The first two months of President Trump’s new administration have been a whirlwind of policy changes. Just this week, for example, broad-based tariffs on Mexico and Canada were enacted and subsequently revoked in just 48 hours. These abrupt changes, on top of the wide-reaching efforts by the Department of Government Efficiency (DOGE) to reduce the federal workforce, are causing a sharp increase in economic uncertainty.
Economists at the Federal Reserve Board have constructed an index to measure this uncertainty in real-time by analyzing sentiment in newspapers, earnings calls, and tariff rates. It’s at an all-time high, reflecting the widespread ambiguity of the future of U.S. trade policy.
Even with this in the backdrop, the labor market added 151,000 jobs in February, coming in just shy of expectations. But the bigger picture remains strong—job growth has averaged nearly 200,000 over the past three months, signaling a resilient start to 2025. The unemployment rate edged up to 4.1%, but it remains near historic lows.
One potential warning sign is the steady rise of part-time workers that would rather have full-time work, termed “part-time for economic reasons” by the Bureau of Labor Statistics. Either these workers’ hours were reduced, or they were unable to secure full-time employment. Employers may decide to cut back hours or reduce full-time hiring in response due to the economic environment, a potential leading indicator of future labor market weakness.
DOGE Blitz
This morning’s jobs report has indicated two things: first, the labor market is growing at a remarkably steady rate, shrugging off the short-run uncertainty of the new administration. While job growth continues to be healthcare-heavy, transportation, construction and information have all had several positive months recently – a steady rebound from last summer’s low.
The second is that DOGE’s efforts to reduce the size of the federal workforce are materializing: employment in the federal government fell by 10,000 last month. This is the largest one-month drop since June of 2022. On Thursday, the Department of Labor’s unemployment claims data (a proxy for layoffs) also indicated that over 1,600 Federal workers filed new claims. The full impact of this initiative will take many months to unfold in the data – but this is the first sign of what’s to come.
Sector Growth
Healthcare is still the leading sector in job growth, making up a third of total employment growth in February. This is no surprise; healthcare has been the powerhouse of the labor market for the past few years, even as other industries have stumbled. However, other sectors showed up last month as well. Construction, information, and transportation all posted growth, continuing to rebound from a slow summer in 2024.
Beyond the federal government contraction mentioned above, losses occurred in leisure and hospitality and retail trade, perhaps due to slowing winter consumption.
Another way to think about the breadth of job growth is the “Payroll Diffusion Index” – which measures the number of sectors either expanding or contracting. The 3-month index recently rose to a two-year high, indicating more industries are expanding employment rather than contracting – a welcome sign after a summer blip.
Where does this leave the Federal Reserve?
The labor market is mostly healthy – 6-month job growth is above 190,000. Wage growth is healthy, though potentially sticky. In the upcoming interest rate decision, and in the months to come, the Fed’s attention will be narrowly focused on the inflationary impacts of trade policy and whether it raises consumers’ expectations of price growth over the next two years. The worst-case scenario would be higher inflation combined with weaker economic growth – stagflation reminiscent of the mid-1970s.
What does this mean for recruiters?
While the labor market has shifted from tight to balanced, new recruiting challenges have emerged. Businesses may begin to push back their 2025 hiring plans in response to shifts in economic policy and consumers may raise their outlook on inflation in the future, all impacting the recruiting funnel. Despite this, in the short term the labor market continues to grow at a healthy pace.
