Unemployment Crisis Next? How Many Jobs DOGE Could Cut (Uncut) 02-22-2025

February 22, 2025

0 18 minutes read

Unemployment Crisis Next? How Many Jobs DOGE Could Cut | Bob Elliott

Inflation is not going to be interesting in 2025. The Fed’s shifts in policies are not going to be the big driver of what’s going on in response to, you know, the backward-looking labor market or the backward-looking inflation picture. It’s really fiscal policy that’s in the driver’s seat that’s going to drive what’s happening in 2025.

Fiscal policies dominate headlines. What’s happening next with markets? What’s happening next with tariffs? What’s happening next with taxes? And what’s happening next with your portfolio? We’ll be talking about this with Bob Elliott, CEO of Unlimited. Welcome back to the show, Bob.

Thanks so much for having me. Exciting times we live in these days. Absolutely.

Last time I had you on, it was right before the election, I think. Yeah, right before the election, the day before the election, in fact. And we were talking about the outcome of the election and how it could impact markets.

Well, let’s take a look at how the markets have performed since November 7th. Take a look at my screen here. This is the S&P 500.

And as you can see, it’s been topping. It’s been choppy sideways ever since the beginning of the year. And actually, if you discount this big drop in the beginning of January, it’s just been trading range-bound and consolidating sideways.

Is this the top for you or for investors? But is this the top for markets, Bob? And then we’ll get into some of the macro drivers here. Well, I think particularly when it comes to stocks, you know, there’s a great deal of euphoric expectations built in, you know, leading up to the election and just afterwards. And I think what’s happened over the last couple of months, which, as you know, basically stocks are flat for the last couple of months, is that investors are just trying to digest whether the actual policies that they’re seeing align with such high growth expectations in the economy.

And, you know, so far, it doesn’t necessarily look like that’s going to be the case. So while the economy is kind of chugging along, doing pretty well on a backward looking basis, I think the real question is, are fiscal policies really going to be, are they going to be as pro-business and pro-growth as many people had hoped for? Well, what do you think? Well, I think when you look at the series of policies that have come in so far, pretty much all of them are growth negative in the course of the next six to 12 months. The clampdown on immigration is reducing the potential growth rate of the U.S. economy, and substantially so, like basically moving it from one to one and a half percent labor force growth to essentially zero and maybe slightly negative.

If you look at, you know, tariff implementation, which is in the short term effectively a tax on consumption, that certainly is starting to add up to be a meaningful drag on the economy. And then, you know, there’s some ambiguity about what DOJ and other tax and fiscal policy is going to be ahead. But the direction certainly looks mostly in one direction, which is figuring out ways to cut spending.

And even though, you know, profligate spending and undesirable spending and waste might be good to cut, it is, you know, the flip side is it’s someone else’s income and that that is a negative for, you know, growth ahead. Okay. So here is the Atlanta Fed GDP now cast.

So this, I mean, it’s basically, it’s still positive territory is my point, right? They’re not, the government is not projecting negative growth. And I wonder if you agree with the assessment that it’s now three percent real GDP growth into Q1 2025 for the remainder of the year. I mean, that’s three percent makes sense to you.

Yeah. Well, by the way, three percent real GDP implies kind of like a six percent nominal GDP. If you take three percent inflation, just FYI, but yeah.

Yeah. Yeah. The Atlanta Fed GDP estimate is very early days for one first quarter data that we have.

So I probably wouldn’t get so focused on that. On a backward-looking basis, the economy has been growing at two to three percent real and pretty much all the data that you look at through the fourth quarter and early first quarter aligns with that. I think the real question is what are the likely fiscal effects ahead? I mean, just take a simple example of labor force growth going from one to one and a half down to zero that effectively is almost direct a cut to potential GDP growth in the economy and a potential growth rate in the economy.

And so that’s a good example, a simple example of where the fiscal policy ahead is not aligned with what the growth has been in the past. And so I think that’s really where the disappointment could set up right now. Equity markets, economists, everyone’s expecting something like three percent real growth in the economy in 2025.

