The US labor market continues to see persistently low levels of unemployment benefit claims, but the momentum of job growth keeps weakening, with the structural pattern of "low hiring, low layoffs" becoming increasingly prominent.

The US Department of Labor reported on Thursday that for the week ending October 3, initial jobless claims fell by 2,000 from the prior week to a seasonally adjusted 197,000, below the market expectation of 200,000 and holding near a 57-year low for the fourth consecutive week. Meanwhile, the September nonfarm payrolls report released last Friday showed only 29,000 jobs added, far below market expectations, signaling a clear cooling in hiring demand.

The divergence between these two sets of data reveals the core characteristic of the current job market: businesses are unwilling to carry out large-scale layoffs, but they are also becoming increasingly cautious about hiring. For the Federal Reserve, this "low hiring, low layoffs" state means both that the labor market has not yet shown obvious deterioration and that the resilience of the job market is gradually weakening.

The market has now significantly lowered its expectations for another 25 basis point rate hike by the Fed in October, with economists generally pushing the next rate increase to December.

Initial Claims Remain Low, Continuing Claims Pick Up

Data shows that initial jobless claims have remained below 200,000 for four consecutive weeks, with the four-week moving average falling to 198,000, the lowest level since early October 2022. By state, California and Illinois were the only two states where unadjusted claims rose by more than 1,000 from the prior week.

The low level of initial claims indicates that businesses are still not significantly expanding layoffs. Heather Long, chief economist at Navy Federal Credit Union, said this remains a "low hiring, low layoffs" job market: for those already employed and hoping to keep their jobs, this environment is relatively favorable, but for job seekers it is more difficult.

However, continuing unemployment claims have picked up. For the week ending September 26, continuing claims rose by 17,000 to a seasonally adjusted 1.716 million, after falling to a nearly three-and-a-half-year low the previous week. Continuing claims better reflect how easy or difficult it is for the unemployed to find work again, so their rebound also suggests that the time unemployed people spend in the labor market is lengthening.

Hiring Cools Markedly, Job Growth Nears Standstill

If initial claims data reflects businesses' willingness to lay off workers, then the September nonfarm payrolls data more directly reveals weakness on the hiring side. US nonfarm payrolls added only 29,000 jobs in September, and employment data for previous months were also revised down, showing that job growth has slowed markedly.

With the layoff rate remaining low, weak net job growth means the problem lies mainly on the hiring side. Although businesses have not carried out large-scale cuts to existing staff, they are reducing new positions, which has allowed the unemployment rate to stay at a relatively low 4.2% while making it harder for job seekers, those changing jobs, and new entrants to the labor force to find work.

Economists believe that uncertainty brought by tariff policies and energy price increases triggered by Middle East conflicts are both reinforcing corporate caution. With the demand outlook unclear, businesses are more inclined to postpone hiring rather than immediately lay off workers.

Beneath Surface Stability, Hidden Pressure in the Labor Market Is Building

The low level of initial jobless claims may also underestimate the pressures emerging in the labor market. Some unemployed people, including recent graduates, are not eligible for unemployment benefits because they have limited or no work experience, and therefore are not reflected in the initial claims data.

In addition, the long-term unemployed may also face limits on benefit duration. In most US states, the maximum duration for unemployment benefits is 26 weeks. The median duration of unemployment rose to 11.5 weeks in September, close to a four-and-a-half-year high, indicating that the time needed to find reemployment is lengthening.

Samuel Tombs, chief US economist at Pantheon Macroeconomics, said that with hiring continuing to be weak, the number of unemployed new entrants and re-entrants to the labor market is still rising, which may put mild but sustained upward pressure on the unemployment rate in coming quarters.

In other words, the main risk in the current job market is not a sudden wave of large-scale layoffs by businesses, but rather persistently insufficient hiring, which makes it increasingly difficult for more job seekers to enter or re-enter the labor market. Once the economy weakens further and businesses begin cutting existing positions, the buffer provided by current "low layoffs" could narrow rapidly.

Job Market Stable but Weakening, Fed's Rate Hike Pace Turns More Cautious

The Fed last month raised the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, the first rate hike in three years, and hinted that further tightening may still be possible in the coming months.

But the clearly weak September nonfarm payrolls, combined with previously weaker-than-expected inflation data, have significantly cooled market expectations for another rate hike in October. According to reports, economists generally expect the Fed's next rate hike to come in December.

The minutes of the Fed's September meeting showed that officials viewed labor market conditions as generally stable, with risks "broadly balanced." This means that as long as the job market does not deteriorate markedly, the Fed still has room to wait for more data before deciding whether to tighten further.

But the "low hiring, low layoffs" state itself does not mean the labor market is strong enough. The current low unemployment rate is mainly supported by limited layoffs, while persistently weak hiring shows that businesses remain cautious about future demand. For the Fed, this delicate balance means the job market has not yet triggered obvious pressure for rate cuts, but its fragility is rising.