April 3, 2025

QuickTakes

More Bad News Caused

By Trump Turmoil 2.0

Trump Tariff Turmoil 2.0 has caused a stock market selloff that is in full swing. The Nasdaq fell around 5% and the S&P 500 nearly 4% in the first hour of trading. The 10-year Treasury yield sank 16bps to 4.03% as recession fears outweigh inflation fears. Yesterday's Liberation Day festivities in the Rose Garden set off a freefall in stock prices on increasing fears of a trade war. The worst-case scenario is a recession if high tariff rates stick, leading to a slowdown in business and consumer spending that cause layoffs. We raised our odds of a stagflation/recession scenario from 35% to 45% on Monday.

While the labor market is in a good place now, it has the potential to deteriorate quickly. Here's the latest look at how the economy is performing just as it is starting to get hit by Trump Tariff Turmoil 2.0 and the DOGE layoffs:

(1) Services. March's ISM nonmanufacturing PMI showed a slowdown from the prior month but remained slightly above 50.0. However, the employment index sank to its lowest level since June 2024 (chart). Even though the trade war is occurring in the goods-producing sector, the knock-on effects are likely to hit the much larger services-providing sector of the economy.

(2) Layoffs. Initial unemployment claims remained low throughout March. However, announced layoffs in today's March Challenger report continued to surge for a second month in a row, reaching a higher level than during the recessions in 2001 and 2008 (chart).

(3) Government vs. private. Almost all of the announced layoffs have been by the government, with some increase in technology and retail (chart). Based on the stock performances of both sectors, layoffs are likely to occur at some point this year as cost cutting measures are implemented in response to a weakening economy.

Still, even government unemployment claims collapsed from their initial DOGE spike (chart). They totaled just 564 in the week ended March 21. The court system has rebuked some of Musk's agency cuts, and reportedly he will be leaving DOGE sooner rather than later. We still expect more federal layoffs, but perhaps the impact will be more muted than Challenger suggests.

At the end of the day, our preferred timely indicator of the health of the labor market is weekly initial unemployment claims. While thus far it has suggested the job market is in a good place and holding up, it's likely to flash warning signs in the coming weeks and months.

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