The Real 'Market Shocker' Will Not Be Trump's New Tariffs, But The March Job Report

Citigroup's latest Non-Farm Payroll Preview suggests job growth from last month may slow to just 95,000, with the unemployment rate rising to 4.2%. This would be the first clear signal of further softening in the labor market, serving as a prelude to potentially more severe weakness before summer. A weakening labor market could prompt the Federal Reserve to resume rate cuts in May, with total reductions potentially reaching 125 basis points for the year.

Citigroup analysts note that market expectations are rapidly shifting toward pessimism, as the U.S. economy faces multiple pressures, including rising tariff costs, weak consumer spending, government funding and job cuts, and heightened uncertainty. However, aside from weaker consumer spending data, most hard data has not yet shown significant deterioration—particularly in the labor market, where the unemployment rate remains in the 4.0-4.2% range, and the three-month average job growth still far exceeds 100,000 per month.

According to Citigroup's research forecasts, against an already volatile market backdrop—especially following the April 2 tariff announcement—weaker-than-expected employment data could serve as a significant catalyst for risk-off sentiment. However, if March job data outperforms expectations, excessive optimism should still be avoided, as the true peak of labor market weakness may not arrive until June or July.

Hiring Slowdown: A Prelude to Economic Downturn

Based on initial jobless claims data, citigroup highlights that layoffs remain at low levels, but weak hiring will be the primary factor limiting employment growth. The bank notes that spring and summer are typically seasons for increased hiring, but this pattern may break down this year.

Citigroup points out that rising uncertainty, federal government layoffs and funding cuts, and higher tariff costs could further dampen corporate hiring intentions. Specifically, job growth in construction, leisure and hospitality, professional services, and retail trade may slow.

Meanwhile, reduced net immigration inflows could constrain hiring in construction and leisure/hospitality, but declining housing construction and weak consumer demand will also fundamentally weaken labor demand in these sectors.

Also, the return of approximately 10,000 workers in February may boost March retail employment, but sluggish consumer spending could limit new labor demand in the industry.

Slowing Wage Growth, Rising Unemployment: Catalysts for Fed Policy Shift

Citigroup expects wage growth to slow in March, with unemployment continuing to rise in the coming months. It maintains its forecast that the Fed will resume rate cuts in May and deliver a total of 125 basis points in cuts throughout 2025.

After a rebound in wage growth at the end of 2024, Citigroup predicts March's average hourly earnings will increase by just 0.2%. Analysts think wage growth for job-switchers has slowed significantly over the past year, returning to pre-pandemic levels, and easing wage pressures also suggest that tariffs and short-term inflation expectations may not trigger broader inflation.

Regarding unemployment, they think weak hiring will lead to further increases in unemployment in the coming months. February's unemployment rate was 4.14%, and March is expected to rise to 4.19% (rounded to 4.20%), aligning with a slight uptick in continuing jobless claims during the household survey reference week.

After February's dip, labor force participation may rebound, and future increases (e.g., new graduates entering the workforce) could pose upside risks to the unemployment rate.

Citigroup also emphasizes that the impact of U.S. government layoffs may appear earlier in household surveys than in payroll statistics. Government sector job cuts could show modest signs in March data.

According to these professionals, although many government employees were laid off in mid-February, they were rehired and compensated by mid-March, meaning these workers may not disappear from March payroll figures.

State and local government hiring is expected to slow, leading to a total government job decline of 10,000 in March, following a 10,000 reduction in February due to a hiring freeze.

Further government layoffs may occur between May and September, with an estimated loss of 300,000 federal jobs potentially pushing unemployment up by 0.1-0.3 percentage points.

Ask Aime: What impact will Citigroup's Non-Farm Payroll Preview have on the labor market and the economy?