February’s Employment Report showed a 151,000 payroll gain but rising layoffs pushed the unemployment rate up to 4.1%. The labor market remained resilient through early February but faces mounting headwinds in the coming months. While the report showed some disruption from federal layoffs, March is expected to show deeper impacts.

Trusted Insights for What’s Ahead^®:

• February payrolls increased by 151,000, while the unemployment rate ticked up to 4.1% within a Household Survey showing employment losses of 588,000—an early sign of labor market wavering.
• While the impact of federal disruptions was limited in February’s report, policy uncertainty appears to have begun weighing on business and consumer sentiment with a noticeable uptick in layoffs in February despite healthy payroll gains.
• The March report is expected to show greater impact from federal hiring freezes, job cuts, and funding disruptions, in addition to capturing more of the private-sector layoffs announced in late February.
• The decline in aggregate weekly hours compounds February data that point to slower GDP growth in Q1.

Figure 1. Slowing payroll growth concentrated in sectors

Report Highlights:

Job Creation Continues Ahead of Uncertainty
Private-sector employment grew by 140,000 in February, despite a wave of layoff announcements later in the month. That suggests that 2024’s labor market strength and business optimism entering the year continued through the survey period ending on February 12. Though we expect March’s report to reflect a greater number of announced layoffs.

Healthcare led payroll gains in February, adding 63,100 jobs, while private education expanded by 9,600. Construction added 19,000 jobs, and manufacturing grew by 10,000, largely driven by transportation and vehicle production. Finance added 21,000, while information services added 5,000. However, payrolls in professional, scientific, and technical services declined slightly, while leisure and hospitality saw a notable decline of 23,800 jobs, with restaurant employment particularly affected, in part due to adverse weather conditions.

Impact of Federal Disruptions
While underlying labor market conditions remained mostly stable in February’s report, early signs of policy-driven uncertainty are beginning to affect hiring decisions. Federal workforce reductions tied to Department of Government Efficiency (DOGE) initiatives emerged in February’s data, with a net decline of 10,000 federal jobs. That figure is expected to rise in the coming months, as over 60,000 federal employees have already been laid off. A federal hiring freeze may have an even greater long-term impact, delaying contracts, and slowing workforce expansion—both for the public and private sectors.

State and local education employment gains are also likely to soften. The slowdown is not solely attributable to federal cuts and funding disruptions—the expiration of pandemic-era programs has played a major role in dampening hiring trends at the state and local levels. For instance, since the 2021 American Rescue Plan, state and local education payrolls grew at a monthly pace of 19,000, compared to a pre-pandemic average of just 6,000. That momentum is now fading. State payrolls were flat in February, down from a three-month average of 15,000, while local governments added 20,000 jobs.

Uncertainty Weighs on Hiring and Layoffs
Uncertainty surrounding tariffs and U.S. policy is weighing on business and household sentiment, delaying investment and spending decisions. The NFIB Small Business Jobs Report for February showed plans to increase employment falling sharply, while The Conference Board Consumer Confidence Index dropped for a third consecutive month, reflecting rising uncertainty that is leading to recession concerns.

February’s Household Survey better reflected the uncertain environment, which showed that employment fell by 588,000. That came from both a scaling back in new hiring and from rising job losses. Figure 2 shows that the job-finding rate of non-employed individuals fell to near its worst mark in the post-Covid in February. Meanwhile, job-losses which had remained subdued throughout 2024 also jumped in February, aligning with February’s uptick in unemployment to 4.1%. Workers reportedly part-time for economic and non-economic reasons also increased in the month, by 460,000 and 136,00, respectively. The combination of slowing hiring and rising layoffs highlights increasing labor market fragility, reinforcing concerns about a potential downturn in the months ahead.

Figure 2. Job-finding slows while job-loss rises

Cooling Labor Demand
Aggregate weekly hours declined 0.5% on a quarterly annualized basis through Q1 (Figure 3). That marks the first contraction since the pandemic. This signals the potential for a notable slowdown in GDP growth compared to 2024’s pace and aligns with other high-frequency indicators pointing to cooling economic momentum. This decline in labor input is consistent with a sizable slowdown in GDP growth in Q1 from the robust pace in 2024. That also fits with other high frequency activity indicators released in recent weeks showing mounting uncertainty.

Figure 3. Slump in aggregate hours portends GDP slowdown

Wage growth also continued to moderate in February, with average hourly earnings rising 0.3%, down from 0.5% in January, while annual wage growth remained steady at 4.0%. Softening labor demand and rising business uncertainty may further dampen wage growth, as employers become more cautious about hiring and compensation adjustments in response to economic headwinds.

March Report and Beyond
Looking ahead, the labor market faces mounting uncertainty. Federal funding disruptions, job cuts, and trade instability are creating volatility, while declining business and consumer sentiment heighten risks to private-sector hiring and restructuring. While the labor market remains largely stable, slowing job growth, rising layoffs, and economic headwinds signal potential fragility ahead if volatility continues. With signs of labor market moderation and uncertainty clouding the economic outlook, businesses and policymakers alike will need to navigate a more fragile environment in the months ahead.