Over 7 million Americans are unemployed — the most since 2017. Why it won't get better anytime soon.

The number of unemployed Americans reached 7.24 million in May, the highest level since 2017 excluding the pandemic era, signaling a potential weakening in the labor market. While the unemployment rate remains relatively low at 4.2%, it has risen nearly a full percentage point from recent lows, and the difficulty in finding work is reflected in surveys and increased duration of unemployment benefits. Businesses are showing reluctance to hire due to ongoing trade war uncertainties, contributing to a slowdown in job creation from 232,000 new jobs at the start of the year to 135,000 in the March-May period.

Analysis

The U.S. labor market is exhibiting clear signs of softening, as evidenced by the number of unemployed individuals reaching 7.24 million in May, the highest figure since February 2017 if the pandemic period is excluded. This represents a notable increase from the 23-year low of 5.75 million unemployed recorded previously. While the unemployment rate stands at 4.2%, which is still relatively low, it has risen almost a full percentage point from its recent half-century trough of 3.4%. Further indicators of a cooling labor market include the number of individuals collecting unemployment benefits hitting a four-year high and the extended duration of job searches. Scott Anderson, chief U.S. economist at BMO Capital Markets, noted that "cracks in the façade of labor market resilience are now starting to show." Businesses are reportedly hesitant to expand their workforce, citing uncertainties linked to ongoing trade wars that have impacted sales outlooks and overall economic confidence. This reluctance is reflected in a deceleration of new job creation, which slowed to an average of 135,000 per month between March and May, a significant drop from 232,000 in January. Companies appear to be adopting a wait-and-see approach regarding hiring, pending resolutions in trade conflicts.

Key Decisions for Investors

• Investors should closely monitor upcoming labor market data, particularly jobless claims and nonfarm payrolls, for further confirmation of a weakening trend, which could impact consumer spending and overall economic growth.
• Given the expressed business caution linked to trade uncertainties, consider a more defensive posture in sectors sensitive to economic cyclicality and scrutinize companies heavily reliant on robust domestic hiring until there is greater clarity on trade policy.
• Factor in the potential for increased market volatility if these labor market conditions persist or deteriorate, and assess the need for adjustments to portfolio allocations or hedging strategies to mitigate downside risk.