WRAPUP 1-US labor market seen holding steady ahead of tariffs turbulence

U.S. job growth likely picked up in February, with the unemployment rate expected to hold steady at 4.0%, but growing uncertainty over trade policy and deep federal government spending cuts could erode the labor market's resilience in the months ahead. The Labor Department's closely watched employment report on Friday would be the first under President Donald Trump's watch.

U.S. job growth likely picked up in February, with the unemployment rate expected to hold steady at 4.0%, but growing uncertainty over trade policy and deep federal government spending cuts could erode the labor market's resilience in the months ahead.

The Labor Department's closely watched employment report on Friday would be the first under President Donald Trump's watch. The Trump administration's fluid trade policy was making it hard for businesses to plan ahead, economists said. Business and consumer confidence have plunged since January, erasing all the gains notched in the aftermath of Trump's victory in November. The stock market has sold off.

"The one thing employers hate most is uncertainty, whether it's in regulation or supply chain," said Jane Oates, senior policy advisor at WorkingNation. "It's a really bad business atmosphere, we could be headed for an ugly spring." Nonfarm payrolls likely increased by 160,000 jobs last month after rising 143,000 in January, a Reuters survey of economists showed. Estimates ranged from 30,000 to 300,000 positions.

The wide range reflects uncertainty of over the size of the anticipated rebound from the winter storms and fires in California, which in January helped to pull back payroll gains below the three-month average of 237,000. Large parts of the country were blanketed by snowstorms in February and some economists expect lagged effects of the destruction from the Los Angeles fires, which could limit the anticipated payrolls bounce. Revisions to December and January payroll counts were also anticipated after the tally for November and December was raised by 100,000 last month.

Trump triggered a trade war this week, slapping a new 25% tariff on imports from Mexico and Canada, along with a doubling of duties on Chinese goods to 20%. But on Thursday, Trump exempted goods from both Canada and Mexico under a North American trade pact for a month from the 25% duty. GOVERNMENT SPENDING FREEZE

Layoffs of probationary federal government workers by tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, are not expected to show in February, as most of the purge happened outside the survey week. But hiring and funding freezes could have slowed or even weighed on government employment, one of the main pillars of job growth in recent years.

"We would not be surprised by a small decline in federal employment of 5,000-10,000 that primarily reflects the hiring freeze," said Michael Pugliese, a senior economist at Wells Fargo. "The March jobs report is a more likely candidate to see a bigger decline in federal employment." Government funding freezes, which have been imposed and then suspended, have thrown some contractors and employees at entities that receive federal grants out of work. With most of the recent job gains concentrated in low-paying industries, including leisure and hospitality, this could worsen what some economists have described as a white-collar recession.

Nonetheless, the employment report is also expected to show average hourly earnings rising 0.3% after surging 0.5% in January, and would be consistent with an economy that continues to expand, though at a very moderate pace. Annual wage growth is seen increasing 4.1%, matching January's gain. A drop in consumer spending and homebuilding and surge in the trade deficit in January linked to tariffs caused economists to downgrade their gross domestic product (GDP) estimates to below a 1.5% annualized rate from around a 2.0% last month. The Atlanta Federal Reserve is forecasting GDP contracting at a 2.4% rate. The economy grew at a 2.3% pace in the fourth quarter.

Labor market stability could buy the Federal Reserve more time to keep interest rates unchanged while policymakers monitor the economic impact of tariffs and an immigration crackdown. The Fed left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range in January, having reduced it by 100 basis points since September, when it embarked on its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

"This economy has shown itself to be surprisingly resilient during the pandemic recovery cycle, which is encouraging, but there are a lot of shocks now surging over businesses, including budget uncertainties and proposed tariffs on the scale that we have not seen since Smoot-Hawley in 1930," said Brian Bethune, an economics professor at Boston College.

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