That is already priced into the markets. So the question is, are we going to do better than that? And how are we going to do better than that, particularly in an environment where fiscal policy is likely going to be a drag ahead? Tariffs, let’s bring up tariffs. How inflationary are tariffs? Let’s take a look at the PPI report that came out today.

Now, this is from last month. So tariffs have not yet been implemented and they haven’t yet had time to feed into the inflation report. So last month’s PPI didn’t factor in any tariffs.

But at the same time, we have to consider the fact that wholesale prices rose 0.4 percent in January, more than expected, excluding food and energy. The core PPI was up 0.3 percent in line with the forecast. Stock market futures moved higher following the release, while treasury yields were sharply lower despite the higher than expected headline number.

Why do you think markets reacted the way they did? Are we expecting the Fed to do something about this in the way of easing following this report? Is that why things are kind of moving the way they are? Yeah, the PPI report, for real macro nerds, you can’t really look at the headline number. What the Fed’s really focused on is what elements of the PPI report flow into the PCE report that’ll come out later in the month. And the initial read from that on the CPI report yesterday was it looked a little hotter than expected.

But when you go under the hood on the PPI report, a lot of those inputs into PCE have now looked like we’re going to get a cooler PCE reading than we expected based upon the CPI report yesterday. And so that’s why you’re seeing basically markets fully reverse the bond yields rise that we saw yesterday as a function of the PPI report. So the headline numbers looked hot, but the underlying constituents that matter, frankly, to the Fed looked cooler than people expected.

What do you make of inflation overall for 2025? Are we staying around 3 percent, heading towards 2 percent or higher? When you’re thinking from a macro perspective, whenever you’re thinking about sort of the big drivers of asset prices, basically growth and inflation, you’ve got to think about which ones of those are going to be more volatile. And for a while we had volatile inflation and inflation expectations for a couple of years, and that drove asset prices. Inflation is not going to be interesting in 2025.

It’s gradually cooling. All the data is aligned with that. The Fed is mostly looking at it and saying it’s gradually cooling.

And whether it’s kind of stuck a little too high, like a 2.5 percent or a little bit above or a little bit below that, it’s not going to matter in asset prices. The thing that’s going to matter in asset prices is do we get real GDP growth at 3 percent over the course of 2025? Do we get high double digit earnings growth, which is currently priced in the equity market in 2025? Those are growth measures. That’s the real uncertainty in this economy, not is inflation going to be 20 basis points higher or lower than what was expected.

Okay. Well, the other component of Fed monetary policy is the labor market. U.S. weekly jobless claims declined amid stable labor market.

According to Reuters, the number of Americans filing new applications for unemployment benefits decreased last week, suggesting the labor market remains stable early in February. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 213,000 for the week. End of February 8th, economists polled by Reuters have forecast 215,000.

So it is better than expected in terms of stability. Is the labor market strong for you right now? Yeah, I mean, the labor market has been pretty stable for the last 18 months or so. It was very red hot in 2023 and early 24, and it’s basically been stable since.

And the initial claims data, which for regular readers of Twitter know that I publish something every week saying, looking at the claims data. And it’s a good real time measure of what’s going on, in particular around layoffs, which is what it specifically measures. And what you see there is that layoffs remain at cycle lows.

There’s not a lot of proactive reduction in labor force by companies. And so to the extent that there’s weakness in labor, it’s really around the hiring side of things and the overall labor force growth. And that’s the side of things that is likely to be disappointing in the future.

But it’s disappointing relative to high expectations, not really. There’s no indications that we’re moving swiftly into a recessionary type mode. Well, here’s the unemployment rate.

By most measures, the labor market is improving. If you’re improving, if you take a look at how it’s behaved in the last couple months, peaking around 4.2% in August, and then coming back down to 4%. Is the labor market heating up is my question.

