We have been seeing signs of a slowing labor market through the first five months of this year. The rate of job growth has slowed modestly, averaging 135,000 over the last three months. That compares to an average of 170,000 in 2024. There also has been a modest uptick in unemployment from 4.0 percent to 4.2 percent. Wage growth also appears to have slowed slightly.

While unemployment insurance claims are relatively low, the number of continuing claims has been edging higher. The data for the most recent week show continuing claims are 7.0 percent above the year ago levels. This does show some deterioration in the jobs picture.

Still, by most measures the labor market looks healthy. The May unemployment rate remains low by historic standards. The slowing of job growth was predictable given the sharp curtailment of immigration which began last June during the Biden administration. And even if wage growth has slowed slightly, it is still comparable to the two years just before the pandemic, when the labor market was as strong as any point since the 2001 recession.

Unemployment Will Edge Higher

The unemployment rate held steady at 4.2 percent in May, keeping it in the narrow 4.0 percent to 4.2 percent range it has been in since May of 2024. However, the May report also showed 625,000 people left the labor force as the employment-to-population ratio (EPOP) dropped by 0.3 percentage points to 59.7 percent, the lowest level since January 2022. This was not just baby boomers leaving the labor force; the EPOP; for prime age workers fell by 0.2 pp in May.

The household data are highly erratic, so the May numbers should be viewed with caution. But the drop in labor force participation was large enough that it is likely reflecting something real, even if the true magnitude of the drop may be less than the May report indicates.

Share of Unemployment Due to Voluntary Quits to Remain Unusually Low

The share of unemployment due to voluntary quits fell to 9.8 percent in May, the lowest share since May of 2021. By comparison, the share averaged 13.2 percent in 2018-2019, when the unemployment rate was roughly comparable. This suggests workers have little confidence in their labor market prospects, so they are reluctant to quit a job until they have a new job lined up.

Unemployment Rate for Young People May Edge Higher

The unemployment rate for workers ages 20-24 remained at 8.2 percent in May, 2.2 pp above the recovery low hit in January of 2024. Their EPOP fell to 65.4 percent in May, 2.8 pp below the peak hit last January. Younger workers are likely to feel the impact of a weakening labor market first, since they are the ones most likely to be looking for jobs.

Unemployment for College Grads Could Edge Higher

While the overall labor market has shown limited evidence of weakening, the unemployment rate for college grads has risen 0.5 pp over the last year to 2.6 percent. While this is still considerably lower than the overall unemployment rate, it is high given the overall rate of 4.2 percent. In the two years before the pandemic the unemployment rate for college grads averaged 2.1 percent.

Job Growth in the Establishment Survey Likely to Slow to Under 100,000

As noted, we have seen some slowing in job growth this year. That is likely to continue with the June data. Some of this likely reflects a slowing economy. The economy did contract at a 0.5 percent rate in the first quarter. But the other factor is reduced labor supply due to fewer immigrant workers. As a result of reduced immigration, slowing job growth is a virtual certainty –  the only question is when it will show up.

Slowing Wage Growth

There has been little change in the pace of wage growth using a year-over-year measure, which came in at 3.9 percent for May. However, wage growth does show some slowing if we compare average wages over the last three months with the prior three months. The annualized rate over this period is 3.5 percent.

With inflation around 2.5 percent, this still allows for a respectable pace of wage growth. But if wage growth slows further and tariffs push inflation higher, that story may change.

There is also an important question of the rate of wage growth that would be consistent with the Fed’s 2.0 percent inflation target. While productivity had grown at a 2.6 percent annual rate in 2023 and 2024, it rose at just a 1.3 percent rate in the first quarter. The surge in imports made data from the first quarter quirky, but a slower rate of productivity growth implies a lower rate of  non-inflationary wage growth, absent some reversal of the shift to profits that we saw during the pandemic.

Healthcare to Lead Job Growth Again

Healthcare has consistently been the leading sector for job growth, adding an average of more than 50,000 a month over the last two years. The sector added 62,000 jobs in May. There will almost certainly be slower growth in June, partly due to employers being more cautious in the face of government cuts and also in part just a reversal of the strong growth reported for May.

State and local governments have also been a strong source of job growth adding more than 26,000 jobs a month in the year to May. Job growth in the sector is likely to be considerably slower in June.

Manufacturing and Construction Employment Stagnating

Manufacturing lost 7,000 jobs in May. Employment is down 90,000 over the last year. There will likely be little change in manufacturing employment in June.

Construction employment had been growing a strong pace through the first three quarters of 2024, but slowed sharply since October. This is due in part to the weakness of the housing market and in part due to the ending of the factory construction boom.

Restaurants Not Likely to Be Big Job Gainer in June

The restaurant sector has been a major source of job gains in the recovery, adding an average of 13,000 a month over the last year and 30,200 in May. Given the sharp fall in spending on restaurants in May (over 1.0 percent in real terms), job gains in the sector in June will be minimal and the number could even fall.

June Report is Likely to Increase Concerns About the Health of the Labor Market

Slower job growth, coupled with a modest rise in unemployment and further slowing of wage growth, should raise questions about the strength of the labor market going forward. Workers may lack the bargaining power to secure real wage gains, and without wage gains they will not be able to support higher consumption.