The U.S. labor market likely saw a pick-up in job growth in February, with the unemployment rate expected to remain steady at 4.0%. However, growing uncertainty around trade policies and substantial federal government spending cuts are raising concerns that these factors could erode the labor market’s resilience in the coming months.
The February employment report, due Friday, will be the first under President Donald Trump’s administration, and analysts suggest that the ongoing trade tensions are making it difficult for businesses to plan effectively. Since January, business and consumer confidence have dropped significantly, erasing the gains made after Trump’s election victory. This has coincided with a downturn in the stock market.
“The one thing employers hate most is uncertainty, whether it’s in regulation or supply chains,” said Jane Oates, senior policy advisor at WorkingNation. “It’s a really bad business atmosphere; we could be headed for an ugly spring.”
Nonfarm payrolls are expected to have increased by 160,000 jobs in February, up from 143,000 in January. However, the wide range of estimates—ranging from 30,000 to 300,000—reflects the uncertainty surrounding the impact of severe weather and wildfires in California during the prior month, which temporarily dampened payroll growth. Economists also anticipate revisions to December and January payroll data, which saw a combined increase of 100,000 jobs last month.
In early March, Trump escalated his trade war by imposing a new 25% tariff on imports from Mexico and Canada, and raising the duties on Chinese goods to 20%. However, goods from Mexico and Canada were exempted from the new tariff under a North American trade pact for a month. The impact of these tariffs could be further reflected in upcoming reports.
Government Spending Freeze and Layoffs
The February report is not expected to reflect the full impact of federal government layoffs, particularly those under Elon Musk’s new Department of Government Efficiency (DOGE), which is streamlining federal staff. However, layoffs and hiring freezes in federal agencies could affect government employment in the future, with some economists predicting a small decline of 5,000 to 10,000 federal jobs in March.
“We would not be surprised by a small decline in federal employment of 5,000-10,000 that primarily reflects the hiring freeze,” said Michael Pugliese, senior economist at Wells Fargo.
Many federal contractors and employees reliant on federal grants have already been impacted by recent funding freezes, further exacerbating the slowdown in low-wage sectors like leisure and hospitality, which have seen significant job growth in recent months.
Wage Growth and Economic Forecasts
The report is also expected to show a rise in average hourly earnings by 0.3%, following a 0.5% increase in January. This suggests the economy is continuing to expand, albeit at a slow pace. Annual wage growth is projected to match January’s 4.1% increase.
Despite these moderate job gains, the U.S. economy is facing headwinds. A drop in consumer spending, homebuilding, and a growing trade deficit linked to tariffs have led economists to downgrade their GDP growth forecasts. Estimates now suggest a growth rate of less than 1.5% annualized, down from around 2% the previous month. The Atlanta Federal Reserve now forecasts GDP to contract at a 2.4% rate. In contrast, the economy grew at a pace of 2.3% in the fourth quarter of 2024.
Federal Reserve’s Response
The stability of the labor market could give the Federal Reserve more time to keep interest rates unchanged, as policymakers closely monitor the economic impact of tariffs and immigration policies. In January, the Fed kept its key interest rate in the 4.25%-4.50% range after reducing it by 100 basis points since September. These cuts were part of a broader policy easing cycle designed to counteract economic downturns.
“This economy has shown itself to be surprisingly resilient during the pandemic recovery cycle, which is encouraging, but there are a lot of shocks now surging over businesses, including budget uncertainties and proposed tariffs on the scale that we have not seen since Smoot-Hawley in 1930,” said Brian Bethune, an economics professor at Boston College.
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