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March 31, 2025

While initial and continuing unemployment claims remain low thus far through March, there are still reasons to expect some weakness in the March payroll number. We know that at least 24,000 federal workers were laid off due to their probationary status and may have not been on federal payrolls through March 12 in order to be counted as employed during the month. That is in addition to other federal job cuts. The government has been ordered to reinstate the probationary workers, but reports are that this process has been slow to ramp up. 

Over time, we tend to lose two private sector workers for every federal job cut due to spillover effects on contractors and the ecosystem of communities . This is in addition to the hiring chill triggered by funding freezes and reductions for education, research and development, and transfers to the states. Most federal workers are located outside of the Washington DC metro area, although it will be hard hit. Those concentrated lob losses could generate additional knock-on effects as local businesses trim employee hours or cut workers.

In response, we are expecting payroll employment to come in at 50,000 in March , less than half the consensus for the month. Direct federal employment losses are expected to top 30,000. State and local payrolls have been slowing, as tax revenues for fiscal 2025 fell short of projections. The only bright spot has been local hiring, which has been helped by earlier tax windfalls and COVID-era stimulus. Public sector payrolls are expected to fall by 15,000 on net during the month.

Private sector payrolls are expected to rise by 65,000 but there is a high level of uncertainty regarding what is in the pipeline. Layoff announcements, hiring freezes and WARN notices, which flag large layoffs at the state level, have soared since February. Job postings according to the job matching firm Indeed are falling, while small businesses have seen a reversal in their intentions to hire.

The official data is slow to capture losses in small business hiring due to the lag between the assumptions on small business hires and the reporting we see via tax records. Cuts to funding and staff are also threatening the ability of the government to conduct the survey, as required by law.

The three pillars of employment gains, which kept the labor market resilient in the wake of higher rates may be crumbling. Healthcare and social assistance, leisure and hospitality, and state and local governments accounted for about 70% of all net new job gains between June 2023 and December 2024. That is no longer the case. Overall payroll employment growth has slowed in response.

Healthcare and social assistance is expected to continue to dominate gains but rise at a much slower pace. Healthcare has been hit by funding freezes, while childcare facilities are once again shedding workers. COVID-era subsidies aimed at low-wage households lapsed with the start of the federal government’s fiscal year on October 1,2024. That has added to the ranks of both men and women with children under the age of five dropping out of the labor force entirely.

Elder care is another hurdle for many households, given the outsized role immigrant labor plays in in-home care and escalating costs. Young men outnumber women when providing unpaid eldercare in their families. That is further delaying their participation in the labor force.

Hiring in the leisure and hospitality sector is expected to contract, despite strong TSA throughput traffic in March. The Federal Reserve’s Beige Book revealed caution by firms and households in March, with discretionary spending and travel and tourism falling short of expectations. Foreign tourism is off, as travel warnings to the US have picked up with escalating trade and geopolitical tensions across some of what were our closest allies.

Retail hiring faces headwinds, with the exception of auto dealers. That is one of the few places where foot traffic picked up during the month as consumers attempted to front-run new auto tariffs. Many major companies issued downward guidance in recent earnings calls due to tariffs and caution that they are seeing across income groups. Recent stock market volatility does not help, given the concentration of spending in high-income and wealthier households. 

Professional and business services shed jobs in February and are poised to do so again in March. This is a sector that has a lot of federal government contracts, which are now under review.

The goods sector is expected to add jobs along with warehousing and transportation. Manufactures are scrambling to front-run and stockpile inventories ahead of tariffs. Rig counts are up in the oil sector, which means additional gains in mining employment.

Construction is among the hardest hit by tariffs and changes to immigration policy. That means a scramble to get as much done now, which suggests a decent increase in March employment, even though the seasonals are tough. This is a time of year when construction activity starts to ramp up. Cleanup is still underway following the fires in California and flooding in the Southeast, while the weather in the South remained unusually bad during the month .

We expect average hourly earnings to rise by 0.3% in March, the same as February. That puts year-on-year gains in average hourly earnings at 3.9%, a tick lower than February. Average hours worked should tick up a notch to 34.2 hours in response to the scramble to front run tariffs in manufacturing. Those gains are expected to be short-lived. 

Separately, the unemployment rate is forecast to edge up to 4.2% in March, a tick higher than the 4.1% pace of February. Measures of underemployment or what is known as the U-6 jumped to 8% from 7.5% in February. Expect another move up, as more workers are forced to accept part time over full-time work for economic reasons and the ranks of those marginally attached to the labor force continue to rise.

In March. the labor force participation rate is expected to hold at the subdued level of February. The micro data suggests that more men and women with children under the age of five are bowing out of the labor force entirely. An end to COVID-era subsidies for childcare for low-income households in October 2024 has contributed to those losses.