Amid a slew of disappointing data releases and fever-pitch anxiety over tariff policy and DOGE actions, the February jobs report offered a welcome reprieve and a signal of resilience. It may not be worth a whole lot, however, given that relevant policy changes have yet to visibly translate into the data.
The next several months are likely to see a steady softening in labor demand on account of tariff uncertainty on one hand, and first-, second-, and third-round effects from DOGE, on the other. In the direct impact category we place changes to federal employment via the deferred resignations deal (about 75,000 people) and other current and yet-to-be-announced reductions in workforce (RIF) at federal agencies. The latter total about 35,000 so far but are poised to escalate quite dramatically if what has been leaked in terms of “broad strokes” guidelines ultimately transpires. The deferred resignations should not show up in the payrolls report until October (since those affected remain on regular payroll through the end of September) but they may trickle into the household survey (from which the unemployment rate is derived), sooner than that given that respondents self-designate and may declare themselves unemployed ahead of the official deadline.
The second-round effects relate to the flow of government funding, which, while seemingly shielded from threatened freezing/cuts via court order, remain surrounded in considerable uncertainty. This uncertainty trickles down to not only state and local government level, but also private sector areas such as health and education. One would expect hiring intentions to slide materially in these categories until clarity and funding is restored (if it is restored, that is!).
Third-round effects speak to the negative demand shock resulting from the above such that unrelated business areas like eating out, travel, housing, etc., could experience softer demand and, in turn, calibrate lower their own hiring plans.
This need not be a permanent downshift, but it does appear to be the next leg in the labor market journey, at least until policy clarity returns. That’s probably months away. And so, while it is good that the February jobs report was roughly as expected, with 151k jobs added, our focus is on what comes next. By April, things could look materially softer. In fact, even the February data looked a little soft under the hood. For instance, the unemployment rate rose a tenth to 4.1% and the underemployment rate surged half a percentage point to 8.0%, the highest since October 2021. In a taste of what’s to come, federal employment declined by 10k, the most since June 2022. Then, that declined was followed by a full retracement the following month and a long string of almost uninterrupted big gains. This time is different, at least on that front. Within the private sector, gains in trade and transportation halved relative to January, while retail employment contracted after two unusually strong readings.
A less downbeat corollary here is that this is a potential boost to private sector labor supply that could help lower wage inflation a little further and diminish lingering concerns about inflationary pressures emanating from the labor market.
