U.S. Recession Seems ‘No Longer Completely Unthinkable’ as Jobless Claims Spike

The U.S. economy is beginning to show signs of slowing down, raising concerns about a possible recession in the near future.

‍

Uncertainty surrounding the Trump administration's economic policies, particularly the layoffs of federal workers by the Department of Government Efficiency (DOGE), has led businesses and consumers to question the economic outlook. If this uncertainty triggers a major pullback in spending and investment, the economy could enter a recession within the next few quarters.

‍

While the situation remains uncertain, a recession is no longer an unimaginable outcome, according to Ajay Rajadhyaksha, global chair of research at Barclays. He noted that while a downturn is still unlikely, the risks have increased as economic momentum weakens.

‍

A pressing question now is whether the federal job cuts, led by Elon Musk’s DOGE, could push the economy into a recession. Recent data shows that jobless claims have risen to their highest level in three months, largely due to these federal layoffs.

‍

Despite the increase in jobless claims, many economists believe that federal job losses alone are unlikely to destabilize the broader labor market. Beth Ann Bovino, chief economist at U.S. Bank, pointed out that the federal government employs around 3 million people—about 2% of the total nonfarm workforce. While these job cuts are a negative shock, Bovino emphasized that the economy would need to endure multiple shocks to tip into a full-blown recession.

‍

Current estimates project approximately 200,000 federal job losses by October, averaging about 20,000 per month. Although these numbers are significant, economists believe the labor market’s overall resilience will limit their broader impact.

‍

Andrew Husby, senior U.S. economist at BNP Paribas, expects the unemployment rate to hold steady at around 4%. While slower economic growth typically reduces labor demand, he argues that a shrinking labor supply due to immigration restrictions will offset some of the negative effects. As a result, he does not anticipate a dramatic loosening of the labor market.

‍

Husby also highlighted that recent concerns about the economy follow a strong second half of 2024. While some cooling is expected, he believes it does not yet signal a fundamental shift toward recession.

‍

The Atlanta Federal Reserve’s GDP tracker now estimates first-quarter growth at an annualized rate of 2.3%, down from earlier projections of nearly 4%. This is a slowdown from the 3.2% growth rate recorded in the final quarter of 2024.

‍

Economists are closely monitoring consumer spending, as it remains a key driver of economic activity. Jonathan Pingle, chief U.S. economist at UBS Securities, argued that unless consumer confidence collapses, the overall economic outlook is unlikely to deteriorate significantly.

‍

Pingle also noted that federal workers who lose their jobs may have an easier time finding new employment, as most hold college degrees. With the unemployment rate for college graduates at just 2.3%, he believes many displaced workers will be able to transition to other roles. Unlike during a recession, when job openings are scarce, the current labor market remains functional and continues to generate new opportunities.

‍

Although Pingle expects the labor market to weaken this year, he believes it will stay just above the threshold of serious concern. The U.S. economy added an average of 210,000 new jobs per month in 2023 and 166,000 in 2024. He anticipates that figure will decline to around 100,000 new jobs per month in 2025.

‍

Bovino shares a similarly cautious outlook. While she expects some economic softening, she does not foresee a dramatic collapse. U.S. Bank predicts GDP growth of slightly above 2% this year, which she describes as “pretty nice” despite the slowdown. While the unemployment rate may edge higher, she does not expect a sharp increase.

‍

However, not all economists are as optimistic. Richard Moody, chief economist at Regions Financial, expressed greater concern, estimating that 300,000 to 500,000 jobs could be at risk in 2025. He emphasized that government employment, along with the healthcare and leisure sectors, has been one of the primary supports for the labor market in recent years. A reversal in government hiring could weaken the overall employment landscape.

‍

Moody also highlighted a critical difference between current federal layoffs and previous downsizing efforts. Historically, such cutbacks were guided by detailed analysis, whereas the current approach appears more abrupt.

‍

Federal job losses represent just one factor influencing the economic outlook, according to Moody. If these layoffs coincide with other negative forces—such as declining consumer confidence, falling asset values, persistent inflation, and high interest rates—the risk of recession increases significantly.

‍

Ultimately, while federal layoffs alone may not push the U.S. economy into a recession, they could contribute to a broader downturn if combined with other economic shocks. The coming months will be crucial in determining whether these risks materialize or if the economy can maintain its fragile momentum.

‍