Let’s take the opposite side of the spectrum. Are we going to get a heat up the labor market such that the Fed would no longer have to be concerned about labor market weakness and thus is less likely to cut rates even if inflation comes down a little bit? If you look at a holistic set of data on the labor markets over the last six or 12 months, not much has changed. The unemployment rate, when the Fed shifted to their big 50 basis point cut last fall, the unemployment rate was an outlier moving to the upside.

And what we’ve seen over the course of the last couple months is basically normalization. If you look at things like payrolls, ADP, initial claims, various surveys, employment surveys, they’re all basically flat for the last 12 months. And so I think there’s a lot of noise around the unemployment rate, but the reality is from a labor market perspective, not much is changing.

From an inflation perspective, not much is changing. And so it’s not that surprising. The Fed’s shifts in policies are not going to be the big driver of what’s going on in response to the backward-looking labor market or the backward-looking inflation picture.

It’s really fiscal policy that’s in the driver’s seat that’s going to drive what’s happening in 25. Doge is laying off a lot of people in the federal government, headlines after headlines about different departments cutting their staff. What is that going to do to the unemployment rate? Yeah, I think Doge, there’s a real ambiguity about how big a deal Doge is.

And I think it’s one of the challenging things. Typically, when you look at fiscal policy, traditional fiscal policy, you look at legislative outcomes, and you can then translate that into government spending. Here, we’ve got something where it’s not really clear exactly how much cuts are going to come out of the program on a forward-looking basis.

The interesting thing is if you look at the actual cash flow numbers from the daily treasury statements, so far, you don’t see a meaningful impact. You see USAID spending going to zero, but in an aggregate perspective, spending since the Trump administration took over here in 25 is actually above the same pace it was in 24 over the same dates. So maybe there are cuts, maybe they’re coming.

So far, it’s not actually affecting the cash flow. Well, here’s the headline I alluded to earlier. Doge’s power expands as federal agencies start planning large-scale layoffs.

The next stage of the Trump administration’s efforts to slash the federal workforce is underway. Agents and leaders have been told to begin preparations for large-scale layoffs, known as reductions in force, or RIFs. Under an executive order President Donald Trump signed Tuesday, they will work with Ilama’s Department of Government Efficiency to carry out the mandate, expanding the role of the billionaire’s team, and reshaping federal government operations.

This comes after reports that the administration is trying to buy out certain workers, quote-unquote. Obviously, that’s not the way they’re pitching it, but that’s the way some people are interpreting it. Anyway, the question is, Bob, how large-scale can we expect, and can we see a structural disruption to the labor force? You know, I think probably, if you look under the hood when you talk to people about this stuff, you hear talks of like a 10 percent cut in the government labor force, which, you know, wouldn’t be that extreme in the scope of labor force reductions.

That’d be about 250,000 jobs that would be eliminated, which would represent, at current labor growth, labor market growth, like, you know, something like two to three months of baseline employment growth in the U.S. economy. Does that matter? Yeah, that matters. Is it, you know, will it alone drive us into recession? Probably not.

I think the issue is you’ve got a series of these different effects. Each one of them are—they’re all in the same direction, which is less government spending, right? Every one of these different stories, whether it’s the cuts to programs, whether it’s the labor force reductions, et cetera, they’re all growth-negative impacts on the U.S. economy. Well, so here’s the thing.

It’s workforce, federal workforce, roughly 2.4 million people. If you take the 10 percent assumption that you just made, that’s 240,000 layoffs, which is going to significantly add to the weekly jobless claims numbers that I just read earlier, okay? We’re not talking about—yeah, it’s going to be somewhere north of 400,000 if you take that into consideration. Is the private sector going to be able to absorb some of these layoffs? That’s kind of the argument that economists have posed to me, which is that, well, it doesn’t really matter.

They’ll just find jobs in the private sector anyway, so we don’t really care. Is that true? I mean, it’s certainly possible, and probably some of the 75,000 that have taken the buyout already have jobs lined up. I think the question is, you know, there’s a friction.

