This number is bad news for the economy

Washington Post

13 hours ago

Mark Zandi is chief economist at Moody's Analytics.
The unemployment rate has historically been the go-to barometer for the economy's performance. At just over 4 percent, unemployment remains low, and it has edged only a bit higher since the start of the year. Taken at face value, the economy is doing just fine.
But it's not. If the labor force had increased this year at the pace it did last year, the unemployment rate would be headed toward 5 percent. Of course, low unemployment is great, but only if it is due to lots of new jobs, not an evaporating labor force.
And the labor force, which includes all those working and looking for work, is sounding the recession alarm bell. It has flatlined so far this year. Compare this with last year, when the labor force grew by well over 1 million workers, or the year before, when it increased by almost 2.5 million. Without more workers, it is tough for the economy to grow: A recession is more likely.
It's no mystery what ails the labor force; it is the severe restrictions on immigration. The surge in undocumented immigrants that occurred during much of the Biden administration undoubtedly put financial and societal pressures on many communities across the country. However, many of these immigrants quickly applied for work authorization, received it and started a job less than a year after arriving.
The timing of this immigration surge was fortuitous in one crucial respect. It came when the Federal Reserve was aggressively ramping up interest rates to cool off the red-hot job market and rein in runaway inflation. There is a reasonable argument that without the immigration surge, the Fed would have had no choice but to push rates up even higher and induce a recession to quell the inflation.
Immigration policy has since been flipped on its head, beginning at the end of Joe Biden's presidency with his executive order to restrict asylum seekers. President Donald Trump's policies have since shut down the southern border, and many immigrants are leaving the country either forcibly or through self-deportation.
Thus, the immigrant labor force has waned. This time last year, the foreign-born labor force expanded at an extraordinary 5 percent yearly pace, translating into more than 1.5 million additional workers every year. In recent months, it has declined. The native-born labor force has picked up, but not enough to fill the void left by fleeing immigrants.
A labor force flat on its back has many implications — none of them good. It means disruptions to businesses that rely on immigrant labor. Agriculture and construction are especially vulnerable, but manufacturing, transportation, hospitality, retail, and child and elder care also depend critically on immigrants. Without these workers, labor costs will increase, adding to the inflation fueled by the tariffs. This is a compelling reason for the Federal Reserve to be cautious in resuming its interest rate cuts, and once it does, to go slowly.
More broadly, it means the economy's potential growth — the pace of growth consistent with stable unemployment and inflation — is much lower. The economy can sustainably grow only as fast as the labor force and its productivity grow. With the labor force stuck in place, unless productivity growth ramps up, the economy's growth will consistently fall well short of the pace we've come to expect and are counting on for the future.
Weak immigration and labor force growth plague other parts of the world. Take Japan and Germany, countries that struggle to attract immigrants sufficiently to expand their workforces. Their economies are seemingly almost always flirting with recession. Will this be our future, too?
Of course, we aren't these other countries. We are leading the way on many technologies, especially artificial intelligence, which promises significant productivity gains. (By the way, consider who is running many of our most successful AI companies — yes, immigrants.) Yet even the most ardent AI proselytizers don't expect AI and other technologies to diffuse through the economy fast enough to make up for the imminent shortfall in growth.
Lawmakers could agree on substantive immigration reform. As recently as this time last year, they nearly passed bipartisan legislation allowing more immigrants with needed skills to come here. Presidential election politics waylaid that effort, and though another political window for these reforms might open again, it won't happen quickly enough.
Given the current immigration policy, it seems increasingly unlikely that the moribund labor force will come back to life soon, and more likely that a recession is dead ahead.