When Will Unemployment Go Back To 5%

The last time unemployment was 5% was in August 2021. The job market was rebounding from the COVID-19 pandemic, which had driven the jobless rate to 14.8% in April of the previous year. Economists often refer to 5% as “full employment.” Above that level, there is a possibility of an inflationary increase. The jobless rate was 4.2% in July. It is up a fraction from 3.4% in April of last year.

Economists worry that the 7% jobless rate will remain a risk late in the year or into the early part of 2026. That is when, some experts believe, tariffs will begin to push inflation up rapidly, in the direction of the last recession, when the jobless rate reached 10% in October 2020. It is doubtful that the figure will reach anywhere near that level.

Several think tanks believe tariffs could increase unemployment by between 0.7% and 2%. At a 2% increase, the economy enters a full recession. The jobless rate is not the only problem. High inflation hits discretionary spending. A decline in discretionary income results in a decline in GDP. The ripple effect hits home prices, which were the major problem with the Great Recession’s economy

Among the most likely of the CPI components that will increase in the prices of food, much of which comes from Mexico. An increase in lumber prices, particularly from Canada, would hit home repair and new construction. New and used vehicle prices would rise because many of the cars and components in vehicles are from Mexico. Apparel costs would increase because a significant portion of clothing is manufactured in China.

The one CPI most likely to fall is energy. There is already an abundance of oil, the price of which has dropped from $80 at the start of the year to $62 recently.

A Reuters poll from two months ago put the odds of a recession due to tariffs at 45%. The job market from now into 2026 could be rough, if that is correct.