A labour market that measures itself too cleverly

Initial jobless claims ticked up by 1,000 to 199,000 for the week ending August 1st, according to the Department of Labour. The market expected 202,000, so the data was, in technical terms, good news. Two weeks earlier, claims had hit 188,000—the lowest since 1969. The four-week moving average hovers near levels not seen in more than half a century.

By the narrow logic of the headline, the labour market is pristine. The trouble is that low claims no longer mean what they used to.

Initial claims measure people who have just been laid off. Fewer of them means fewer firings, which is reassuring. But it says nothing about how many people are being hired, how fast the unemployed are finding work, or whether the labour market is creating opportunities or merely ceasing to destroy them. The richer evidence tells a different story.

The hiring cliff

Then on Wednesday, ADP reported that private-sector employers added just 44,000 jobs in July, well below the 75,000 consensus and roughly half of June's revised figure.

That combination—steady wages, vanishing job creation—suggests a market where employers have stopped adding headcount but have not yet begun cutting it. It is the calm before the layoff round, or the sign of a hiring freeze that has simply become permanent.

What claims hide

The Richmond Federal Reserve Bank published a useful dissection last week.

Low initial claims are no longer sufficient evidence of a buoyant labour market. They are evidence of a labour market where job loss is less likely but, when it occurs, more costly.

The Fed's bind

This is the puzzle that Kevin Warsh, the Federal Reserve's new chair, inherits. Yet the employment picture, for all the historic lows in claims, is losing its punch. The risk is that the Fed raises rates on inflation that is partly structural and partly transitory, while a labour market that is already cooling slips further.

To be sure, the unemployment rate remains stable at 4.2%. Wage growth, though softening, is not collapsing.

What to watch

Whatever the number, the more useful measure is whether job creation resumes or the ADP-style deceleration deepens.

More structural than any single month: the exit rate. The claims series will continue to look impressive while the underlying labour market grows more brittle. Policymakers would do better to monitor the household survey's long-term unemployment measure and the Department of Labour's exhaustion rates—indicators that do not share claims data's eligibility cliff.

The danger is not immediate collapse. It is slower: weaker investment, higher costs and a monetary policy that tightens on the basis of data that has become progressively less honest about what it measures. Claims rose by 1,000 last week. The real story is what 199,000 no longer proves.