the month to 1.46 million, fewer than half of what the median forecast had pointed to at 8.7%. November’s number was revised down to 10.8% from 14.8%.

Despite the downward revision, the residential construction sector ended the year on a much stronger note than expected, most likely because of lower mortgage rates.

But with rate cuts likely this year, builder sentiment should improve, adding more reason to believe that this year will be a better one for the sector.

Building permits, a proxy for future starts, picked up in December, rising by 1.9% to 1.495 million. Completions also ended the year with two consecutive strong months, rising by 8.7% in December and by 5.3% in November.

That said, the new home market remains under-supplied as both permits and starts continue to stay below the equilibrium level that we view as 1.7 million new homes each year. That will continue to maintain pressure on housing prices, putting a home purchase out of reach for many buyers.