With the shutting down of immigration flows, the large-scale government firings and cancellation of contracts, and the threat of tariffs, there seems to be a lot going on in the economy. However, it is yet to show up in a big way in the labor market data. Perhaps March will be a turning point.

For now, the unemployment rate is still a relatively low 4.1 percent, although that is a modest increase from 4.0 percent in January. There was a 0.2 percentage point dip in the employment-to-population ratio (EPOP), both overall and for prime age workers (ages 25 to 54), which is a bit more concerning.

The establishment survey showed a respectable increase of 151,000 jobs, although the index of aggregate weekly hours rose just 0.1 percent in February after dropping 0.2 percent in January. This left it below the average for the fourth quarter of last year. These data are erratic, but that does indicate some weakness in labor demand.

Immigration and the Labor Market

The shutting down of immigration flows pre-dated Trump. The Biden administration negotiated terms with Mexico that sharply slowed flows beginning in June of 2024. This is worth keeping in mind, since there is a lag of roughly six months between when people enter the country and when they start showing up in the employment data.

This means that even if the Trump administration were not pursuing a policy of large-scale deportations, we should be seeing a slower flow of immigrants into the labor market. The increased threat of deportation is likely to further reduce employment of immigrants.

As noted last month, the new population controls included with the January data – coupled with the fact the data are not seasonally adjusted – make it difficult to compare monthly changes in employment of immigrants. Looking at year-over-year employment levels, the February data showed an increase in employment of non-native workers of 685,000; however this figure would have been -658,000, if not for the impact of population controls. By comparison, the year-over-year increases for November and December, which did not include the new population controls, were 401,000 and 342,000, respectively.

In the establishment survey we may see some effect in the sectors that employ a large number of immigrants, such as construction, food processing, home health care and restaurants.

Can the Health Care Sector Continue to Support the Labor Market?

The health care sector has consistently led employment growth over the last two years. The growth of 52,000 in February, which is roughly equal to the average pace of the prior year, accounted for more than a third of the new jobs created in the month. The threat of reduced federal funding through Medicaid and other programs may make hospitals and other employers more reluctant to hire. The reduction in immigration may also reduce the supply of available workers.

The second biggest source of job growth in February was couriers, which added 23,500 jobs. Employment in this sector is notoriously erratic. It is a safe bet we won’t see similar growth in March, and could see some of the February gains reversed.

State and local government employment has been the second leading source of job growth after health care. Here also the threat and reality of federal cuts is likely to slow hiring. The sector added 21,000 jobs in February, but we are almost certain to see slower growth in March. Coupled with cuts to federal employment (10,000 reported for February), the government sector is likely to be a net negative for job growth in March.

Restaurants, which also had been a major source of job growth, may see weak growth in March. Real spending in February was below its fall level.

Construction and manufacturing both showed respectable growth in February, adding 19,000 and 10,000 jobs, respectively. This growth was likely a bounce back after weak growth in prior months. We are likely to see considerably slower growth in construction, with manufacturing employment close to zero and possibly a small negative.

The high-paying professional and technical service sector lost 9,300 jobs in February after losing 8,700 in January. It had added an average of 5,000 a month in the year to December. This had been an important source of good-paying jobs for decades. A third consecutive month of job losses would be discouraging.

 Share of Unemployment Due to Voluntary Quits May Fall

The share of unemployment due to quits is a measure of workers’ confidence in their labor market prospects. It fell from 13.2 percent in January to 12.9 percent in February. With an unemployment rate close to 4.0 percent, we would expect the share to be over 14.0 percent. We may see some further drop in March.

Slower Wage Growth

The annualized rate of wage growth for the three months ending in February was 3.6 percent, down from a year-over-year rate of 4.0 percent. If workers are more fearful about their labor market prospects – and therefore reluctant to quit a job in search of better pay – and employers are uncertain about future demand, we may see more evidence of slowing wage growth.

Worsening Labor Market for Young Workers

The unemployment rate for workers between the ages of 20-24 rose from 7.9 percent in January to 8.3 in February, the highest rate since August of 2021. If we are seeing an increased reluctance of employers to hire, it is likely to hit younger workers first since they are just entering the labor market and switch jobs more frequently.

March May Show Evidence of a Weakening Labor Market

We have seen numerous measures of business and consumer confidence show increased pessimism about the economy, presumably attributed to the threat or reality of higher taxes on imports, coupled with the cutbacks in federal employment and government contracts. But most labor market measures have remained reasonably healthy – most notably weekly unemployment insurance claims, which only show a modest rise from the end of 2024.

As noted, there were some signs of weakness in the February report; but given the erratic nature of the monthly data, it’s not possible to draw any clear conclusions. However, we know that the sectors that provided the basis for much of the job growth over the last two years, health care and state and local governments, are seeing direct revenue hits from the Trump administration, which is likely to slow job growth at some point.