Job Market in Crisis: The "Stagnation" Dilemma Behind Unemployment Data

Last year at the end of the year, data released by the U.S. Department of Labor confirmed market concerns: the unemployment situation is worsening. As of the week ending December, the number of first-time unemployment claims unexpectedly decreased, seasonally adjusted to 199,000, hitting a new low since late November. However, this seemingly positive signal masks deeper issues in the job market — the U.S. labor market is falling into a dangerous “stagnation” state.

Economists had predicted claims would rise to 220,000, but the actual number declined instead. Such fluctuations are not uncommon during the holiday season, and seasonal adjustment challenges make this figure somewhat uncertain. More worryingly, behind this data lies an unsettling reality: the entire labor market is playing out a strange pattern of “neither hiring nor firing.”

Claims remain steady, but underlying unemployment risks are brewing

Although initial unemployment claims have fallen from recent highs, the number of people receiving unemployment benefits after the initial aid increased during the week in mid-December, reaching 1.866 million after seasonal adjustment. This seemingly contradictory data points to a deeper problem: the duration of unemployment is lengthening.

The number of people continuously claiming unemployment benefits approached 2 million in late October, though it later declined but remained above last year’s levels. A recent survey by the Conference Board shows consumer sentiment about the labor market has deteriorated to its lowest since early 2021. This indicates that public pessimism about job prospects has surpassed that during previous economic downturns.

The severity of unemployment issues is further highlighted by another set of data: throughout last year, the average monthly new jobs added in the U.S. was only 55,000, less than one-third of the monthly average for 2024. Employers are in a wait-and-see mode, partly awaiting clearer policy directions, and partly reassessing their labor needs amid the rollout of new technologies like AI.

Labor supply constrained, hiring in “wait-and-see” mode

Since January last year, a series of rapid policy shifts by the new administration have taken place, notably sharply increasing import tariffs and tightening immigration controls. These policies directly impacted labor supply — rising import costs led employers to cut back expectations, while immigration restrictions directly reduced the available workforce.

These policy changes have created a perfect storm with the labor market’s “stagnation” phenomenon. The slowdown in hiring has approached the “break-even point” economists describe — the minimum employment growth needed to keep the unemployment rate from rising. In November, the unemployment rate rose to 4.6%, a four-year high, partly due to the federal government shutdown.

A striking contrast illustrates the issue: although the official unemployment rate rose from 3.7% in January to 4.6% in November, the proportion of Americans receiving unemployment benefits relative to the total labor force remained at just 1.1%, with little change. These two indicators are usually highly correlated, but their decoupling suggests employers are under unprecedented hiring pressure — they prefer to reduce hiring rather than lay off workers in large numbers.

The Fed faces a dilemma: sustain growth or fight inflation

The unusual features of the current unemployment situation have become a core concern for the Federal Reserve. Should it cut interest rates further to prevent continued deterioration of employment, or maintain current borrowing costs to curb inflation that remains above target? This decision will directly influence the future economic trajectory.

This month, the Fed lowered the overnight benchmark rate by 25 basis points to a range of 3.50%-3.75%, but also indicated that further rate cuts are unlikely in the near term. Policymakers are awaiting more signals regarding the labor market and inflation trends.

From the December minutes of the Fed’s meeting, it is clear that there are deep divisions among decision-makers. Even those supporting rate cuts acknowledge that “this is a delicate balancing act,” implying they are fully capable of supporting a hold on rates. Some officials skeptical of the recent cut suggest that upcoming labor market and inflation data will be crucial in determining whether further action is needed.

For the Fed, the coming weeks’ economic data will determine the policy path. Whether the unemployment situation worsens further, and whether inflation can continue to move toward the 2% target, will influence whether the Fed chooses to prioritize stable growth or controlling inflation.