Despite their importance in lung health and disease, it remains unknown how human alveolar macrophages develop early in life. Here we define the ontogeny of human alveolar macrophages from embryonic progenitors in vivo, using a humanized mouse model expressing human cytokines (MISTRG mice). We identified alveolar macrophage progenitors in human fetal liver that expressed the GM-CSF receptor CD116 and the transcription factor MYB. Transplantation experiments in MISTRG mice established a precursor–product relationship between CD34−CD116+ fetal liver cells and human alveolar macrophages in vivo. Moreover, we discovered circulating CD116+CD64−CD115+ macrophage precursors that migrated from the liver to the lung. Similar precursors were present in human fetal lung and expressed the chemokine receptor CX3CR1. Fetal CD116+CD64− macrophage precursors had a proliferative gene signature, outcompeted adult precursors in occupying the perinatal alveolar niche, and developed into functional alveolar macrophages. The discovery of the fetal alveolar macrophage progenitor advances our understanding of human macrophage origin and ontogeny.