Photograph Source: Pete unseth – CC BY-SA 4.0

The question for the Fed is whether it has to worry more about inflation or a weak labor market. Last week’s data indicate both are real concerns, but to my mind, the labor market weakness is unambiguously the bigger problem. I acknowledge that I am generally far more concerned about workers being unemployed than modest inflation rates that may be somewhat higher than we want, but the specific circumstances do warrant much more concern about the former than the latter.

The big news item on the labor market side last week was the jump in new unemployment insurance claims, which rose by 27,000 to 263,000, the highest since October of 2021. To be clear, the weekly data are erratic, and this could be reversed due to revisions or shown to be an aberration with this week’s data. Also, even 263,000 is not high by historical standards, so by itself this would not be a big deal.

However, this fits with a series of other reports showing a weakening of the labor market. The most important is the August jobs report, which showed both weak job growth for the month, and that we have not had any job growth outside of the healthcare sector for the last four........

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