Wall Street Questions if DOGE Job Cuts Could Lead U.S. into Recession

The financial community is increasingly concerned about the potential implications of job cuts linked to the Department of Government Efficiency (DOGE) and their ability to tip the U.S. economy into a recession. According to Torsten Slok, chief economist at Apollo Global Management, the foremost inquiry among their clients centers around whether these firings could precipitate an economic downturn.

Recent data highlights the anxiety around this issue, with government-related job cuts yet to make a discernible impact on jobless claims. The White House has initiated efforts to streamline the federal workforce, but as of now, initial jobless claims, which rose by merely 5,000 to 219,000 for the week ending February 15, remain at historically low levels. However, many economists worry that layoffs of federal employees may soon result in an influx of unemployment claims, compromising the strength of the labor market.

Market Responses amid Job Cuts and Economic Stability

Interestingly, the current economic indicators suggest that many investors are not exhibiting imminent recession fears. The S&P 500 recently reached an all-time high, closing above 6,100. Yet, the Dow Jones Industrial Average saw a more than 550-point drop, along with a minor decline in the S&P 500 and a 0.6% slip in the Nasdaq Composite. Despite these fluctuations, Treasury yields remained lower on the day. The broader context is the resilient U.S. economy post the pandemic-induced recession of 2020, which was notably brief.

Since that recession, which lasted just two months, the U.S. economy has demonstrated remarkable resilience. Current unemployment stands at around 4%, and recent revisions show job gains for nonfarm payrolls have exceeded initial expectations by 100,000 for the months of November and December. Jobless claims, based on available data, have held relatively stable since 2022.

Potential Future Ramifications from DOGE Layoffs

At Pantheon Macroeconomics, senior U.S. economist Oliver Allen forecasts that initial claims might rise to 250,000 in the coming months. He notes that if this prediction holds true, it might shift market perceptions regarding potential Federal Reserve interest rate cuts in 2025, leading to potential adjustments as early as May or June. However, Allen argues that the scope of DOGE-related layoffs is unlikely to single-handedly cause a recession. The critical factor remains whether these governmental job cuts could be reflective of broader reductions in federal spending impacting contractors and nonprofits.

Minutes from the Federal Reserve’s January meeting have suggested that officials expect the labor market to keep its strength, though they also acknowledge the risk of unforeseen economic weakening. For the Fed to consider further rate cuts, several officials note the necessity for degrading labor market conditions—a component yet of varying significance amid the current landscape of job cuts and economic stability.

The Future of Federal Employment

Efforts spearheaded by the Trump administration and DOGE aim to reduce the federal workforce by at least 10%. Reports indicate potential layoffs could affect over 200,000 employees, particularly those hired in the last year or two, although the total number remains uncertain. According to Apollo’s Slok, about 10 million people make up total federal employment, including contractors.

As noted by Jim Baird, chief investment officer at Plante Moran Financial Advisors, the impact of these government job cuts may not necessarily tip the economy into recession, especially if private-sector employment continues to expand and household spending growth remains steady. He reflects on how the ongoing news of federal worker layoffs generates valid concern but that investors currently seem indifferent to immediate recession anxieties. Although equity markets have displayed volatility, they have still managed to yield gains since the year commenced.

Conclusion

The conversations surrounding DOGE-related job cuts and their potential effect on employment—and ultimately, the economy—are intensifying. While the future remains uncertain, current economic resilience denotes that immediate recession risks are not fully resonating within investor sentiment. As economic indicators evolve, both market participants and economists will continue to monitor labor market conditions and jobless claims closely, remaining vigilant for indicators of broader economic impact.