Despite the highest interest rates in two decades, fears of recession, and a tightening credit market, the job market remains robust.

Last week, fewer Americans filed for unemployment benefits than a week ago, according to the Department of Labor. Initial jobless claims in the week ending August 12 fell by 11,000 to 239,000.

Economists were almost on the money this time. They expected a slight decrease in claims to 240,000 from the previous week's 250,000, which had been revised up by 2,000.

Meanwhile, continuing jobless claims for extended unemployment rose by 32,000 to 1.716 million.

In contrast to the unexpected surge in claims last week, this week's job market report offers a sunnier picture.

Job data echoes other upbeat indicators

The question on everyone's lips is whether the Fed can engineer a soft landing with the fastest rate hike cycle since the 1970s. Or is the economy inevitably headed for a recession?

Today's jobless claims are just the latest set of numbers that point to an economy in much better shape than people had previously thought.

"If you look at the broader trends, with consumers still spending and the flatter trend in jobless claims, that is going to keep up the pressure for higher wages," Edward Moya, Senior Market Analyst at OANDA, told Creditnews. "There is still an expectation that the economy will do well in the third quarter," he said.

Even though it's still early in Q3, the Federal Reserve Bank of Atlanta produces a forward-looking estimate of GDP, which can give a better perspective than the delayed official estimates.

At its last review yesterday, the Atlanta GDP Now forecast for the third quarter was 5.8% for Q3.

Strength in the consumer sector, which makes up about 70% of US economic activity, reinforced that narrative on Tuesday. Retail sales rose by a more-than-expected 0.7% in July, with the June numbers also revised up.

Goldman Sachs was among the investment banks to upgrade Q3 economic growth forecasts on the back of that report, going for a rate of 2.2% for the full year. That was a big jump from its prior 1.5% forecast.

Moya said rates could still go up because the economy is clearly not weakening enough to bring inflation down to the Fed's 2% target range.

"The trend towards lower jobless claims had already begun," he added. "To raise any alarm about unemployment, we would need to see a series of weekly claims above 300,000."

The double-edged sword

In the context of the Fed's policy, the reality—or perception—of a strong economy is a double-edged sword.

On one hand, the Fed's rate hikes might have a milder effect on the economy than previously expected. On the other hand, a robust labor market could fuel inflation and prompt the Fed to raise rates further.

That raises the question of what impact a prolonged period of higher rates would have on the economy.