Over the past several months, the health of the labor market has emerged as a key debate for financial markets. Just how close the economy is to maximum employment is a crucial consideration for monetary policy, particularly with the threat of a pickup in inflation over the coming months as companies increasingly pass through the costs of higher tariffs to consumers. A weaker labor market gives the Federal Reserve cover to modestly lower interest rates later this month even as inflation risk increases because tariff-driven inflation is not expected to persist.
However, inflation is not the only part of the Federal Reserve’s dual mandate adjusting to a new a regime: the labor market is also facing an adjustment as the pace of immigration into the U.S. has slowed considerably over the past several months. Border encounters have been running between 25,000 and 30,000 per month in each of the past six months according to U.S Customs and Border Protection data, well below the 225,000-250,000 average per month during the same six months in each of the previous three years. Although it takes several months for newly arrived immigrants to receive work permits, the 90% reduction in border encounters suggests that the incremental supply of workers has dramatically slowed in 2025.
The impact of immigration on the labor market is not a new phenomenon; in fact, it was one of the key drivers of the rise in the unemployment rate that triggered the Sahm rule in 2024. The surge in immigration was the primary reason why the elevated unemployment rate was overstating the degree of labor market softness. While this is no longer an issue, the unemployment rate falling over the past year highlights how shifts in immigration can impact the metrics commonly used to gauge labor market health.
We tend to focus on three key labor measures: jobless claims, job sentiment and wage growth. The first shows signs of strain while the latter two remain healthy.
Stock market information on the floor at the New York Stock Exchange (NYSE) in New York, US, on Monday, Sept. 8, 2025. Wall Street piled into bets the Federal Reserve will cut rates next week, with stocks rising on speculation that policy easing at a time when the economy is not in a recession will keep powering Corporate America. Photographer: Michael Nagle/Bloomberg
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For job sentiment, we analyze data in the Conference Board’s Consumer Confidence report, specifically the difference in the share of individuals reporting that “jobs are plentiful” versus “jobs are hard to get.” Deteriorations in consumer perceptions of the labor market tend to presage slowdowns in consumption as individuals hold off on marginal purchases given less confidence in their ability to find work if needed. This metric has been weak for over two years, which would traditionally be concerning. However, we believe this indicator has suffered from the post-pandemic “vibecession” where many sentiment surveys have been biased negatively without translating into actual changes of behavior.
Wage growth, meanwhile, has stabilized around 4% over the past year and a half—something of a goldilocks level consistent with the Fed’s 2% inflation target when productivity gains (of ~2%) are considered. Jobless claims have moved through their typical summer swoon and begun to normalize. Initial jobless claims indicate only a minimal pickup in layoffs and/or deterioration in labor conditions at present, a positive dynamic.
We also keep tabs on an array of labor data including job openings and the quits (and hires) rate. This data helps round out the picture of the labor market and currently paints an image of “low churn” with few firings but also less hiring occurring. After peaking above 12 million in 2022, the number of job openings as measured by the Job Opening and Labor Turnover Survey (JOLTS) has leveled off around 7.5 million over the past 12 months, suggesting employers are looking to keep hiring steady.
The quits rate has been steady around 2% over the past year after peaking at 3% in 2022, suggesting fewer workers are voluntarily leaving their jobs. This is consistent with a softer hiring environment, which is backed up by the hires rate similarly declining from its recent peak but holding steady over the past year.
The July and August jobs reports showed a slowdown in hiring that was not unexpected directionally but has been larger and quicker than anticipated. What was most surprising in these last reports were not the monthly prints themselves but the revisions to prior months, with June seeing a loss of 13,000 jobs — the first monthly decline since December 2020. These was the largest two-month revisions since 1968 outside of NBER-defined recessions.
The silver lining, however, is that the pattern over the past few months appears to indicate that job creation could hold steady or even pick up in the coming months. While any single month can be volatile and revisions can further change our understanding, hiring ground to a halt in May and June in the uncertain aftermath of the Liberation Day tariff announcements. However, July showed a resumption of hiring as visibility began to improve, and consensus expectations are for a similar pace of monthly hiring over the balance of the year.
Looking ahead, the hiring backdrop appears healthier given reduced uncertainty. Trade policy concerns have diminished over the past two months as a series of trade deals have been struck, and a loose template appears to be emerging that includes the use of import/export quotas and investment agreements alongside tariffs to achieve the administration’s trade policy agenda. Importantly, the “state of play” now has a much narrower range of outcomes, which should give greater comfort for corporate decision makers.
Uncertainty has also been reduced by the passage of the One Big Beautiful Bill in July, which clarifies questions around tax policy and provides incentives for corporations to invest while also boosting their free cash flow generation in many cases. The combination of incentives to invest and more cash to do so should ultimately lead to job creation, although this process does not typically play out overnight.
Jeffrey Schulze, CFA, is Director, Head of Economic and Market Strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice. Past performance is no guarantee of future returns. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.