Federal Layoffs in Perspective

Editors’ note: MarketMinder is nonpartisan, favoring no party or politician, and assesses political issues for their potential market consequences only.

February’s jobs report hit the wires last Friday amid heavy and heated discussion surrounding President Donald Trump’s Department of Government Efficiency (DOGE) efforts to trim government spending and the workforce—discussion that has only heightened in the days since. These moves are charged with emotion, as well as partisan politics. So we urge you to view them as coldhearted markets do. In the short term, such moves can contribute to uncertainty and volatility. But we don’t think the moves’ scope—or their very nature—is likely to wallop this bull market.

DOGE claims moves it recommended have saved the government $105 billion so far—and aims to hit $1 trillion this year.^[i] Many fear this will kill economic growth either directly, because it isn’t contributing to GDP, or indirectly since those who were going to be paid won’t be anymore and that lost spending could risk recession. Taken at face value, though, the scale of these cuts remains tiny. It is about 2.1% of 2024’s $5.0 trillion in government spending and less than 0.4% of last year’s $29.2 trillion in GDP (nominal, to match DOGE estimates).^[ii] As for foregone consumption due to cuts, that activity isn’t necessarily deleted, but redirected—potentially for tax cuts or other government spending initiatives. (Not to mention, there is a long history of consumption holding up fine even as layoffs mount, whether in the public or private sector, because most spending goes to essential goods and services—this is why consumer spending generally isn’t an economic swing factor.)

That said, the methodology DOGE uses to tabulate these supposed savings is suspect, so they are likely smaller than what is already a small hit. That $105 billion isn’t all contracts canceled, spending cuts or even jobs furloughed. It is, according to the website, a “Combination of asset sales, contract/lease cancellations and renegotiations, fraud and improper payment deletion, grant cancellations, interest savings, programmatic changes, regulatory savings, and workforce reductions.” A lot of those things, like interest savings and programmatic changes, are merely guesstimates.

Beyond this, on contracts DOGE says agencies have canceled at its request, it calculates “savings” by subtracting funds paid out from the contract’s estimated total or “ceiling” value.^[iii] Problem is, contracts’ ceilings represent potential maximum payouts, which can be much higher than what is actually spent, exaggerating theoretical savings. Meanwhile, about 40% of the contracts it lists as terminated were already delivered, suggesting claimed savings are dubious. This is on top of media analysts’ highlighting clerical errors in the data, like mistaking an $8 million contract for $8 billion and counting single contracts multiple times.^[iv]

Spending calculations aside, what about very real federal workforce reductions? While huge for those affected and their local communities, scale them and look under the hood. Nonfarm payrolls rose 151,000 in February, a net gain near its 162,000 12-month moving average (and right on trend factoring in the weather)—nothing alarming.^[v] Even government jobs as a category added 11,000. That doesn’t mean there were no layoffs: Federal jobs fell -10,200 (Postal Service ranks declined -3,500 and non-Postal Service employes fell -6,700). But state & local government hiring offset the cuts.

A couple caveats to be aware of, though. The Bureau of Labor Statistics’ payroll survey collected responses as of February 12, before the Trump administration let go of the most people. So the impact may be yet to come. Indeed, outplacement firm Challenger, Gray & Christmas estimates around -64,000 DOGE-related cuts in February.^[vi]

How does this look in context so far? Exhibit 1 shows federal employment over the last decade (2020’s spike is from the temporary hiring of Census workers). The dip at the end, if you can discern it, is February’s -10,200 decline to 3,006,700 workers. We could see more in March, perhaps as layoff announcements Challenger, Gray & Christmas catalogs follow through. But so far, at least, federal layoff effects appear muted.

Exhibit 1: Ranks of Federal Employees Still Near Record Highs

Source: Federal Reserve Bank of St. Louis, as of 3/7/2025.

Another way to see this is jobless claims, which run through the week ending March 1—after surveys that underpin the Employment Situation Report concluded. They remain historically low, with no material uptick evident. (Exhibit 2) Several judges have issued restraining orders preventing mass firings at agencies, as courts work out their constitutionality. So depending on their rulings, more may be on the way, but the fact that the courts are stepping in shows a lot of the DOGE handwringing doesn’t quite match reality.

Exhibit 2: Initial Jobless Claims Remain Near Record Lows

Source: Federal Reserve Bank of St. Louis, as of 3/7/2025. Note: 2020’s spike truncated at 1 million; initial jobless claims peaked at 6,137,000 the week ending April 4, 2020.

Explore this hypothetical. If federal layoffs spike to 5 or even 10 times February’s rate, federal employment could shrink another -100,000 or so, taking levels down to around 2.9 million from the current 3 million. About a -3.3% workforce reduction. However, this wouldn’t be unprecedented. As Exhibit 3 shows, it shrank from about 3.1 million in 1993 to less than 2.8 million in 1997, a -10% decline—at a similar clip—over a generally good economic and market backdrop.

Exhibit 3: Ranks of Federal Employees in Historical Perspective

Source: Federal Reserve Bank of St. Louis, as of 3/7/2025.

And, here again, the private sector could outweigh the effects. While federal layoffs focus attention, don’t lose sight of the big picture: Non-federal employment is 52 times bigger. With federal employment still below its late-1980s peak ex. Census (and World War II, for that matter), its share of overall employment has dwindled for decades. Increasing use of contractors adds to this somewhat, but federal workers are less than 2% of nonfarm payrolls—the lowest on record—and less than half their 1950s’ share. The government may be America’s largest employer, but it is far from the US economy’s biggest driver.

Speaking of which, no one seems to be talking about the private sector’s ability to absorb displaced federal workers. For example, the National Oceanic and Atmospheric Administration (NOAA) employs among the most capable climate scientists in the world, but they are facing steep job cuts.^[vii] Guess who is hiring weather modeling experts for $1 million a pop? Hedge funds.^[viii] And we doubt opportunities are limited to just this.

We don’t discount the uncertainty mass federal layoffs are injecting. That isn’t great—and perhaps a more measured approach would yield better results. But these actions don’t seem likely to prove a recession driver. Uncertainty may contribute to market volatility in the short term, but over more meaningful stretches, federal job cuts don’t look likely to hurt stocks’ economic drivers.