This week's non-farm payrolls, sounding the alarm for the U.S. economy?

Citigroup believes that although hard data has not fully weakened, the March non-farm payroll data may become the first clear signal of an economic downturn.

On Monday, Citigroup released a preview report for March non-farm payrolls, predicting that the number of new jobs in March may be only 95,000, and the unemployment rate will reach 4.2%, which will be the first clear signal of further slowdown in the labor market, and this is just a prelude to potentially more severe weakness before summer. Weakness in the labor market may lead the Federal Reserve to resume interest rate cuts in May, with a total reduction of 125 basis points for the year.

Citigroup analysts stated that market expectations are rapidly turning pessimistic, with the U.S. economy facing multiple pressures from rising tariff costs, weak consumer spending, government funding and job cuts, and high uncertainty. However, aside from the weakening consumer spending data, most hard data has not deteriorated significantly, especially in the labor market—unemployment remains in the 4.0-4.2% range, and the three-month average job growth is still far above 100,000 per month.

According to Citigroup's research forecast, in an already turbulent market context, especially after the tariff announcement on April 2, weaker-than-expected employment data may become a significant risk-off catalyst. However, if the March employment data is stronger than expected, one should not be overly optimistic, as the true peak of weakness in the labor market is likely to occur in June-July.

Recruitment Slowdown, Prelude to Economic Downturn

Based on initial unemployment claims data, Citigroup emphasizes that the number of layoffs remains low, but weak recruitment will become the main factor limiting job growth. Citigroup stated that spring and summer are usually seasons of increased hiring, but this pattern may be broken this year.

Citigroup points out that increased uncertainty, federal government layoffs and funding cuts, as well as rising tariff costs may further suppress companies' willingness to hire.

In specific industries, employment growth in construction, leisure and hospitality, professional services, and retail trade may slow down.

A decrease in net immigration may limit hiring in construction and leisure/hospitality, but declining housing construction and weak consumer demand will fundamentally weaken labor demand in these industries.

About 10,000 workers returning to work in February may boost retail employment in March, but weak consumer spending may limit the industry's demand for new labor.

Slowing Wage Growth, Rising Unemployment Rate, Catalyst for Fed Policy Shift

Citigroup expects wage growth to slow in March, and the unemployment rate will continue to rise in the future, maintaining the forecast that the Federal Reserve will resume interest rate cuts in May and cut rates by 125 basis points throughout 2025.

After a rebound in wage growth by the end of 2024, Citigroup expects the average hourly wage in March to grow by 0.2%.

• Wage growth for job switchers has significantly slowed over the past year, returning to pre-pandemic levels.

• The easing of wage pressures also indicates that rising tariffs and short-term inflation expectations may not trigger broader inflation.

Regarding the unemployment rate, Citigroup's research report states:

• Weak hiring will lead to a further increase in the unemployment rate in the coming months. The unemployment rate in February was 4.14%, and it is expected to rise to 4.19% in March (rounded to 4.20%), which is consistent with a slight increase in continuing unemployment claims during the reference week of the March household survey.
• The participation rate may rebound after a decline in February, and the participation rate may rise in the coming months (for example, as recent graduates enter the labor market), which could pose an upside risk to the unemployment rate.

Additionally, Citigroup emphasizes that the impact of layoffs by the U.S. government may be reflected in the household survey earlier than in wage statistics. Moderate signs of layoffs in U.S. government departments may appear in the March data.

• Although many government employees were laid off in mid-February, they were rehired and compensated by mid-March, which means this group of workers may not disappear from the March wage statistics.
• We expect state and local government employment data to slow down, leading to a decrease of 10,000 jobs in total government employment in March, following a reduction of 10,000 jobs in U.S. government employment in February solely due to hiring freezes.
• More government employee layoffs may occur between May and September, with an estimated loss of about 300,000 U.S. government positions potentially causing the unemployment rate to rise by 0.1 to 0.3 percentage points