US Jobless Claims Defy Economic Gloom

The US labour market continues to present a complex puzzle for global investors as 2025 draws to a close. Despite growing headwinds and a cooling hiring environment, the number of Americans filing for unemployment benefits has defied expectations, remaining at historically healthy levels. Data released on Wednesday revealed that initial jobless claims for the week ending December 20 fell by 10,000 to a seasonally adjusted 214,000.

This figure came in significantly below the 232,000 forecast by analysts, suggesting that on the surface, the labour market remains tight. However, beneath this headline resilience lies a more fragile reality. The four-week moving average, a metric often used to smooth out volatility, also dipped to 216,750. While low layoffs are generally a positive signal for equities, the broader macroeconomic data suggests that businesses are freezing hiring rather than firing, a dynamic that complicates the Federal Reserve’s policy path heading into 2026.

While the private sector appears to be hoarding labour, a significant shift is occurring within the public sector. The national unemployment rate has ticked up to 4.6 per cent, the highest level since 2021. Much of this softness is attributed to a dramatic reduction in federal payrolls. Following the end of the fiscal year in September, the government sector shed approximately 162,000 workers.

Market observers are calling this the "Musk purge," referring to the aggressive cost-cutting measures championed by billionaire Elon Musk under the Trump administration. This public sector contraction is beginning to weigh on the broader employment data, creating a divergence between government and private payrolls. For investors, this signals a potential reduction in government consumption, which has historically been a tailwind for GDP growth.

The disconnect between low jobless claims and a rising unemployment rate has placed the Federal Reserve in a precarious position. Earlier this month, the central bank cut its benchmark lending rate by a quarter-point—its third consecutive reduction—citing concerns that the labour market may be weaker than the headline numbers suggest.

Fed Chair Jerome Powell has been surprisingly candid about the reliability of current data, warning that recent job figures could be revised lower by as much as 60,000. This implies that the US economy has been shedding an average of 25,000 jobs a month since the spring, rather than creating them. This "phantom strength" in the labour market is a critical risk factor for bond markets. If the revisions are confirmed, it could force the Fed to accelerate rate cuts in early 2026 to prevent a hard landing, potentially driving Treasury yields lower.

Beyond the public sector, Corporate America is adopting a defensive stance. Hiring momentum has stalled, hobbled by the lingering effects of high interest rates from the previous cycle and fresh uncertainty regarding President Donald Trump’s tariff policies. Since March, job creation has plummeted to an average of 35,000 per month, a stark contrast to the 71,000 average seen in the preceding year.

Major blue-chip firms, including General Motors, Amazon, and Verizon, have recently announced workforce reductions. While these cuts can take months to materialise in official claims data, they serve as a forward-looking indicator for the consumer discretionary sector. If anxiety over tariffs persists, the "low hire" environment could quickly transition into a broader layoff cycle, challenging the current valuations of US equities.