There’s a necessary friction or an eventual friction that happens as someone leaves one job and moves into the other, and that will likely, you know, create a modest upward pressure on unemployment as a function of this. As I said, it’s not—in and of itself, it doesn’t matter enough, but as part of a holistic picture of tightening of government spending, it’s, you know, just another straw in the camel’s back of fiscal contraction that’s coming ahead. What do you think will be the top asset class for 2025 going back to the markets? Yeah, well, if you look at what’s priced in the asset markets, particularly the stock market, you have very high expectations and a momentum that is likely to be—a policy environment that’s likely to be challenging ahead, and so that likely favors bonds in particular relative to stocks.

That combined with an environment where you’re having increasing cross-border tensions related to tariff activities also favors gold relative to stocks, and so we’re probably going to see an environment where, you know, which is a bit of a reversal from what we’ve seen over the last couple years, which is, you know, stocks have powered ahead relative to bonds, where the sort of growth expectations and disappointment that are going to come are likely to favor bonds and gold relative to stocks in 2025. Let’s talk about gold now then. So what is it right now? 2947 as of, you know, roughly noon Eastern time on the 13th.

What is going on with gold? 3000 is just around the corner, Bob. What’s your outlook? What have been the major drivers of this run-up? Tell us. Yeah, well, I think the basic challenge with gold is that there’s been, you know, a meaningful shift in the desire to hold gold relative to particularly U.S. dollars from, you know, global central banks.

That’s been in place for a couple of years. And now, increasingly, you’re seeing retail demand in one form or another come into the gold market, in part because it’s a place where folks in Asia can store wealth that is not subject to capital controls, and in part because, you know, there’s real questions about the safety and security of holding savings in the U.S. federal government if you’re a foreign investor. And so you put those two things together, that’s creating a real squeeze on the gold price because the challenge with gold is there’s essentially a fixed supply.

And actually, if anything, that fixed supply is going down because the supply that we’re seeing right now is a function of prices from 10 years ago, and that’s how long the production cycle takes. And so supply is going down at a time when demand is going up. The only way that that gets met is through scrap.

And the challenge with scrap is that in order to get people to scrap their gold, people are very sensitive to the price. Like, what will it take, you know, to get ads back on television to get, you know, scrap gold for cash? Prices got to rise even more. And so that’s the challenge is it’s very hard to meet incremental demand in the gold market, and it doesn’t take much financial demand to really create a squeeze on the gold price higher, which is what we’ve seen.

What do you make of the argument that gold is signaling something, that something could be higher inflation, it could be wars on the horizon, that could be market volatility for equities, and thus gold is acting as a hedge maybe preemptively? Do any of these theories make sense to you? Well, I think it’s probably not gold as an inflation hedge. I think what it is, is it’s a geopolitical hedge, and certainly I’d say, and an uncertainty hedge. Gold benefits from those two environments where there’s a lot of policy uncertainty, and where there’s a great deal of geopolitical conflict.

And, you know, if you look at the current circumstance, both of those things are elevated. And so it makes sense that it’s getting a bid. The problem is, it’s like hard to connect that to like, you know, a stat came out, and therefore gold rises the way you can with, in many cases, stocks and bonds.

And so it’s just, it’s a looser relationship than what you see with other macroeconomic factors. Gold responds usually negatively to the dollar. They’re inversely correlated.

The DXY has taken a bid earlier in the month, but has basically, it’s been on a downward trajectory. If you just ignore some of the blips here, this was when Trump announced tariffs on Canada and Mexico, and then they came back down when he rescinded them. Anyway, the point is, the dollar has been weakening.

Has that been a contributing factor to the rise in gold, do you think? Yeah, certainly on the margin, gold prices and dollars have benefited from a weaker dollar. But, you know, gold’s been rising in global currency terms as well. I often like to think about gold in global currency terms because it really is, it takes away, you know, views of the dollar versus other currencies that are underlying it.

And so the rally in gold has been global in nature across pretty much everything, every currency. And if anything, it’s been more muted in dollars over the course of the last three or four months than we see in other currencies. One thing that I find interesting is that, first of all, tariffs usually have been in the past bullish of the dollar.

