US nonfarm payrolls preview: robust job market

Resilient labour market: The forthcoming nonfarm payroll report this Friday should not change the Fed’s view of a strong labour market, nor should it provide any reason to cut interest rates anytime soon. We expect the unemployment rate to remain steady at 4.0% (as does the Bloomberg consensus), which will likely ease some of the recent concerns around US economic growth. However, we anticipate employment to rise by 120k in February – below the consensus estimate of 160k – as some employers likely froze hiring plans amid elevated uncertainty last month. That said, it is important to emphasize that the breakeven rate (the monthly employment gains required to keep the unemployment rate steady) is likely just above 100k this year, compared to around 200k last year. This is due to slower labour force growth in 2025, driven by a slowdown in immigration, the key source of labour supply in the US. Therefore, for this year, a figure around 100k should not be interpreted as a “weak” labour market, but rather one that is “in balance.”

Additionally, the San Francisco Fed estimates that the unusually cold weather in January (the coldest January since 1988) reduced the headline nonfarm payrolls print for that month by 84k jobs. So, even if the February reading comes in well below consensus and the breakeven rate, the weather-adjusted 3-month moving average would remain above the 166k average monthly employment gain in 2024.

Federal layoffs will not impact February’s results: The Department of Government Efficiency (DOGE)-driven job cuts will not appear in the February nonfarm payrolls, although they have already started to show up in unemployment insurance data (see Charts 1 and 2). Those who accepted the “deferred resignation” offer (around 75k people) will remain counted as employed until September. Only in October will the nonfarm payroll data reflect them as no longer employed. As for the recently laid-off federal employees, almost all of them most likely received pay during the reference week of the payroll survey (10-14 February). So, they will still count as employed in February, possibly even in March if they receive a 4-week severance.

Pay attention to immigration, not DOGE layoffs:Immigration policy has a far greater impact on the labour market than DOGE-related layoffs (for more see US: misplaced concerns about a growth scare). We expect labour supply to decline rapidly due to restrictive immigration policies, meaning any marginal increase in supply from federal layoffs will not create significant slack. Immigrants have accounted for nearly all the gains in the labour force since the pandemic. In 2024, only 49k out of 2 million job gains (2.5%) were from federal employees, while illegal immigrants were likely responsible for more than half of the expansion in employment. It is also worth noting that most government hiring occurs at the state and local levels, which drove 20% of employment growth in 2024 — nearly ten times more than federal jobs. In an extreme scenario, even if federal layoffs reach a total of 300k this year and all of them move into unemployment, it would only increase the unemployment rate by 0.2 ppt, from 4.0% to 4.2% — right in line with the Fed’s long-run estimate of maximum employment.

This, too, shall pass: The recent pessimistic consumer outlook on the labour market in the University of Michigan and Conference Board surveys (see Chart 3) is largely a reaction to federal layoffs and tariff-induced stagflation fears, which should prove temporary. The Fed will not place much emphasis on these concerns, as the overall labour market conditions are what truly matter. The US labour market data is extensive, allowing for the construction of both ultra-bullish and ultra-bearish views by focusing on specific indicators. To filter through the noise, the Fed will continue to rely on key metrics (in addition to nonfarm payrolls and the household survey), such as the Kansas City Fed’s labour market conditions indicator (see Chart 4) and the New York Fed’s labour market tightness measure (the HPW index). The message from these aggregate indicators is clear: The labour market remains solid and continues to drive economic growth. From the January Fed meeting minutes: “Participants judged that labour market conditions had remained solid and that those conditions were broadly consistent with the Committee’s goal of maximum employment.”

Chart 1: Federal layoffs starting to show up in unemployment insurance data

Applications in unemployment compensation for federal workers program. Sources: Department of Labor, Haver Analytics

Chart 2: Initial jobless claims in Washington, DC, spike amid DOGE-related job cuts

Sources: Department of Labor, Haver Analytics

Chart 3: Consumers form a pessimistic labour market outlook

In %. Sources: Conference Board, University of Michigan, Haver Analytics

Chart 4: Fed to focus on the bigger labour market picture

The Kansas City Fed labour market conditions indicator measures labour market conditions based on 24 indicators. A reading greater than zero implies that level of activity in labour market is above the long-run average. Sources: Kansas City Fed, Haver Analytics

Atakan Bakiskan

US Economist

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