March’s non-farm payrolls release came in well above consensus expectations, up +228k versus the estimate for +140k. Driving the print were notable gains in health care (+54k), social assistance (+24k), retail trade (+24k), transportation & warehousing (+23k), and government (+19k), although admittedly that was led by state and local hiring as DOGE efforts are starting to have an impact on data. Revisions to January and February payrolls netted to a decrease of -48k versus the previously reported prints.
Wage growth came in on target, up +0.3% month-over-month and +3.8% year-over-year, continuing the cooling trend in 2025.Average hours worked were steady at 34.2. Employed persons rose by +201k while unemployed persons rose by only +31k. The participation rate rebounded back to 62.5% from 62.4%, helping to drive the unemployment rate higher to 4.2%. The caveat to the relative strength of this report is that it reflects the time period ahead of the now announced tariffs; it also reflects a reversal of an outsized impact from poor weather in the prior two reports.
As for the market reaction, equity markets are lower as are Treasury yields as tariffs remain squarely in the crosshairs for investors. In fact, despite the stronger than expected print, markets are still pricing in four rate cuts by October, reflecting lower growth, higher inflation, and higher recession risks on the back of Wednesday’s tariffs announcements. This might prove difficult for the Fed to effect given the likely upward pressure on prices; more color may come from the Fed in the coming days.
To that end, we have widened our range of outcomes for both U.S. GDP growth and inflation. Coming into this year, we had expected +2.3% growth and lowered that to +1.7% on the back of initial tariff announcements. With this week’s news, we estimate that U.S. GDP, if tariffs remain in place at currently announced levels, could be at or slightly below +1% in 2025, with some downside risk on escalation. We also believe that inflation could be +3.5% at the end of 2025, higher than our initial forecast of +3.1% after the first round of tariffs and +2.6% in our year end outlook.
Given the strong current starting point for the U.S. economy, however, with robust employment levels and strong consumer and corporate balance sheets, as well as the potential for tariff rates to be negotiated lower as pro-growth fiscal policy comes into focus, we believe that the U.S. will avoid a recession and a protracted economic deceleration. We expect uncertainty to ease as we move closer to the second half of the year but acknowledge that volatility may persist in the near term. This may create attractive levels for adding to equity exposure, particularly for clients with outsized cash positions. We remain conscious of the balance between risk and opportunity in this environment, and we will continue to assess this balance as we allocate at the asset class, sector, and company level with the overarching goal to align portfolios with your long-term goals.
