ORLANDO, Florida, June 10 (Reuters) - Seismic shifts in

immigration are distorting the U.S. employment picture, making

it harder for investors and policymakers to know exactly how

much the labor market is actually slowing.

Assuming the Trump administration makes good on its pledge

to reduce immigration, either by stopping the flow of people

coming into the country or by deporting many already here, the

labor supply will shrink.

The long-term impact of lower immigration is generally

agreed to be negative, as new workers are needed to replace

retirees, fill job vacancies and drive economic growth. Over

time, fewer new workers will likely mean lower growth.

But in the short term, a smaller pool of workers results in

a tighter labor market, which keeps a lid on the unemployment

rate, albeit artificially and probably temporarily. This may

already be playing out.

Figures released last week showed that employment in May

fell by 696,000 jobs. That's the biggest single monthly decline

since the historic losses seen during the pandemic in early

2020. Some economists argue that the recent drop is a

consequence of Trump's immigration crackdown.

Nonfarm payrolls rose 139,000. Meanwhile, the unemployment

rate held steady at 4.2%, which though higher than it was two

years ago, is still historically low by any measure.

All else being equal, this points to a tight labor market,

which should put upward pressure on wages and perhaps even

warrant a more hawkish policy stance from the Federal Reserve.

But that is almost certainly a misreading.

When labor supply and the labor force participation rate

fall, this brings down a country's so-called 'breakeven' job

growth. That's the number of net new jobs the economy needs to

keep up with growth in the working-age population and maintain a

steady unemployment rate.

That figure is falling, and if the Trump administration

toughens up its anti-immigration policies further, this decline

is likely to accelerate.

LOWER FOR LONGER

According to economists at Morgan Stanley, breakeven

employment growth averaged 210,000 jobs a month last year, and

is averaging 170,000 so far this year. They reckon it will fall

to 90,000 by the end of this year and 80,000 next year.

Ryan Sweet, chief U.S. economist at Oxford Economics, goes

further, estimating that the breakeven rate is "quickly

approaching" 50,000 jobs a month due to weakening labor supply

growth, primarily because of reduced immigration.

"The unemployment rate can remain low, but for the wrong

reasons," Sweet says.

If these projections prove accurate, monthly employment and

job growth could continue to slow without raising the

unemployment rate. The contradictory signals this sends could

create confusion for both investors and policymakers.

In his press conference after the most recent Fed policy

meeting, Chair Jerome Powell repeatedly told reporters that the

labor market is "solid". The unemployment rate "remains low,"

and the labor market is "at or near maximum employment."

If these headline indicators are the gauge, Powell is

absolutely correct. But he also stressed that policymakers are

looking at the "whole huge array" of labor market indicators for

a truer guide.

One of those inputs in the months ahead will no doubt be net

immigration. And that could generate significant uncertainty, as

there are huge gray areas and wide margins of error when trying

to estimate net immigration and its impact on the labor market.

In January, the non-partisan Congressional Budget Office

projected net immigration of 2 million people this year and 1.5

million next year, down from an estimated 3.3 million in 2023.

With Trump seemingly hardening his stance on immigration, those

projections could turn out to be far too high.

Morgan Stanley's economists just slashed their immigration

forecasts to 800,000 this year and 500,000 next year. If these

figures turn out to be closer to reality, we could soon be

looking at a "tight" labor market with monthly payrolls gains of

well under 100,000. Pity the poor Fed Chair who has to

communicate policy in that environment.

(The opinions expressed here are those of the author,

a columnist for Reuters)

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