The US labor market has been showing perplexing trends recently, marked by robust nonfarm payroll (NFP) growth juxtaposed with a rising unemployment rate.
In June, NFP grew by 206,000, with an average of 222,000 over the past six months and 218,000 over the past year. Traditionally, such figures would indicate an overheating labor market, reducing unemployment.
Yet, unemployment rose to 4.1% in June from 3.7% in December and 3.4% in April 2023, raising questions about why the unemployment rate is not following given the strong NFP data.
A surge in immigration post-pandemic has significantly increased labor supply, outstripping demand. Estimates suggest net immigration tripled from the pre-pandemic forecast of 1.0 million to 3.3 million in 2023 and 2024.
This increase adds around 192,000 net immigrants per month, with about two-thirds participating in the labor force. This influx has likely been undercounted by the Bureau of Labor Statistics (BLS), contributing to an apparent mismatch between job growth and unemployment rates.
To maintain a stable unemployment rate, the breakeven NFP growth rate must match labor force growth, according to Nomura analysts. Pre-pandemic estimates placed this rate around 100,000.
“However, once the post-pandemic immigration surge is factored in, estimates of the NFP breakeven rate increase substantially; indeed, we estimate the average from four different estimates is around 240k, more than double the old breakeven rate,” Nomura analysts noted.
Nomura outlines three key implications of the revised breakeven NFP rate. First, current NFP figures, like June's 206,000, should not be viewed as indicators of a hot labor market; they might actually signify a cooling trend.
Second, if NFP declines to around 150,000 in the coming months, it could indicate a weak job market with labor supply significantly outpacing demand.
Third, this elevated breakeven rate is likely temporary, influenced by pent-up immigration post-pandemic. The Congressional Budget Office projects a decline in net immigration to 2.6 million in 2025 and 1.8 million in 2026, suggesting a return to normalcy in the medium term.