Nomura: Currently, the monthly increase in non-farm payrolls in the United States is 200,000, which is only equivalent to 100,000 before the epidemic

Many people have noticed a puzzling phenomenon in the US labor market over the past year - strong job growth continues, but the unemployment rate is not decreasing, instead it is rising.

As pointed out in a previous article by Wall Street News, the current non-farm employment data is highly inflated, with a large number of illegal immigrants entering the US border contributing more than half of the non-farm employment figures.

Major Wall Street firm Nomura also shares a similar view. Their latest report suggests that the impact of non-farm employment on the unemployment rate has been "halved".

Specifically, before the pandemic, the long-term average "balanced" non-farm employment growth rate was around 100,000 per month. If non-farm employment growth falls below this number, the unemployment rate will rise; conversely, the unemployment rate will decrease. Now, this "balanced" number has doubled to 200,000.

This also means that in order to maintain the unemployment rate, non-farm employment must grow at a faster pace, which could be seen by the market as a signal of an overheated labor market and rebounding inflation.

Non-farm Report Influenced by Illegal Immigrants

On Tuesday local time, Nomura analyst Rob Subbaraman released a report pointing out that over the past year, US non-farm employment growth has been strong:

In June, it was 206,000, averaging 222,000 over the past 6 months and 218,000 over the past 12 months.

Historically, such employment growth rates are usually seen as evidence of an overheated labor market, leading to a decrease in the unemployment rate.

However, by June this year, the unemployment rate had risen from 3.7% in December last year to 4.1%, higher than the low of 3.4% in April 2023.

This raises a difficult question: Why is the unemployment rate rising instead of falling despite strong non-farm employment growth?

According to Nomura's research report, economists such as the Brookings Institution, the San Francisco Fed, the Yale Budget Lab, and former Fed research and statistics director David Wilcox have recently come to the same conclusion: the massive post-pandemic immigration (including illegal immigration) has led to a surge in labor supply, but this has been underestimated in the non-farm report.

The Congressional Budget Office (CBO) raised its estimate of net immigration in 2023 from 1 million before the pandemic to 3.3 million, also projected for 2024. This translates to an increase of 192,000 net immigrants per month, with CBO assuming that about two-thirds of them will participate in the labor market.

In other words, out of the nearly 220,000 monthly new non-farm employment population, around 128,000 come from immigrants, accounting for over half. If these immigrant workers, especially illegal immigrants, are excluded, the US labor market would not appear as strong as it does today. NOMURA also stated:

Despite the strong non-farm employment this year, due to the sharp increase in immigrants, the growth rate of the labor supply in the United States has even exceeded the labor demand.

The Impact of Non-Farm Employment on the Unemployment Rate is "Halved"

According to Nomura's research report, the above economists estimated the "break-even" speed of non-farm employment growth, that is, the speed of non-farm employment growth that can keep the unemployment rate stable at the long-term natural level without causing unnecessary pressure on wage growth - the "balanced" non-farm employment growth rate.

The study found that before the epidemic, the long-term average "balanced" non-farm growth rate was about 100,000 people per month. However, after the epidemic, due to the large influx of immigrants, the labor supply has significantly increased, leading to an increase in the "balanced" non-farm growth rate. Currently, the long-term average "balanced" non-farm growth rate is about 240,000 people per month, more than twice as high as before the epidemic.

Nomura wrote:

The current 200,000 non-farm growth may be equivalent in effect to the previous 100,000, which means that faster employment growth is needed to maintain the unemployment rate unchanged.

The report also pointed out that the high level of the "balanced" non-farm employment growth rate may be a temporary phenomenon, and it is expected that this indicator will gradually fall back to a more normal level starting next year with the slowdown of the immigration wave.

This is because the current strong net immigration is unlikely to continue, partly due to the backlog of immigrants during the epidemic. If Trump wins the presidential election, this growth may quickly normalize.

Even without new legislation, the CBO expects net immigration to decrease from 3.3 million this year to 2.6 million in 2025 and 1.8 million in 2026.

This means that in the medium term, the "thermostat" of non-farm employment growth should return to normal.

In other words, by then, if non-farm employment can still grow at a rate of 200,000 per month, this will prove once again the hotness of the labor market