Labor market slowing

Bottom line

Headline nonfarm payrolls rose by a lighter-than-expected 151,000 jobs in February (consensus at 160,000 and Federated Hermes at 170,000), due to the slowing economy, brutal winter weather and fiscal-policy uncertainty. But that was an improvement over January’s downwardly revised gain of 125,000 jobs. Private payrolls had a similar experience, posting a slightly weaker-than-expected gain of 140,000 workers in February (consensus at 145,000), up sharply from a downwardly revised increase of only 81,000 in January.

DOGE impact small so far Overall government payrolls grew by only 11,000 jobs in February, the weakest monthly gain in a year. State and local hiring rose by 20,000, offset by a decline of 10,000 on the federal level. While the latter is the largest decline since June 2022, it is well short of the positions that Elon Musk and DOGE intend to eliminate.

Household plunge paces employment and participation rates Household employment plummeted by 588,000 jobs in February, its worst performance in more than a year. But some of that may be related to the rightsizing of January’s massive 2.234 million increase, an unsmoothed variant of the Labor Department’s final benchmark revision for the 12 months ended March 2024. Compared to January, the unemployment rate rose a tick to 4.1% from 4.0%, the labor impairment rate leapt to 8.0% from 7.5% and the participation rate slipped to 62.4% from 62.6%.

(More) brutal winter weather The Commerce Department reported that the cold and snowy winter weather seen across the country forced 404,000 workers out of work in February, on the heels of 573,000 sidelined in January. The historical average for February over the past half century is 315,000, so last month’s bad weather resulted in 89,000 more job losses than normal.

Fed back in the game? From 4.8% in mid-January, benchmark 10-year Treasury yields plunged to 4.1% earlier this week as the economy slowed and fiscal policy uncertainty grew before rebounding to 4.3% today. The growing consensus on Wall Street last month was that the Federal Reserve may be done cutting rates, and their next move may be a hike. We disagreed, expecting a quarter-point cut in June and another sometime in this year’s second half. After today’s data, however, the bond vigilantes have turned on a dime, seeming to believe policymakers may cut three times this year. That volatility has sparked a much-needed 8% correction in the S&P 500 over the past fortnight.

Other key labor-market indicators weak:

• ADP private payroll survey February added a much weaker-than-expected 77,000 jobs (consensus at 140,000), the smallest gain since last July, compared with a healthy January gain of 186,000. Workers who changed jobs last month saw their wages rise by 6.7% year-over-year (y/y), down slightly from 6.8% in January and less than half the cycle peak of 16.1% in April 2022. But those who remained in their jobs earned a more modest 4.7% y/y raise in February, which was unchanged in five of the past six months but well below the peak of 7.8% in September 2022.
• Initial weekly jobless claims This high-frequency leading employment indicator spiked to a four-month high of 242,000 for the week ended February 22, above February’s survey week that ended February 15 at 220,000 claims. Unemployment applications filed by federal employees in Washington, D.C., and Virginia have risen as the Trump administration has been shrinking government employment levels.
• Challenger, Gray & Christmas layoffs report Employers announced plans to let 172,017 employees go in February—more than double the amount from a year ago and triple that of January. Government downsizing accounted for 36% of the total layoffs last month, with retail second at 23%.

Unemployment & labor impairment rates rise, participation rate falls Household employment (an important leading employment indicator) plunged by 588,000 workers in February, its worst monthly performance since it lost 762,000 jobs in December 2023. That compares with an outsized gain of 2.234 million workers in January 2025 and an increase of 478,000 jobs in December 2024. Why such a big gain? In February, the Commerce Department’s final benchmark revision adjusted the March 2024 payroll level down by 598,000 workers on a non-seasonally adjusted basis. That reduced the size of the labor market in the largest final downward revision since 2009, so February’s household employment gains rose off a much lower base.

But with the sharp decline in household employment in February 2025, the unemployment rate ticked up to 4.1%. While that’s below July’s three-year high of 4.3%, it’s still well above April 2023’s 53-year low of 3.4%. The labor impairment rate leapt to 8.0% in February (its highest reading since 2021) from 7.5% in January, well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate fell to a two-year low of 62.4% in February from a four-month high of 62.6% in January. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

Wage inflation mixed, hours worked decline Average hourly earnings rose by an in-line 0.3% month-over-month (m/m) gain in February, down from a 0.4% m/m gain in January. But earnings grew at a 4.0% y/y pace in February, up from 3.9% y/y in January. The Fed is targeting a 3% gain. Average weekly hours worked remained steady at 34.1 in February, down from 34.2 in December and 34.3 in November. Each change of 0.1 hour worked is the equivalent of subtracting an estimated 350,000 jobs from the economy. This is important, as employers tend to cut hours before they downsize staff.

K-shaped recovery gap widens The unemployment rate for highly educated workers rose to 2.5% in February, up from 2.3% in January 2025 and up from September 2022’s cycle low of 1.8%. But the unemployment rate for less-educated workers leapt to 6.0% in February 2025, up from 5.2% in January, and well above its 31-year low of 4.4% in November 2022. Cold winter weather negatively impacted hiring trends in leisure & hospitality, temporary help and retail.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 12,000 jobs in February, after losing 10,000 jobs in January. This sector has lost jobs 32 times out of the previous 34 months.
• Manufacturing added a stronger-than-expected 10,000 jobs in February (consensus at 3,000), after losing jobs in five of the previous seven months.
• Construction added 19,000 jobs in February, up from only 2,000 jobs in January, after adding 15,000 jobs in December and 6,000 in November. In the aftermath of the hurricanes and the wildfires, we expect construction to accelerate in the spring from rebuilding.
• Retail lost 6,000 jobs in February, after adding a strong 30,000 jobs in January and 34,000 jobs in December, reversing losses of 14,000 jobs in November and 7,000 in October. The holiday retail season was strong, but we’re expecting a weak start to 2025.
• Leisure & hospitality lost 16,000 jobs in February and 14,000 jobs in January, likely due to bad weather, after posting strong gains of 47,000 jobs in December and 54,000 in November.

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