Friday’s employment report, while impactful on the information surface of the labor market and the economy,is the echo emanating from before the tariff shock, and amplified by the tariff regime itself, as well as being impacted by the size of the labor force, which is itself impacted by immigration policy.
The labor market had already downshifted coming into 2025, with a significant drop-off in job creation after the December 2024 NFP print. Tuesday’s QCEW revisions confirmed this.
Tariff-related economic headwinds were a modal expectation from the Liberation-Day economic shock, potentially culminating in a late summer/early fall recession.
Playing out according to script, this dynamic accelerated post-tariff, with revised job creation falling from solid 6-figure gains through April to outright job losses in June. The current 3-month job creation moving average is 29,000 jobs per month.
For a brief summer it looked as if this weakness would not materialize, but alas it has and it is here. The question is, where from here?
Those labor market reports you incinerated your week reading will not help you answer the question above. The hair splitting over prime working age employment, or unemployment by cause, or employment rate by demographic group, or unemployment duration, etc., is the noise.
They are residuals to a broader contextual economic understanding that is required for a more holistic understanding of the labor market and of the economy.
Readers of these pages will recall the August 27th commentary, which indicated:
Current immigration restrictions in the U.S. are projected to reduce GDP growth by 80-basis point in 2025.
US real GDP growth over 2025 and 2026 is -0.5 pp lower each year from the 2025 tariffs. In the long run, the US economy is persistently -0.4% smaller.
All else being equal, a slower growing economy will lead to more labor market slack. Slack indicates unused or underutilized labor capacity. More slack would normally raise the unemployment rate.
However, all else is not equal. While immigration policy is shrinking potential growth, it is also shrinking the labor supply, which has a lowering effect on the unemployment rate.
A shrinking labor market with a lower supply of workers will have an aggregate impact on the demand for workers. After all, workers are consumers as well, and their consumption needs must be services by other workers.
In summary, current immigration policy is not only shrinking potential growth, but also the labor supply, which impacts macro aggregate demand. None of this is controversial and is in fact well understood.
What is controversial is the degree of immigrant-related labor market shrinkage.
The July 2025 Current Population Survey (“CPS”), aka the monthly household survey which generates the monthly unemployment rate, cited 2.5 million fewer immigrants in the U.S. in July 2025 than in January 2025.
2.5 million fewer people in 6 months, even for a country the size of the U.S., is a massive amount of people. And this estimate likely off the charts wrong.
A shrinkage of that scale means nonfarm payrolls would have to be revised down by over negative 2 million people. The benchmark revisions were well below that and within range of expectations – albeit on the higher side.
Or it means the true U3 unemployment rate would be at a 72-year low of 2.6% and the economy would be overheating as wages get bid up.
None of these things are happening.
This immigration data matters because it determines nonfarm payroll breakeven numbers for U3.