The market is growing increasingly concerned about the US government's layoffs, which may lead to a surge in unemployment benefit applications.

Although the scale of layoffs at the White House and its "Department of Government Efficiency" (DOGE) has not yet appeared in the latest data, the market is concerned that these layoffs may lead to a surge in unemployment benefit applications in the coming months and have an impact on the labor market. According to data released on Thursday, the number of initial jobless claims in the U.S. rose only slightly by 5,000 to 219,000 in the week ending February 15, remaining at a historical low. However, some economists and market observers warn that the impact of federal government layoffs has not fully materialized, and in the coming months, government employees who have been laid off may start applying for unemployment benefits. Torsten Slok, Chief Economist at Apollo Global Management, stated that the main concern for clients currently is whether the layoffs related to DOGE will trigger an economic recession, and how the market will react if the number of unemployment benefit applicants starts to rise significantly. "All risk managers should pay attention to this issue." Currently, the market has not shown excessive concerns about an economic recession. The S&P 500 index hit a new high on Wednesday, closing above 6,100 points. However, by Thursday, the market's attention had shifted to weak earnings guidance released by Walmart Inc. (WMT.US), with the Dow Jones Industrial Average falling over 450 points, the S&P 500 index retracing from its high of 6,144.15 points, and the Nasdaq Composite Index dropping by 0.47%. Meanwhile, U.S. Treasury yields fell throughout the day, indicating that some investors are still seeking safe havens. Since the brief economic downturn caused by the COVID-19 pandemic in 2020, the U.S. economy has not fallen into a recession again. Despite the Federal Reserve raising interest rates to curb inflation, the job market remains robust, with an unemployment rate of 4% as of January, and nonfarm payroll data for November and December revised upwards by a total of 100,000, reflecting the resilience of job growth. Since 2022, the number of initial jobless claims has remained stable. Oliver Allen, Senior U.S. Economist at the British macroeconomic research firm Pantheon Macroeconomics, predicts that the number of initial jobless claims may rise to 250,000 in the coming months. He stated that if this prediction comes true, market expectations for a rate cut by the Federal Reserve in 2025 may change, and the possibility of a rate cut in May or June may increase. However, he also pointed out that "the scale of layoffs at DOGE is not sufficient to independently cause an economic recession. The real issue to watch is whether the layoffs by the federal government will lead to significant cuts in government spending, affecting government contractors and non-profit organizations." Just a day ago, minutes from the January Federal Reserve meeting showed that officials expected the labor market to remain strong, but also acknowledged the risk of "unexpected weakness." Some officials believed that a deterioration in the labor market conditions was a precondition for future rate cuts. The Trump administration and the "Department of Government Efficiency" are planning to cut at least 10% of federal government employees to reduce "wasteful spending." According to foreign reports, over 200,000 employees who have joined in the past one or two years may be affected, but the specific number of layoffs is not yet clear. In addition, over 2 million government employees have received a "deferred resignation" plan, which allows them to receive several months of salary and medical benefits as compensation. Slok estimates that the total number of federal government employees, including contractors, is approximately 10 million. "It is still unclear whether there will be a significant increase in unemployment benefit applications, in part because the pace of policy changes in Washington is too rapid." said Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors, "Multiple sources indicate that there are over 200,000 employees in the federal government who have worked for less than a year, putting them at a higher risk of layoffs." Baird wrote in an email to MarketWatch, "Just layoffs at the government level are not enough to cause an economic recession, as long as private sector hiring remains robust, household spending continues to grow, the overall economy can maintain a certain level of resilience." But he also added that the ongoing news about government layoffs in Washington has raised some market concerns, although investors are not currently showing serious concerns about a short-term economic recession. Since the beginning of the year, there has been increased volatility in the U.S. stock market, but overall, it remains on an upward trend. Baird said, "Although there have been occasional fluctuations in the market, the stock market continues to rise."