NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Light U.S. Payrolls Close Out a Noisy Week

March 07, 2025
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

Expectations for a Fed cut in the next two meetings declined but are likely to gyrate over the coming weeks as investors digest both policy changes and economic data that are likely to point towards a short-term softening in the U.S. economy

February’s non-farm payrolls release came in below consensus expectations, up only +151k versus the consensus estimate for +160k. Driving the print were notable gains in health care (+52k), financial activities (+21k), transportation & warehousing (+18k), and manufacturing (+10k). Losses were lodged in leisure & hospitality (-16k) and retail (-6k). Government hiring was still positive at +11k but is well off last year’s monthly average of +38k as federal payrolls declined by -10k in the period. Revisions to December and January payrolls netted to a decrease of -2k versus the previously reported prints. Wage growth also moderated in the month, up +0.3% month-over-month and +4% year-over-year -- a much cooler number than January’s +0.5%.

The household survey was less constructive in our view. Employed persons declined by -588k while unemployed persons rose by +203k. The participation rate fell to 62.4% from 62.5%, and the unemployment rate ticked back up to its December level of 4.1%. The divergence between the household and establishment surveys over the last two years has likely frustrated the Fed, as it calls into question the relative strength of the labor market – a key consideration as the Fed attempts to navigate delivering disinflation without impairing growth.

Perhaps what wasn’t reflected in the report is most notable. The efforts by the Department of Government Efficiency (DOGE) to cut federal payrolls is likely to skew data more dramatically in the months ahead. While one could assume that at least some of those individuals find employment in the private sector, there is likely to be a lag even if that occurs. In addition, it is not just the public sector that is likely to produce layoffs; according to outplacement firm Challenger, Gray & Christmas, planned layoffs rose +103% in the month of February to +172k – with only +63k of that attributed to DOGE efforts. The timing of these layoffs is less clear, however, and concerns are tempered by other data, with last week’s jobless claims down -11k and the employment component of the ISM Services PMI survey rising in February.

Market reaction to today’s release had equities down and Treasury yields slightly lower. Expectations for an interest rate cut in the Fed’s next two meetings declined, but we anticipate that those expectations are likely to gyrate over the coming weeks as investors digest both policy changes and economic data that is likely to point towards short-term softening in the U.S. economy. Employment reports are unlikely to buck this trend. Tariffs will remain on the front burner in the coming weeks and the overhang of policy uncertainty may continue to weigh on both consumer spending and business sentiment.

As it relates to our positioning, we acknowledge that tariffs (proposed or implemented) will likely result in more pronounced volatility, specifically for certain sectors and stocks that are viewed as more heavily exposed. We believe that there are signals from the Trump Administration that it may be willing to tolerate more market disruption from its implementation of policies designed to deliver future growth. We remain at target in equities, overweight in investment grade fixed income, and constructive on private markets in this evolving environment, but are as always considering the evolving landscape in our decisions on both the macro and portfolio levels.

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