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Rising U.S. Unemployment: Another False Recession Signal – July 22, 2024

Immigrants sometimes get blamed for things that go wrong in a country, but there is some truth to the fact that a surge in new immigrants has provided a misleading bearish U.S. economic signal. A just-published report examined the details behind the rise in U.S. unemployment and found that, indeed, this time is different.

In the past, a sustained rise in unemployment has generally heralded a recession. However, the current rise has not coincided with increased layoffs, which is a departure from past instances of rising unemployment ahead of recessions. The report highlighted that a large, exogenous increase in immigration plausibly explains much of the recent increase in unemployment. Without it, the unemployment rate today would be as much as 40 bps (0.4%) lower, i.e. hardly have risen from extremely low levels.

Given the distortions in the unemployment data (including the Bureau of Labor Statistics household survey), investors should focus on nonfarm payrolls, initial unemployment insurance claims and layoffs to get reliable insights on the labor market. The fact that the business cycle is not impaired and the Fed will soon cut rates imply a continued supportive backdrop for risk assets and economic activity.