Current youth unemployment rates have attracted considerable attention as young college graduates struggle to find jobs. Indeed, youth unemployment has been rising rapidly relative to the overall unemployment rate.
Historically, the widening of the gap between youth unemployment and overall unemployment has been associated with a recession. But this time could be different: the gap between the two is still quite small, relative to history, and the immigration-associated labor dynamics are still filtering through the economy.
On the first point: the 5-percentage point gap between youth and overall unemployment is historically associated with an extremely tight labor market. The current youth unemployment rate of 9.6% would have been enviable in the decade following the financial crisis, when youth unemployment averaged 14%.[1]
Immigration has been dramatically curtailed, beginning in 2024 and accelerating under President Trump. The slower flow of immigration will filter through to the stock of labor gradually but should tighten at least some parts of the labor market over time.
The number of people unemployed for five weeks or fewer continues to be stable, but we are concerned about the slow and steady rise of people unemployed for longer periods. As people enter the labor market (i.e., the labor force participation rate improves as it did in April), it appears to be increasingly difficult to actually find a job.
The latest BLS data shows that the median duration of unemployment reached 10.4 weeks in April, a length not seen since December 2021. Almost 1.7 million Americans had been unemployed for more than 27 weeks in April, a level (excluding the pandemic) that has not been seen since 2017, when the labor market was still arguably absorbing the massive unemployment shock of the 2008 financial crisis.
If companies stop hiring and pause investment decisions due to fiscal and economic uncertainty, we can expect these metrics to continue to worsen. Additionally, changes in policy may also cause structural unemployment, particularly in industries that are negatively affected by tariffs or reductions in government spending.
We see firms behaving quite cautiously in the labor market and the market may be tilting slightly in favor of workers.
Firms have remained very reluctant to lay off workers. The layoff rate has not recovered from its post-pandemic lows. There has been a very gradual increase in the share of workers being laid off since early 2022, the peak of labor market tightness.
By contrast, the quits rate has recovered from post-pandemic distortions. Workers have been increasingly reluctant to quit their jobs since 2022. Quits are now in a more ordinary range.
Since the November 2024 election, we have seen a slight tightening of the labor market. Quits have reversed their slide and hooked higher, revealing improved confidence in the labor market for workers. At the same time, layoff rates have stopped rising and remain in their post-pandemic lows.
This has happened in the context of two sets of policies implemented by the Trump Administration. First, the crackdown on immigration has likely reduced the flow of workers into the workforce, shifting the balance of power toward the now relatively scarcer workers. Second, the tariff policies have bred enormous uncertainty, which appear to have frozen firms in place as they wait for greater resolution before engaging in strategic changes.
We still expect a recession in the U.S., although the probability (60%) remains close to a coin flip. However, we are (very) cautiously optimistic, given the progress on “trade deals” and in particular in lowering tariffs on China.
Our biggest concern remains with investment. Volatile policies and valuations are causing some firms to slow investment and hiring decisions, as well as deal-making. We expect the 10% near-universal tariff rate to cut significantly into profit margins. This is likely to particularly affect smaller businesses, who have less pricing power, lack the deep pockets to accumulate inventory, and are less likely to be diversified against shocks.
Consumers are increasingly worried, according to recent survey data. In the near term, we expect households and firms to continue to front-load the purchase of imported goods, with a tapering off into midyear. We are also concerned about whether the households who are invested in the stock market will pull back spending in light of volatile markets. Households in the top 10% make up 50% of all consumption, so the behavior of this group of consumers is critical to continued economic growth.
Q2 is likely to be a critical one for the labor market, as the cumulative effects of tariffs, DOGE actions, and policy uncertainty filter into earnings and economic data.
Chair Powell, in his recent remarks, repeatedly articulated his satisfaction with the current monetary policy stance. We expect the Fed to resist cutting until there is greater clarity on the ultimate effect of tariffs on prices. In the second half of the year – assuming that tariff policy settles down by then – we expect labor market dynamics to rise in importance and the FOMC to make substantial cuts to the Fed Funds rate.
Looking forward, we expect continued tariff uncertainty as well as a broadening of attention by the Trump Administration to include more growth-oriented policies such as tax cuts and deregulation.
The risks to our view are tilted toward stronger than expected growth. Some sort of “Liberation Day” tariffs are likely to remain in place, but if there is a moderation in the universal tariffs, a détente with China, and few or no other bilateral tariffs are imposed, this could help tilt the economy toward growth. We also expect the Trump Administration to focus on more growth-positive policies in the second half of the year, including deregulation and an extension of the Tax Cuts and Jobs Act.
Labor markets may remain stronger than we expect, especially given the diverse actions that are broadly discouraging of inbound labor flows.
If an off-base case growth scenario does begin to prevail, however, we would expect it to go hand in hand with greater inflation as consumers remain relatively strong and continue to tolerate higher prices.
Endnote
1. BLS Youth unemployment 2009-2018.
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