In some ways, the February jobs report does not look very unusual. Payrolls rose by 151,000, which is quite in line with expectations. The unemployment rate is 4.1%, well within the range it has been in for many months.
But a closer look at the numbers suggests that the cuts in federal employment and among contractors/grantees under President Donald Trump are beginning to appear in the national labor market, as are the dampening effects of the chaos and uncertainty that they have created on consumer spending.
Effects Of Cuts And Uncertainty
Federal government employment dropped by 10,000, and jobs in professional services dropped by 2,000. The latter likely reflects the frozen funding of many contracts and research grants. These drops are modest so far but are likely to grow in magnitude next month and beyond. Employment in leisure and hospitality as well as retail trade also fell a bit, perhaps reflecting the dampening effects on spending of declining consumer confidence.
The household survey shows a drop in reported employment of 600,000. Nearly two-thirds of that decline (385,000) is driven by people leaving the labor force, though the numbers of unemployed people rose by 200,000 as well. The extent to which these numbers reflect federal cuts plus chaos and rising uncertainty, as opposed to pre-existing factors, is hard to infer, though the former likely contribute at least somewhat to the declines we see. Again, we will probably see more of this next month.
Coming Effects Of Tax Cuts, Tariffs And Deportations
But the future path of the labor market this year and beyond are very hard to predict. On the one hand, Trump’s federal workforce cuts (if the courts allow them to last) and their impacts on contractors and grantees will be a drag on the labor market, a Washington Post column argues, as are the uncertainty and drops in consumer confidence that they create. On the other hand, the very large tax cuts that are coming later this year — some of which will simply extend the status quo while others will be new — will likely bolster spending and job creation.
And the effects of new tariffs on imports and deportations of immigrants are very uncertain as well. The effects of tariffs (including retaliation against our exports abroad) and deportations will likely be stagflationary — adding to consumer prices but also disrupting industries and jobs that depend on exports and immigrant workers. These will reinforce the inflationary effects of the coming tax cuts while possibly offsetting their positive effects on spending and employment.
Of course, we really do not know the extent to which tariffs and deportations will rise and how long they will last. The Trump administration’s implementation of new tariffs has been very erratic, and he appears to pull back whenever their negative effects become apparent. Are they just short-term bargaining chips, designed to pressure other countries to reduce their tariffs on us (or protect the border) and sign new trade deals, are does Trump intend for them to remain permanently in effect? When the costs and economic disruptions of large immigrant deportations become apparent, will he keep ordering them?
And, if it appears that inflation is on the rise in a lasting way, the Federal Reserve Board will have no choice but to keep interest rates high — though policymakers will move more gingerly to raise them if there are other signs of declining economic activity. Higher interest rates will reduce business investment and increase federal interest payments on the debt, which will balloon as a result of these actions.
Net Effects?
Going forward, the only thing we know with certainty is that there is great uncertainty about the future of the job market and the economy, this year and beyond. The jobs reports next month and afterward, plus other indicators of economic activity, will hopefully shed more light on exactly where we are headed.