The effect of the job market on the economy

The U.S. labor market appears sluggish so far this year. In February, the economy created 151,000 new jobs. That followed January’s revised gain of just 125,000 new jobs.¹ While February’s report demonstrates some job market stability, it also indicates a slowing trend compared to last year.

Other key measures, including the unemployment rate, average hourly wage gains, initial weekly jobless claims, and labor force participation rate, showed little change from January.

“Expectations for February were modest,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “At this point, we have a lot more questions than answers about the labor market’s direction as the economy deals with an uncertain environment.” Much of that uncertainty is tied to new Trump administration policy initiatives. Nevertheless, Haworth says monthly job gains in the 100,000 to 200,000 range are generally favorable, more than keeping pace with population growth.

As is frequently the case, the healthcare industry was responsible for the month’s biggest job gains, adding 52,000 positions.¹ “Healthcare is an area where we’re chronically understaffed,” says Tom Hainlin, senior investment strategist with U.S. Bank Asset Management. “It is an industry with more than one million job openings, so there is more opportunity for continued growth, but employers can’t find enough workers.”

Other major contributors to February’s job gains included financial activity (+21,000 jobs in February), transportation and warehousing employment (+18,000), and social assistance (+11,000).1

Trends in federal government jobs are an increasing focus. The Trump administration is seeking to trim the federal workforce. In February, federal government employment declined by 10,000 positions.1 The numbers could drop further in the coming months. “Federal jobs are only a modest number in terms of total payrolls,” says Haworth. “However, there could be ripple effects, as by some estimates, there are two private contractors associated with every federal employee.” Haworth says this year’s job cuts may be rolling back some of last year’s strong federal government job gains, but markets will be watching to see if other segments of the economy must absorb negative multiplier effects.

Unemployment ticks modestly higher

The unemployment rate moved modestly higher, from 4.0% in January to 4.1% in February.¹ “When taking a more historical view of the unemployment rate, a number in the low 4% range is quite favorable,” says Haworth.

Weekly jobless claims

An important, real-time labor market measure is the weekly initial jobless claims report. This number often fluctuates from week-to-week. In late February, initial claims jumped to 242,000, raising some concern. However, claims dropped again the following week, to 221,000.² “One week’s numbers represent a data point, not a trend,” says Haworth. “If you look at long-term history, sub-300,000 initial weekly jobless claims are considered a fairly healthy level for the economy.”

Markets also track the labor force participation rate, considered a key barometer of the broader economy's health. This number hasn’t changed much over the past year, but in February, the labor force participation rate stood at 62.4%, a slight drop from previous levels.¹ Throughout 2024 and early 2025, the labor force participation rate remained in a narrow range of 62.5% to 62.7%.³ “Improving labor participation is one way to address tightness in the labor market that’s propping up wage gains,” says Matt Schoeppner, a senior economist at U.S. Bank.

The most job openings data shows 7.6 million open positions as of the end of December 2024, down about 500,000 from the prior month,⁴ but still considered a healthy job market signal. As has been the case since 2020, the number of job openings still outpaces the number of unemployed workers.

According to the February jobs report, average hourly earnings increased 4.0% over the past year, consistent with readings from the past two years.¹ By this measure, wage gains exceed the inflation rate, as measured by the Consumer Price Index. Inflation for the 12 months ending in January measured 3.0%.³

Keeping an eye on the Fed

Labor market data is a key consideration as the Federal Reserve (Fed) assesses interest rate policy. Between September and December 2024, the Fed cut the federal funds target rate (a rate used by banks in overnight lending that influences mortgage rates and other consumer credit products) by 1.00%, the first cuts in more than four years. Early labor market weakness signals contributed to the Fed’s rate cut decisions. So far in 2025, the Fed held rates steady as it signaled plans to limit 2025 rate cuts.⁵ “The Fed still considers the current fed funds rate level to be tight,” says Haworth. That gives the Fed more leeway to cut rates further should it see labor market deterioration.

“Issues like tariffs, if implemented to the extent the Trump administration has proposed, could result in temporary higher inflation,” says Haworth. “But the Fed is more concerned with long-term structural inflationary issues than with transitory issues like a tariff increase.”

What to expect going forward

Investors closely track jobs data as an important economic indicator and a potential signal about Fed monetary policy. Fed rate cuts are considered a way to boost the economy, help support the stock market rally that began in 2023, and over time, reduce bond market interest rates. After rising to 4.79% in January 2025, 10-year Treasury bond yields recently dropped below 4.30%.⁶ In the meantime, stocks endured a highly volatile start to the year, with the S&P 500 down more than 2% year-to-date through March 6. This follows two consecutive years of 25%+ annual growth in total returns for the S&P 500.⁷

A new issue Haworth is watching is the labor market impact of tighter immigration policy proposed by the Trump administration. “People subject to deportation, in many cases, came to America to work, so if they leave, other workers will need to step into those jobs.” Haworth says the construction industry is a key area where the labor market may tighten.

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