Non-Farm Payroll Preview: The Last Healthy Non-Farm Data?

Is the U.S. economy facing a "winter is coming"? Citigroup warns that the February non-farm payroll report may become the last relatively "healthy" data for the U.S. labor market.

On March 4th, Citigroup economists Veronica Clark and Andrew Hollenhorst stated in a report that U.S. job growth in February is expected to slow to 135,000 jobs, a slight decrease from January's 143,000, but still within the range of healthy growth.

Citigroup expects that although the unemployment rate is projected to remain at a relatively stable level of 4.1%, February may be the last month of "healthy" employment data, with the employment environment likely to deteriorate further in spring and summer. Federal government layoffs and funding cuts will pose additional downside risks, and the unemployment rate may rise to around 5% by mid-year.

Based on the above analysis, Citigroup expects the Federal Reserve to cut interest rates by 125 basis points starting in May this year.

Job Growth: Steady but Entering a Slowdown

Citigroup economists expect non-farm payroll growth in February to be 135,000 jobs, roughly in line with January's 143,000 jobs. Citigroup points out that despite the slowdown compared to the growth rate in the fourth quarter of 2024, this figure still falls within the healthy range and may have some upward potential due to seasonal adjustment factors.

According to Citigroup, private sector employment is expected to increase by 120,000 jobs, slightly higher than January's 111,000. Government employment may be affected, particularly at the federal level, where job growth is expected to slow, partly due to the hiring freeze policy that began in January. Although the recently announced federal worker layoffs may not start to reflect in employment data until March, policy uncertainty and potential funding cuts have already suppressed hiring.

"Funding cuts and policy uncertainty may also impact private sector employment through channels such as government contractors, with effects likely to manifest in months following February, particularly in sectors like professional services," the report notes. Additionally, tariff uncertainties, high interest rates, and a strong dollar may further weaken manufacturing employment, which has been sluggish for quite some time.

Unemployment Rate: Short-term Stability, Expected to Reach Around 5% Mid-Year

Citigroup expects the unemployment rate in February to remain at 4.1%, still within the recent range of 4.0%-4.2%, which aligns with the moderate increase in the number of people continuing to claim unemployment benefits compared to the reference week in January. The decline in the unemployment rate in January may partly be attributed to a significant increase in the labor force and employment numbers due to demographic changes, a factor that will not repeat in February.

However, looking ahead, the report predicts that the softening of the labor market—primarily due to weak hiring—will lead to further weakening of employment data in spring and summer, with the unemployment rate rising. Notably, the increase in the unemployment rate over the past two years has mainly occurred in spring and summer, which is typically when hiring increasesCitigroup stated, "If layoffs begin to increase, even if they come from changes in federal government employment, this could put further upward pressure on the unemployment rate, as low hiring means workers cannot be well absorbed by the private sector."

Citigroup warned that "the expected loss of about 300,000 federal positions may begin to reflect in labor market data starting from March/April and continue until September/October. Depending on changes in labor force participation rates, the direct loss of 300,000 positions could lead to an increase in the unemployment rate by 0.1-0.3 percentage points."

The report predicts that federal government layoffs and funding cuts could have a broader impact on the unemployment rate. If policy uncertainty, government funding and contract cuts, and tariffs suppress private sector employment, the impact will be more significant. Citigroup continues to expect the unemployment rate to reach around 5% by mid-year.

Hourly Wage Growth: Falling to Moderate Levels

After a strong month-on-month increase of 0.5% in January, Citigroup expects February to fall back to a more moderate level of 0.3%. Citigroup analysts believe that the strong increase in January may reflect several temporary factors:

First, wages tend to see strong adjustments at the beginning of the year in recent years, similar to price change patterns, with a 0.5% increase recorded in January last year followed by a moderation in February.

Second, the decline in working hours over the past two months has pushed up average hourly wages. Researchers noted that while temporary factors such as the Los Angeles wildfires and cold weather may not necessarily have affected January's employment numbers, they could have suppressed working hours. A rebound in February would put pressure on average hourly wages.

Overall, Citigroup economists expect that the loosening of the labor market will continue to put downward pressure on wage growth this year. This has already been reflected in recent data such as the Atlanta Fed's wage tracker, which tracks wage growth for a given worker over a period of time.

Labor Market Slowdown Paves the Way for Rate Cuts

Recently, influenced by softening growth expectations, U.S. Treasury yields have declined, with the 10-year yield falling faster than the 2-year yield.

Citigroup researchers believe that once weak growth data materializes, the market may expect the Federal Reserve to implement more rate cuts this year. Citigroup still maintains a baseline scenario of a 125 basis point rate cut.

Overall, Citigroup's research indicates that the labor market may be at a turning point, transitioning from a relatively healthy state to a significant slowdown. This shift will provide ample justification for the Federal Reserve's anticipated rate cuts this year, with the first rate cut expected in May.