Despite some signs of weakening, the labor market remained healthy through the first four months of this year. However, there is evidence that slower consumer demand may be having an impact. In particular, new unemployment insurance claims have been inching higher. Even more concerning, continuing claims are now almost 7.0 percent higher than the year ago level. This puts them at the highest level since November of 2021.

This would be consistent with a story of a modest weakening in hiring, associated with little change in layoffs. To be clear, this is not the sort of increase we typically see in a recession, where large layoffs in construction and manufacturing lead to big surges in unemployment insurance claims. However, weakness could feed on itself, eventually leading to a downturn, but the data to date do not show us that.

Evidence of a Weakening Labor Market: Wage Growth and Unemployment of Young People

Two areas where we could have seen some evidence of weakness in recent jobs reports were the slowing of wage growth and a modest rise in the unemployment rate of young people. Wages had been growing at roughly a 4.0 percent year-over-year rate from late 2023 through 2024. However, they appear to have slowed modestly in recent months.

The year-over-year rate fell to 3.9 percent in January and was down to 3.8 percent in March and April. The annualized rate over the last three months was just 2.6 percent. Wage growth has almost certainly not slowed that much (the annualized rate for three months is erratic), but it does clearly seem to be slowing, as the Employment Cost Index also indicates.

This is bad news both from the standpoint of living standards — as the administration’s tariffs virtually guarantee some uptick in inflation — and also from the standpoint of supporting growth. If real wages grow less rapidly, consumption is virtually certain to slow. In this respect, it is worth noting that consumption growth was revised down to 1.2 percent in the latest GDP data for the first quarter.

Unemployment Rate for Young People Likely to Rise Further

Young people are likely to see the effects of a weak labor market first, as more of them are looking for jobs. In April, the unemployment rate for people between the ages 20-24 rose to 8.2%. This brought the three-month average to 8.0%, the highest since the summer of 2021. For men, the rate was 9.6%, putting the three-month average at 9.3%. If we actually are seeing the beginnings of a slowdown, we should expect the unemployment rate for young people to remain elevated in May.

We also have seen a rise in the unemployment rate for college grads that is out of line with overall unemployment trends. The rate is up 0.3 percentage points from year ago levels, but at 2.5 percent it is still considerably lower than the overall unemployment rate.

Unemployment Due To Quits Edging Lower

The share of unemployment due to people voluntarily quitting their jobs has been unusually low given the unemployment rate. It was just 11.8 percent in April. That compares to an average of 13.2 percent in 2008-09. It is likely to edge lower in May.

Further Weakening of the Labor Market for Black Workers

There is some evidence that the labor market for Black workers has been weakening in recent months. Their unemployment rate hit 6.3 percent in April, that compares to an all-time low of 4.8 percent in April of 2023. More striking was a fall in the employment-to-population ratio (EPOP) to 58.2 percent, the lowest level since March of 2022.

This weakness has primarily hit Black women. Their EPOP hit 57.5 percent in April, the lowest level since December of 2021. Black workers always disproportionately feel the effect of a weakening labor market, but the impact might be amplified by layoffs of federal government employees, who are disproportionately Black, and also the Trump administration policies ending efforts to curb racial discrimination.

Payroll Employment Likely to Slow

The jobs gains in the establishment survey were surprisingly strong in the last two months, although the number was less impressive when factoring in downward revisions to prior months’ data. (These downward revisions totaled 52,000 last month.) Job gains in May are likely to be considerably slower than April’s 177,000, both because of underlying factors and also a reversal of unusual gains.

The biggest underlying factor is the sharp curtailment of immigration that started under Biden last June and has intensified under the Trump administration. We should have been seeing the effects of the reduced flow already by the start of the year. The Trump administration’s more aggressive policies likely are causing some migrant workers to leave their jobs. This should result in slower employment growth, especially in areas like agricultural employment (not included in the survey), construction, restaurants, and healthcare.

The one-time factors that boosted jobs in April included a bounceback of 18,600 jobs in restaurants after job losses earlier in the year. We also have seen a large increase in employment in delivery services since the election, presumably reflecting efforts to stockpile items in advance of tariffs. We may not see job declines in these sectors, but we are unlikely to see another month of strong growth.

Healthcare to Again Lead Growth, Followed by State and Local Governments

The healthcare sector has consistently led job growth in this recovery, averaging over 50,000 jobs a month. It is likely to again lead growth in May, although the risk of future budget cuts may be leading to more caution in hiring. In the same vein, we will likely see some slowing in state and local government employment. The sector added 19,000 jobs in April, down from a monthly average of 25,000 in the twelve months to March.

Manufacturing and Construction Employment Stagnating

Employment growth in these highly cyclical sectors has been weak for the last six months. Manufacturing has been shedding an average of 7,000 jobs a month since September, while construction has shown modest growth. Both sectors will have near zero job growth in May.

Evidence of a Weakening Labor Market: Slower Job Growth, Higher Unemployment

The May report is almost certain to be weaker than the last two both in the number of new jobs shown in the establishment survey and a further rise in the unemployment rate. However, even if the unemployment rate inches up a notch to 4.3 percent, it is still relatively low. The issue will be how it is distributed, and whether this is likely to be part of an ongoing upward trend.