The Big Idea
Layoff watch
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The consensus view is that the labor market, along with output growth, is poised to soften noticeably in the months ahead, as the fallout from higher tariffs disseminates into the broader economy. At the moment, the macro data are not yet showing a dramatic impact. April payroll gains were actually better than expected. Nonetheless, there are ample anecdotal reports that companies are slowing the pace of new hires as they navigate the heightened uncertainties over tariffs. On the other side of the labor equation, thankfully, it appears that firms have so far held off from widespread layoffs. The weekly initial unemployment claims data are traditionally among the timeliest indicators of an impending acceleration in job cuts, and these data so far are largely steady.
Unemployment insurance
The federal government pays unemployment insurance (UI) to covered workers who are laid off. The program is administered by the states, so eligibility rules and payouts vary from state to state, but the bill is paid by the federal government and ultimately funded by taxes on employers. Most companies are required to participate in the unemployment insurance system, paying taxes so that any workers they let go can collect benefits. Payroll employment in April totaled just over 159 million, while the universe of covered employment in the UI system is about 152.5 million, about 96% of payrolls.
Incidentally, once a quarter, the federal government requires all companies included in the UI system to submit a roster of employment. These quarterly censuses of employment are used by the BLS to reconcile the survey-based monthly payroll estimates. Once a year, the BLS updates its payroll benchmark, replacing the preliminary survey estimates with a more concrete count of workers derived from this dataset.
Weekly initial claims
Every week on Thursdays at 8:30, the Employment and Training Administration of the US Labor Department releases a count of initial unemployment claims. The ETA tallies up the figures provided by various state labor offices of the number of people who filed an application for unemployment insurance. The other primary statistic in these weekly releases is continuing claims, which is the total number of people collecting benefits at the time.
After unprecedented figures in the early days of the pandemic, when they spiked into the millions a week for several months, initial claims settled into a relatively narrow range as the economy fully reopened. Looking at the 4-week average of initial claims going back to early 2022, the scale is incredibly narrow (Exhibit 1). The series has spanned a range of barely more than 50,000 from top to bottom and has spent most of the past four years between 210,000 and 230,000.
Exhibit 1: A narrow range on the 4-week average of initial unemployment claims
Source: Labor Department, ETA.
In 2022, when the economy was enduring a historic labor shortage, initial claims averaged 214,000 for the year. As conditions began to normalize in 2023, the yearly average crept up to 223,000. As it happens, the yearly average in 2024 and the year-to-date figure for 2025 are also exactly 223,000. Despite considerable week-to-week volatility in the series, the underlying trend has been remarkably steady for over two years.
You may notice that the series has inched up over the past few months. In fact, the latest reading of the four-week average increased to 230,000, the highest since October. My first reaction is to note that the current 4-week average includes the 241,000 for the week of April 26 that was inflated by New York City schools spring break—evidently, non-salaried New York City school system employees are allowed to file for and collect unemployment checks during breaks, but the seasonal factors do a poor job of adjusting for this because the school holidays move around from year to year. Once this reading drops out of the 4-week window, the average is likely to fall, as it did earlier this year when there was an outlier 243,000 weekly reading in February that proved a one-off.
The extremely tight range on this measure may distort the perception of swings in the numbers. The historical rule of thumb that I learned in my early days in the business was that 300,000 (or lower) was consistent with a very strong economy, while 400,000 or higher signaled a recession. In that context, it is easy to understand why I am not excited about a backup from 215,000 or 220,000 up to 230,000. In reality, these numbers are still indicative of a historically low pace of layoffs.
Note that this perspective might have served the FOMC well last year. When Chair Powell and the committee were on the verge of panic last summer over the prospect of a weakening labor market—after a couple of sub-100,000 payroll advances and a backup in the unemployment rate—the fact that initial claims ran up from 210,000 to 240,000 seemed to offer confirmation of a decisive weakening in labor demand. However, the rate of new filers remained consistent with a historically low pace of layoffs.
In past episodes of tight labor markets, initial claims still ran well above the level of recent years. In 2005 to 2007, initial claims barely fell below 300,000 and in the 1999-2000 period, the number of new filers generally ran between 250,000 and 300,000. By the spring of 2001 and the summer of 2008, respectively, initial claims exceeded 400,000, the rule of thumb for a recession signal.
In any case, by the time the FOMC got around to its dramatic 50 bp rate cut in September of last year, initial claims had already slid back into the 220,000s, and then immediately after the Fed pulled the trigger on its easing, the September payroll gain ballooned to 240,00, an indication that officials’ labor market concerns had been overwrought.
The lesson here in my view is to maintain a broader context. Even if initial unemployment claims continue to creep higher, it would hard for me to worry much as long as the readings are below 250,000 or even 275,000. That said, there is a plausible case for a substantial pickup in layoffs over the next few months, associated with the economic fallout from tariffs, so it will be important to monitor the weekly UI data for signs that firms are beginning to shed workers at a noticeably faster clip. But the increase would need to be far steeper than anything seen over the last few years to be truly worrisome.
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