DOGE Layoffs: A Growing Risk to US Economy and Markets

The Trump administration's Department of Government Efficiency (DOGE) has announced plans to lay off around 300,000 federal workers, which could potentially trigger wider unemployment and slow economic growth, according to Torsten Sløk, chief economist at Apollo Global Management. This move, coupled with persistently elevated policy uncertainty, poses growing risks to the US economy and markets.

The layoffs could potentially affect up to 1 million people, considering that there are two private sector contractors for every federal employee. This significant number could push jobless claims higher over the coming weeks, leading to an increase in the unemployment rate. This, in turn, could have consequences for interest rates, equities, and credit, as Sløk noted.

The incoming economic data remains strong, with the economy growing at a solid pace. However, the near-term downside risks to the economy and markets are growing. The question is whether persistently elevated policy uncertainty will begin to have a negative impact on capital expenditure (capex) spending and hiring decisions.

The Fed last month held the main interest rate at a range between 4.25% and 4.75%, noting a lack of clarity in federal regulation, trade, immigration, and taxation under the Trump administration. The uncertainty surrounding these policies is spiking higher, but credit spreads have not responded the way they normally do to rising policy uncertainty.

The layoffs could have a significant impact on regional economies, particularly in areas with a substantial federal presence. For instance, in Washington D.C., the unemployment rate would spike to 9.6% from its current level of 2.8% if the Trump administration achieves its goal of reducing the federal workforce by 75%. This significant increase in unemployment could lead to a decrease in consumer spending, which accounts for a substantial portion of economic activity in these regions.

Moreover, the layoffs could disrupt essential government services, such as food safety, tax collection, and disease research, which could have broader economic implications. For example, layoffs at the IRS could delay the processing of taxpayers' returns and reduce federal revenue, as fewer IRS workers would make tax cheats less likely to be caught. Similarly, layoffs at the Federal Aviation Administration could impact air travel safety, and layoffs at the Food and Drug Administration could affect baby formula safety, among other potential disruptions.

In summary, the potential layoffs of federal workers and contractors could have a significant impact on the unemployment rate and regional economies, particularly in areas with a substantial federal presence. The disruption of essential government services could also have broader economic implications, as highlighted by the examples and data provided in the materials. The Trump administration's efforts to reduce the federal workforce could potentially affect the federal budget by lowering federal spending, but other measures, such as raising taxes, reforming entitlement programs, reducing military spending, and addressing the swollen federal budget deficit, could also be considered to help address the budget deficit more effectively.