“The formulation of a problem is often more essential than its solution.” – Albert Einstein and Leopold Infeld, “The Evolution of Physics”
“The formulation of a problem is often more essential than its solution.”
Over the last several years, the U.S. foreign-born labor force shifted from rapid expansion to outright contraction. From 2022 through 2024, it grew by roughly 1 million to 2 million workers a year. By July 2026, it was about 550,000 smaller than a year earlier. That reversal might help explain why recent labor data has puzzled some investors and economists. Weak employment growth alongside a low unemployment rate appears contradictory by historical standards but makes more sense when the labor supply itself is shrinking.
In Blog 93, Weak Jobs, or Just Fewer Workers?, we note that slowing immigration and a barely expanding labor force were making the old payroll breakeven of roughly 100,000 to 150,000 jobs per month obsolete. An April 2026 Federal Reserve paper went further. With immigration extremely weak and population aging a drag on participation, the paper estimates that the pool of available workers could grow by fewer than 10,000 per month in 2026, meaning the economy might now need almost no monthly job growth to keep the unemployment rate stable. A payroll number that once would have signaled significant weakness might now be consistent with a balanced labor market.
Recent household-survey numbers show how this can work in practice. From May through July, employment fell by about 594,000, even as the unemployment rate declined to 4.1% from 4.3%. The reason is that the labor force shrank even more, declining by roughly 1 million. Workers who leave employment and exit the labor force are no longer counted as unemployed. The foreign-born labor force does not explain that entire decline, but its 550,000 year-over-year decrease shows that one important source of labor supply has already moved into reverse.
Immigration is not the only constraint on labor supply. Aging and retirement are removing workers from the other end of the labor force. Employment among Americans 55 and older fell by roughly 116,000 from May through July, while Federal Reserve research shows the employment-to-population ratio for older workers remains well below its 2019 level. A retiree and a laid-off worker both reduce employment, but only the laid-off worker who continues looking for work is counted as unemployed. Retirement can therefore reduce employment without raising unemployment the way layoffs typically do.
These developments make both payroll growth and unemployment harder to interpret as recession signals. Weak payroll growth can look more alarming than it is if the economy needs almost no new jobs to absorb incoming workers. At the same time, a low unemployment rate can look more reassuring than the decline in employment suggests if workers are leaving the labor force altogether. The statistics themselves have not changed, but the labor-supply assumptions behind their historical interpretation have.
The foreign-born labor force has gone from adding more than 1 million workers a year to shrinking outright. Investors have spent decades using payroll growth and unemployment to judge recession risk, largely during periods when the labor force was expanding. With the supply of workers now contracting, those same indicators might no longer carry the meaning they once did.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
