Employment report March 2025

Spring thaw before the tariff chill

The strong 228,000 payroll gain in March is a reminder that economic fundamentals were robust heading into the tariff storm. Yet, the downside risks to the labor market and consumer outlook have escalated significantly in recent days, and underlying economic momentum is poised to decelerate rapidly as the impact of the global economic shock from reciprocal tariffs materializes.

• The strength of the March payroll data likely reflected some bounce back from the unusually cold weather in January and February. Payroll gains over that period were revised lower by a cumulative 48,000. Looking at the broader trend, the labor market is undeniably cooling. Private sector industries added an average of 152,000 jobs in the first quarter of the year, a notable step down from the 209,000 average in Q4 2024.
  
  
• In March, private sector payrolls expanded 209,000 while government payrolls rose 19,000 despite lower federal employment. Job growth was concentrated in the services sector, which registered a 197,000 increase in employment led by robust gains in health care (+78,000), leisure and hospitality (+43,000), retail (+24,000), and transportation (+23,000). The job picture was softer on the goods-producing side with payrolls rising by 12,000 amid a modest increase in construction employment (+13,000) and subdued manufacturing hiring (+1,000).
  
  
• The government sector made a larger-than-expected contribution to the overall payroll gain last month, with overall employment up by 19,000. A 4,000 drop in federal government payrolls was more than offset by a 23,000 gain in state and local employment. The ongoing efforts to significantly reduce the federal workforce will likely translate into further declines in federal employment in the coming months.
  
  
• On the household survey side, the labor market picture was a little more encouraging than in February. While the unemployment rate edged up a tick to 4.2% in March, it was for “good reasons” as more people (particularly 16- to 24-year-old individuals) joined the labor force to look for work. The participation rate rose 0.1 percentage point (ppt) to 62.5% after reaching its lowest level since January 2023. Looking ahead though, the sharp decline in immigration flows in recent months and tighter immigration policies will constrain labor supply dynamics.
  
  
• On the wage front, average hourly earnings saw a moderate 0.3% month-over-month increase in March but were revised down in the prior month, which led to a 0.2ppt decline in wage growth to 3.8% year over year — the slowest pace since July 2024. Amid limited labor market churn, continued wage growth containment efforts by employers are leading to further moderation in wage growth, a trend that will likely continue throughout 2025. Still, inflation risks are tilted to the upside.
  
  
• Looking ahead, the steep tariff increases and the surge in uncertainty and market volatility will likely result in a more rapid economic downshift than we previously anticipated, with the risk of triggering a “non-linear” labor market response that would tip the economy into a recession. Large cuts to the federal workforce and the cancellations of many government contracts will also be a drag on overall payroll growth in the coming months, while tighter immigration flows will weigh on labor supply dynamics, further constraining job growth.
  
  
• With inflation risks decidedly tilted to the upside and labor market conditions still generally healthy, Fed policymakers will remain in wait-and-see mode. We expect they will maintain a reactionary stance in the coming month and will want to avoid front-running the impact of tariffs on output and inflation. We will likely see a growing fracture between those that are more concerned about the negative impact of tariffs on growth and employment and those more concerned about the risk of a de-anchoring of inflation expectations and persistently higher inflation.