The DOGE layoff storm is in full swing, but Wall Street is worried about one thing: will this lead to a recession in the United States?
Apollo Global Management's chief economist warns that laid-off federal employees may begin applying for unemployment benefits in the coming months, and as the numbers rise, this will make a rate cut by the Federal Reserve in May or June more likely. There are also analyses suggesting that significant layoffs could lead to substantial cuts in federal spending, which may affect contractors and non-profit organizations, thereby dragging down the U.S. economy
Recently, the White House and its Department of Government Efficiency (DOGE) have launched a massive federal government layoff storm aimed at cutting "wasteful spending," raising concerns on Wall Street about the economic outlook.
Earlier this week, Torsten Slok, Chief Economist at Apollo Global Management, stated in an article that the main concern for clients is whether the layoffs and firings related to DOGE will trigger an economic recession, and how the market will react if unemployment application data begins to rise. Slok emphasized:
“All risk managers should ask themselves these questions.”
Currently, the scale of federal government layoffs has not yet appeared in the data. The latest initial claims data, as of the week ending February 15, shows that the number of initial unemployment claims has only slightly increased by 5,000 to 219,000, remaining at historically low levels.
However, some economists and market participants warn that federal employees who are laid off may begin to apply for unemployment benefits in the coming months. Oliver Allen, Senior U.S. Economist at Pantheon Macroeconomics, predicts that the number of initial unemployment claims could rise to around 250,000 in the next few months. He also stated:
“If this prediction comes true, it could change the market's expectations for a Federal Reserve rate cut in 2025, making a cut in May or June more likely. However, the scale of DOGE's layoffs is not yet sufficient to push the economy into recession on its own. The bigger question is whether DOGE's cuts to federal employment will lead to significant reductions in federal spending (which could affect contractors and non-profit organizations).”
The Trump administration and DOGE plan to reduce the number of federal employees by at least 10%, with probationary layoffs potentially affecting over 200,000 employees hired in the past one to two years, and more than 2 million government workers have received "delayed resignation" proposals.
Despite the ongoing layoff news, many investors seem not overly concerned about the impending recession risk. The S&P 500 index reached a record closing high of 6,144.15 points on Wednesday. Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors in Michigan, also stated, “It seems unlikely that government layoffs alone could push the economy into recession, especially if private sector hiring remains robust and household spending continues to grow at a decent pace.”