WASHINGTON, DC – OCTOBER 24: As the government lays of workers, what is the unemployment impact … [+]
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Job cuts are a little over 172,000 for February, according to the Challenger Report, which tracks announced layoffs. Government job losses are a about a third of the total. That’s the highest overall level of layoffs for February since the financial crisis in 2009, though job losses in January were more typical.
Overall, February tracked job cuts are estimated to be double the prior year. Within that are 62,000 government layoffs. Government layoffs are a leading contributor to spiking job losses, but retail and technology are seeing notably increasing layoffs, too, according to the Challenger report.
Why Government Job Losses Are Small In Context
To put this in context, total unemployed for January 2025 was 6.85 million or 4% of the working population, according to the Employment Situation Summary. Government layoffs are small in the context of that figure. For example, if the 62,000 government employees did not find work elsewhere, then those numbers are a rounding error on the unemployment rate representing a 0.04% increase compared to January’s figures. In addition, that’s an overstatement of the contribution because a proportion of impacted government employees will find work elsewhere.
Tracking Recession Risk With The Sahm Rule
A 0.5% annual increase in the unemployment rate is considered early evidence of a recession, as a simplification of the Sahm rule. The Sahm rule provides a rule of thumb for spotting recessions.
Over the prior 12 months back to February 2024, the 3-month average low in unemployment rate is 3.9%. As such the 4.1% 3-month average unemployment rate to January 2025 doesn’t meet the recession bar, showing a 0.2% increase compared to the required 0.5% hurdle. However, it’s possible to see that indicator being triggered in the coming months. It would take approximately 650,000 net job losses from January’s levels. We’re not there yet. But if government losses occur in parallel with job cuts in the private sector we could see a recession in 2025. In fact, recession warnings for 2025 are starting to pick up according to various indicators.
Why Government Job Losses Likely Won’t Move The Needle
Federal government job losses are unlikely to be sufficient in isolation to drive a U.S. recession. That’s because federal government jobs are a very small part of employment. Federal government employment is about 2% of U.S. total employment. The bulk of government jobs are at the state and local level, such as in teaching. That’s not where current cuts are occurring.
Plus even layoffs with federal government are small so far. Cuts up to February 2025 represent an estimated 2% of total federal government jobs. Therefore, federal government job losses would have to increase about fifteen-fold from current levels before triggering a recession, in isolation. That seems unlikely.
Rising Job Losses Could Create A Recession, But Not On Recent Data
However, the trend of rising job cuts overall against a backdrop of downward-trending hiring since early 2022 according to FRED data, could create a recession over the coming months. That could occur with sustained or elevated job cuts compared to February’s levels as reported in the Challenger report. This does not appear to be a base-case scenario for markets, but is a currently rising possibility. For example, prediction market Kalshi current gives a 4 in 10 chance of a 2025 recession, up quite sharply from January, but consistent with elevated risk periods of 2024. Of course, tariffs complicate the analysis further.
How Job Losses Could Trigger A Recession
Nonetheless, federal government jobs represent a small part of the economy. Therefore, a recession would likely only be triggered if government job cuts were to drastically increase in scale, or to occur at the same time as weakening employment for larger sectors of the economy.
Ir might administrative services and retail jobs continuing to weaken to prompt a recession. Or a recession could occur if job losses broaden to other major employment categories such as healthcare, professional services or leisure and hospitality. However, even more aggressive federal government government job cutting is unlikely to create a recession in isolation. If the spike in job loses moderates from February’s levels them recession risks could recede.
