A weakening, but not-yet-weak labor market added 151,000 jobs in February (vs. 159,000 expected) as the unemployment rate unexpectedly increased to 4.1%. Job creation in the first two months of 2025 is still in healthy territory, but has come in much lower than the last two months of 2024. The higher unemployment rate may mostly be a correction after last month’s unexpected—and perhaps questionable—decline to 4.0%. Importantly, the U-6 unemployment rate, which adds those marginally attached to the labor force and those working part-time, who would rather work full-time, to the headline unemployment rate, jumped to 8.0%, the highest level since October 2021.

More importantly, the outlook for the labor market has deteriorated meaningfully over the past few weeks as the impact of DOGE cuts, the immigration crackdown, and the tariff rollercoaster are expected to hit job creation. Federal government employment only declined by 10,000 in February’s data, but this is the calm before the storm. More extensive cuts are expected to hit the data in the coming months. In addition, the change in immigration policy will also negatively impact job creation as labor supply shrinks. And businesses are unlikely to invest in expanding payrolls when tariff policy is so unpredictable. The cooling in the labor market over the past two years has been a welcome adjustment from too tight to more sustainable, but further deterioration at this point would not be welcome.

Mortgage rates may tick down very slightly today, but will mostly remain unchanged. Bond market investors are now hoping for as many as three rate cuts from the Fed in the second half of this year as the economic outlook has worsened, but uncertainty is at all time highs. The White House’s ever-changing stance on tariffs, the size of the federal government, tax policy, and immigration will continue to drive the outlook on rates.

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