It’s a bleak job market for new college grads. These are the unluckiest.

The challenges the Class of 2025 face in securing a job provide a glimpse at the troubles brewing under a still relatively strong labor market—and how they could spill over into the broader economy over time.

For the first time since 1980, recent and new college grads have a higher unemployment rate than the national average—close to 6% versus the national average of 4.2%, according to Oxford Economics. Typically, college graduates fare better than the average employee, especially during downturns. But that isn’t the case for 22- to 27-year-olds this year.

The uncertainty around trade and other policies, as well as the cuts by Department of Government Efficiency (DOGE) and university funding, have led many companies to hit pause on any big decisions—including hiring—as they try to assess how much potential trade-related price increases they can absorb or pass on, and how much help they could get from the fiscal tax bill.

Broadly, unemployment remained steady in May at a rate of 4.2%, but the number of jobs the U.S. added slowed to 139,000, reflecting some of the uncertainty among employers.

Bank of America U.S. economist Shruti Mishra says the U.S. labor market is in the middle of a “low hiring, no firing" situation but are still scarred from the difficulty staffing back up after the pandemic, which led to a trend of “labor hoarding."

“Firms may not fire workers just yet because they want to see how policy unfolds: Tariffs could be a nothing burger with de-escalation and firms also know they could get a fiscal bill by the fourth quarter that has measures related to capital spending that will help companies restart investment," Mishra tells Barron’s.

The result: A two-sided jobs market. Those who have a job see the market as relatively strong and chances of losing the job for now low, and those without one are struggling. Job postings on Handshake, used by many college placement offices, have declined by 15% over the past year, while the number of applications per job has increased by 30%.

Even though new college graduates account for just 5% of the labor force, they have had outsize impact on the unemployment rate. Oxford Economics Senior U.S. Economist Matthew Martin estimates that 85% of the rise in the unemployment rate since mid-2023 is concentrated in new market entrants.

“The hiring rates are much lower than what you would expect with a 4.2% unemployment rate," says Claudia Sahm, chief economist at New Century Advisors, which manages investments for nonprofits and pensions. “Recent grads have a canary in the coal mine element."

Sahm sees a disconcerting setup for what could come: The already low hiring rate married with extra costs and uncertainty hitting companies could mean the unemployment rate rises quickly if layoffs happen.

Often unemployment rates peak after a recession is already over, as companies tend to cut costs and take other steps before resorting to layoffs. That is one reason economists keep tabs on other earlier indicators of trouble, and some cracks are appearing. Job growth in white-collar sectors like finance, insurance and professional services are slowing, which is uncommon outside of a recession, Bank of America’s Mishra says.

Yet output continues to grow even as employment slows, signaling the possibility something else is at play. “It could be that white-collar positions, especially in tech and finance, will probably see the first impacts of AI since these sectors are likely to be among the first to take jump into AI," she added.

Take the prospects for computer science and math graduates hitting the market: Employment for those 27 or older with those majors is up 0.8% since 2022, but recent grads with these backgrounds are faring much worse. They have seen an 8% decline in employment compared with graduates in other fields, who have a 2% increase in employment, says Oxford Economics’ Martin.

Beyond technology, economists see other potential signs of weakness. Healthcare and private education have accounted for the majority of job gains in recent months, but DOGE and other government-oriented policies are targeting these sectors.

The overall impact may become more tangible in the third and fourth quarters, as companies deal with rising costs—whether by absorbing them, passing them on or cutting expenses, including possibly jobs.

“The biggest risk to our outlook of moderating growth is that the slow hiring and no firing transitions into mass layoffs that take us from a stagflation situation into a recession," Mishra says.

Another concern is the outlook for the Plan B for some graduates—remaining in school for an advanced degree—also looks more uncertain given the threat of funding cuts to universities.

“You can’t understate how serious the threat to universities is right now," says Matthew Nestler, senior economist at KPMG. “Their business model is truly facing an existential threat. That means not refilling postdoctoral positions and PhD candidates getting their offers rescinded. This is an odd combo of labor market uncertainty with low hiring and the main channel where students can turn coming down."

This complicated backdrop could mean a prolonged period of unemployment for recent grads. Studies have shown that graduates who start work during a recession can earn less for at least 10 to 15 years than those who enter during a more prosperous time.

While the economy isn’t in a recession, for college grads looking for a job it may just as well be. The question is whether their experiences spillover into the broader economy.

Write to Reshma Kapadia at reshma.kapadia@barrons.com