Preview: Jobs Report Could Signal Rapid Turn in Labor Market

In advance of Friday’s highly anticipated jobs report, CEPR Senior Economist Dean Baker released the following statement:

“It is remarkably dangerous to treat economic policy like a reality TV show. This jobs report could signal a rapid turn in the labor market. We went from perhaps the strongest labor market in half a century to one marked by uncertainty in almost every sector. While we are not likely to pick up much of the effect of the DOGE cuts, we should see some impact, particularly on the hiring side. Many businesses have put hiring plans on hold; this is especially true in the healthcare sector, but we could see similar trends with state and local governments, universities, and other sectors that rely on federal support. It is not out of the question for job growth to be close to zero in February, and we may also see a modest uptick in the unemployment rate.”

Baker’s full analysis appears below. Read it online here.

February 2025 Jobs Preview: What to Expect in the Jobs Report

The February employment report is the first of the Trump administration. While we are not likely to pick up much of the effect of the DOGE cuts, we should see some impact. Remember, the reference period is the week/pay period that includes the 12th. This is before most of the firings went into effect, and there was no noticeable uptick in the unemployment insurance claims at that point (although we did see an uptick later in the month).

However, we are likely to see an effect on the hiring side. Many businesses have put hiring plans on hold, as they wait to see what DOGE will try to cut and what the courts will uphold. This is especially the case in the healthcare sector, which had been the largest source of job growth in the recovery, averaging over 50,000 new jobs a month in the last year. A large portion of the funding for hospitals, doctors’ fees, and nursing homes comes from Medicaid and other programs that may be in DOGE’s crosshairs. As a result, we can expect employers in the sector to be very cautious in taking on new workers.

There is a similar story with state and local governments, which also were a leading source of job growth in the last year. They are concerned that they will not be seeing federal grants that had been promised. Universities are also looking at large cutbacks in federal support and feel the need to be cautious about hiring.

With the key sectors supporting job growth sharply slowing hiring, job growth is likely to be close to zero in February. This may also lead to a modest uptick in the unemployment rate, as people entering the labor force or losing jobs find themselves unable to find new ones. The unemployment rate may tick up to 4.1 percent, or even 4.2 percent.

Sharp Slowing in Immigrant Employment

The new population controls make it difficult to do year-over-year comparisons (the data are not seasonally adjusted) of employment of immigrants, but it is possible to do a crude workaround to get ballpark numbers. If we assume that the increase in the number of people identified as Hispanic or Asian added by the population controls are immigrants, and we apply the employment-to-population ratio for immigrants to this number, we can get a rough estimate of the increase in employment that is due to the population controls.

The new population controls added a total of 2,121,000 people identified as either Hispanic or Asian. Applying the 63.0 percent employment-to-population ratio to this number implies that it added 1,336,000 to the employment number for non-native workers in January. Correcting for this, employment of non-native workers would have been 727,000 higher in January 2025 than in January 2024. The year-over-year increase had been well over 1,000,000 for most months in 2024, peaking in February at 1,694,000.

With this adjustment, the year-over-year figure is likely to show a far smaller increase in February, due both to Trump’s deportation threats and also the sharp slowing in immigration by the change in the Biden administration’s policy last June.

Wage Growth Could Slow

The strong labor market of the Biden years led to healthy wage growth, which was translating into strong real wage growth in the last year and a half as inflation slowed. The unemployment rate will still be low in February, even if there is a modest uptick, but workers fearful about future job prospects may be reluctant to push for pay increases. The monthly data on wages are erratic, but it is likely we will see some evidence of slowing wage growth in the February report.

Share of Unemployment Due to Voluntary Quits

One of the measures reflecting workers’ confidence in the state of the labor market is their willingness to leave a job before they have a new one lined up. This measure had already been relatively low given the near 4.0 percent unemployment rates we have been seeing, but that could reflect the fact that workers were relatively satisfied with their jobs after massive shifting in 2021-2023. We may see a notable fall in this number from the 13.2 percent share in January.

Hours and Productivity

The index of aggregate weekly hours fell 0.2 percent in January. This was due to a possibly weather-related (or LA fire related) reduction in the length of the average workweek. With weak employment growth, we are likely to see at best a modest increase in aggregate weekly hours in February.

This would ordinarily imply a good story for productivity growth, which has been strong since the pandemic. However, the most recent data on consumption, trade, and housing imply weak and possibly negative GDP growth for the quarter. We are still early in the quarter, but if the economy is actually shrinking, we are not likely to have a strong quarter for productivity.

Manufacturing and Construction

These highly cyclical sectors are both likely to show weakness in February. Manufacturing employment had already been trending slightly downward, losing 105,000 jobs over the last year, as high interest rates took a toll on durable goods purchases and investment.

Construction has also weakened in recent months, adding an average of just 6,000 jobs a month since September, down from 18,000 a month in the prior 12 months. Employment could turn negative in February as housing remains weak, the factory construction boom has peaked, and many projects in both the private and public sector are put on hold.

Weak Job Growth in Most Sectors

With the health care and state and local government sectors both likely showing weak growth in February, it is difficult to see what sectors can pick up the slack. Retail added a very strong 34,300 jobs in January, but this was likely a fluke of seasonal adjustment as fewer workers hired for the holiday season meant that fewer were laid off in January.

Restaurant employment may see a bounce back after being depressed by the LA fires and unusually bad weather in January. Employment in professional and technical services is likely to be weak, as many companies put hiring plans on hold. There could be a good story for the temp help sector as employers look to get additional labor without making long-term commitments.

Uncertainty Takes a Big Hit to Labor Market in February

Apart from the pandemic, most of us have probably never seen such a rapid turn in the labor market as we are likely witnessing now. We went from perhaps the strongest labor market in half a century to one marked by uncertainty in almost every sector. Perhaps we will get a clearer picture of the economy’s direction in the months ahead, but for now, much is up in the air and it is not a good environment for businesses to make plans.