June 6, 2025
The labor market is supposed to be weakening in response to a variety of headwinds, but it is not doing so. Ditto for the economy. It continues to hang in there. At the beginning of the year Trump and Musk said that they were going to take a hammer to federal government employment. At the same time, Trump was going to close the border and deport huge numbers of illegal immigrants already in the country. Tariffs were expected to slow GDP growth. But with each passing month it appears that the damage to the economy has been minimal. Payroll employment continues to climb by a healthy 135 thousand per month. The unemployment rate remains at 4.2% which is generally regarded as “full employment”. After a rough start to the year with a 0.2% decline in first quarter, GDP growth for the second quarter seems likely to rebound by 5.0%. We believe that the combination of the mainstream media and social media has convinced most economists and the American public that the economy will soon be in or teetering on the brink of recession, and that the inflation rate will soar. Economists conclude that it is too soon to expect these bad things to happen by May but that they will become more evident in the second half of the year. Maybe. But it is also possible that economists continue to underestimate the strength and resilience of the U.S. economy.
Payroll employment climbed by 139 thousand in May which is virtually identical to what it has done for the past two years. It is hard to discern any particular softening of the labor market in response to the headwinds described above.
Federal government layoffs get a lot of press and there was a fear that DOGE would slash and burn the federal government payroll. That has not happened. Nobody seems to have pointed out that federal government employment is a tiny part of total employment in this country. To be specific, payroll employment is 160 million. Federal government employment is 3 million or just 2% of the employment pie. Neither Trump nor Musk has ever specified exactly how much shrinkage in government employment they would like to see, but an overall drop of 10% would represent significant decline. But a 10% decline would affect 300,000 workers. If that were to take place over the course of a year, it might reduce employment by about 25 thousand a month. But those workers are not going to be unemployed for long. Most will be quickly reabsorbed in the private sector so perhaps that reduces employment growth for the year by 10 thousand per month. That is virtually undetectable. What we know is that federal government employment was at its peak in January at 3,015 thousand. It is currently at 2,956 thousand workers. That works out to an average decline of 15 thousand per month. Hardly eye-popping.
Then there is the issue of illegal immigration. The idea was to close the border and dry up the flow of illegal immigrants into the U.S., and export vast numbers of illegal immigrants already in the country. Trump has been wildly successful in stemming the inflow. The number of border patrol “encounters” has been steadily decreasing since last summer, but in the past several months the border has effectively become closed. For example, in April of last year 250,000 people were apprehended at the border. In April of this year that number dropped to 25,000. That is a 90% decline. Trump was able to accomplish that without completing the border wall or calling out the Army and/or National Guard to police the border. He merely said that people in those caravans heading through Mexico with the hope of entering the U.S. would be quickly rounded up and returned to their home country. The caravans stopped. The border has closed.
ICE roundups of illegal immigrants also get a lot of headlines, but the reality is that deportation of illegal immigrants has had little impact on the labor market as evidenced by the average increase in payroll employment the last three months of 135 workers per month. Despite fears, employment has not slowed.GDP in the first quarter registered a decline of 0.2% which suggested that tariffs could plunge the economy into recession. But the reality is that businesses were racing to get goods into the country before the imposition of tariffs. Imports in that quarter surged by a record 43% and the trade deficit widened dramatically. In fact, the trade sector subtracted a whopping 5.9% from GDP growth in the first quarter. Because firms were looking ahead and trying to figure how many imported goods they might need for the next several months and tried to get them into the country by March, they clearly would need fewer imports than usual in the spring months. Indeed, imports decline by a record amount in April and the trade deficit for the second quarter seems likely to add as much to GDP growth as it subtracted in the first quarter. For what it is worth, following the 0.2% GDP decline in the first quarter, we anticipate GDP growth of 5.0% in the second quarter. Both growth rates are significantly distorted so perhaps the best way to sort through the distortions is to average growth for the two quarters which would imply a 2.4% GDP growth rate in the first half of the year. That compares to 2.5% GDP growth rate in 2024. The economy continues to hang in there.
While it is possible that the widely expected negative impact on the labor market and GDP growth will eventually materialize, each month that passes that the economy hangs in there should make us realize that our fear was overblown.
Stephen Slifer
NumberNomics
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