The U.S. Labor Market Shows Continued Moderation in May

Since the Federal Reserve began raising interest rates in 2022 in an effort to cool inflation, hopes and expectations for a “soft landing”—a controlled deceleration of the economy without triggering recession—have fluctuated. While inflation has not yet fallen to the Fed’s 2% target, April data showed signs of cooling demand, including moderating topline and core inflation, softer retail sales, and slower job gains. Consequently, hopes have once again risen that a soft landing may be achievable. 

A key component supporting these hopes has been employment outcomes. The labor market has stayed strong enough throughout the interest rate hiking cycle to support household finances and spending (and buffer the economy against recession), but in recent months has simultaneously offered up easing wage pressures. Softer earnings growth for workers has critical implications for the Fed’s fight against inflation, as wages are a cost input for the sticky services components of inflation. Even as strong demand for workers has kept almost everyone who wants a job employed, wage growth has slowed—a dynamic made possible by rising labor force participation.

Immigration has been identified as a contributor for this new labor supply. Morning Consult’s U.S. Unemployment Index showed a growing influx of non-citizens to the workforce escalating from late 2023 through the start of June. The ongoing trend suggests the rising tide of immigration may be continuing to ease wage pressures ahead of June’s employment situation report from the BLS. 

Unemployment is still low, but gradually climbing

While it remains historically low, unemployment has gradually trended higher over the past year. The increase is seen both in the national unemployment rate reported by the BLS, which stood at 3.9% in April, and in Morning Consult’s U.S. Unemployment Index, which has a .8 correlation with official unemployment rate historically. 

This upward trend in joblessness is conducive to the Fed’s aim of achieving a soft landing, as the cooling labor market in turn reduces wage pressures and limits inflation, particularly for “sticky” services categories that have recently been putting upward pressure on topline price growth. The sooner the Fed feels confident in the path to 2%, the sooner central bankers can begin cutting interest rates. While other parts of inflation, like housing and certain commodities, remain supply constrained, the continued uptick in unemployment suggests the non-housing services portion–a keenly watched part of inflation for the Fed–may be poised for further relief. 

Rising joblessness disproportionately impacting the expanding cohort of non-US citizens

Breaking out Morning Consult’s Unemployment index by demographic groups offers further insight into which groups are driving the increase in unemployment. Notably, the uptrend in unemployment has disproportionately impacted those reporting as non-U.S. citizens, lending more evidence to the argument that elevated immigration over the past year is contributing slack to the labor market by introducing new supply to the workforce. The discrepancy in joblessness rates grew particularly stark over the past year, corresponding with the recent trend in overall rising unemployment, as unemployment index scores rose dramatically for non-citizens.

Non-citizens are also making up a larger share of the overall sample as immigration rates climb. Since 2020, the share of non-citizens among total (weighted) respondents climbed from about 2.5% to over 4.5% in early 2024–a 44% increase from when tracking began. Customs and Border Patrol reported a sharp uptick in encounters with immigrants seeking to cross the border over the past year as well, noting a similarly sized 40% increase from 2021 to 2023.

Rising unemployment in May portends further softening in June’s jobs report

Through the first few weeks of May, Morning Consult’s Unemployment Index for U.S. adults overall has shown slightly higher average unemployment levels compared with April–though still below the recent peak in late March. Importantly, Morning Consult’s data is not seasonally adjusted; accounting for seasonality would likely make the May unemployment index readings even higher. The BLS typically adjusts unemployment down in March and up in April and May to account for seasonal factors. Consequently, the March spike in Morning Consult’s unemployment index data could have been seasonally driven, but April and May levels would be even higher if adjusting for seasonality in line with BLS practices. 

The May reference week, during which the BLS collects its monthly unemployment data, concluded a couple of weeks ago, with Morning Consult’s topline U.S. Unemployment Index registering a 3.7 point increase from the period corresponding with the April reference week. The observed uptick in unemployment, which would likely be even higher if accounting for seasonality, suggests we may see another month of moderating labor market pressures in the June jobs report, potentially nudging expectations among Fed watchers for rate cuts to come sooner.