In fact, like I pointed out, whenever there has been major tariffs announced, the dollar has seen a bit. Now, because the dollar, the DXY, has been sliding on a more medium-term scale, I think the market is signaling that the market doesn’t really believe that these tariffs are going to be actually implemented or going to be in place for very long. They may just be transactional tariffs, Trump announcing them to get something made or done, and then once a deal is made, he rescinds these tariffs.

Is that the case? Is that how you’re reading this situation? Yeah. I think across basically all markets, the view is that the tariffs are going to be transitory. And certainly, if you look at the equity market, you see that if you look at the, you know, the dollar market action, you see that the one place where it’s not, where it’s being taken a little more seriously is actually in the breakeven inflation market, where we’ve seen breakeven inflation in the medium-term move up to cycle highs.

It’s basically at the same level today as it was back in 2023, early 23, when headline inflation was, you know, six or seven percent and core inflation was a little bit below that. That’s the one place that seems to be taking it very seriously is the bond market. And so it’s setting up kind of an interesting circumstance where if tariffs are a little longer, you know, if tariffs actually come to fruition, which, you know, the Chinese tariffs have, they were implemented in the stock, the reciprocal tariffs that look like they’re being announced today will likely stick around for a while.

You can easily see that be a disappointment for stocks and actually be pretty good for bonds because it’s unlikely they’ll be quite as extreme as what’s being priced into the breakeven inflation market. Okay. Finally, I want to touch on the consumers of the U.S. U.S. consumer debt delinquency hits highest in almost five years, 3.6 percent of debt was in delinquency in fourth quarter, the New York Fed says.

So total household debt rose to a record $18 trillion. So let me just read the first paragraph. The share of outstanding U.S. consumer debt that’s in delinquency rose in the fourth quarter to the highest level in almost five years.

Some 3.6 percent of debt was delinquent in the final three months of 2024. Bob, this is a serious trend. Troubled debt.

We, I mean, if this trend were to continue, it’s possible that the U.S. consumer is going to start weakening in terms of strength that could put downward pressure on margins of consumer staples or consumer discretionary stocks. Is this a start of a recession? Bob, I think it’s very indicative of the K shaped recovery or economy, which is that there are many people at the bottom who are struggling and and nothing has been in place to help relieve that stress for them in this economy. And so that is gradually, gradually building up as a pressure.

I think the big question for the U.S. economy as a whole is basically a lot of supports outside the consumer, whether it be residential building or business investment, have really started to fade. They faded in the second half of 2024. And the U.S. economy, the growth, it’s all about the consumer.

Basically, all the U.S. economic growth that you’re seeing in the last couple of quarters has been driven by consumer demand. And so if you don’t get asset prices that continue to appreciate, that means that consumers feel good about spending and you don’t get continued and you get an increase in taxes, which could effectively comes from a tariff increase or other spending cuts. All of those things are the sorts of things that could put chinks in the of the consumer driven cycle here in the U.S. And none of that is priced in to the particularly the stock market at this point.

Any other risks or opportunities for investors that we haven’t spoken about yet? Well, I think the biggest one is to to look outside of of of stocks. You know, we’ve we’ve definitely seen, you know, the last two years before the election, it was, you know, long stocks and the riskier, the better. And and now it’s time to take some of those gains off the table and look for other assets, diversifying assets in your portfolio, whether it be things like gold, which has got a lot of positive pressures right now, or something like bonds, which, you know, for a long time, we’re not providing a lot of benefit, but look like they could be a diversifier here in twenty five.

Good. Thank you, Bob. Good update.

Let’s catch up another time. Where can we learn from you? Follow your work. Yeah, if you want to follow my ongoing macro commentary, check me out on Twitter at Bobby Unlimited.

I’m also on YouTube as well as Blue Sky. And I do tick tock videos every morning. So if you want to see me first thing in the morning talking about what’s going on in the macro economy, definitely check that out as well.

You’re not concerned about the tick tock band, then I guess that’s not who knows, but who knows what will happen. But but I’ve had actually a lot of fun on tick tock doing videos. We’ll put the links down below.