| Dear Reader,
The first of Trump’s federal layoffs have just begun trickling in through jobless claims data — and over the next few months, that trickle will become a flood.
Here’s how a wave of federal layoffs (and an inevitable payroll crash) could pave the way for lower rates this Summer:  | 
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Click here to see all the details. | Video Transcript: Welcome to Moneyball Economics. I'm Andrew Zatlin, and the topic today is payrolls…
See, you know that the federal government is laying off people and they're cutting programs, and all of this will lead to a ripple through effect in the broader economy. It all comes down to fewer jobs out there.
But what you may not remember is that the Federal Reserve is right now trying to decide when they're going to cut interest rates and by how much and what happens in payroll land will trigger those cuts. See, the Fed has a dual mandate…
They're supposed to keep inflation under check. That's one mandate, and guess what? Inflation continues to come down. We are so far out of the danger zone we were in a couple of years ago. We are now entering that sweet spot where the Fed feels comfortable that we could cut interest rates a little bit.
The second mandate has to do with the job market and keeping jobs up.
So if inflation's coming down, that creates conditions under which the Fed can cut rates without getting into a place where they think they're heating up the economy too much, and if payrolls are at a sustained level of softness, the Fed is motivated to cut interest rates.
And right now we are at a place where payrolls are soft, right?
They're not soft, soft in a panic way … but they've been softening, and what comes next is what the Fed is scared of — and this is why I think we're going to see deeper and sooner interest rate cuts.
Let's talk about payrolls and what I expect to see. I think between now and the end of the year, 250,000 fewer payrolls, that's a lot. If you were to peanut butter spread that over the next nine months, we're talking about 30,000 fewer jobs per month.
That's a big drag.
That's a big headwind, but that's only if you spread it evenly. I don't think it's going to happen evenly. I think in fact, it's more front loaded. I think we could see a couple of months where it's a 40,000 per month drag and it continues to linger on. That's the trigger point I'm looking for.
So how do I get to 250,000? Let me show you the math that I'm coming up with…
It starts with the federal worker level. After Trump's first administration, and since Biden's administration, the federal government grew about 170,000 workers. Okay, well, guess what? I think Trump, in an ultimate FU to Joe Biden, is going to try to roll back all 170,000 workers. His style, right?
Alright, 170,000. Well, guess what? We already have line of sight to 125,000 of those.
For example, 70,000 people have already accepted packages. They've already left, so that's 70,000. Recent announcements say that the postal workers, that's 10,000. That gets us to 80,000 and there’s another 10,000 from Social Security Administration.
That's now 90,000, and then you've got roughly 30 to 35,000 of outright layoffs already in motion. It's 125,000 of that 170,000 figure I put on the table.
Now, you could go beyond that. You could simply let people who are normally going to retire or quit or go somewhere else, attrition is what we call it. Just let that happen and don't backfill those jobs. It's very easy to take the current line of sight, 125,000, move it to 170,000 or even 200,000 without much effort going forward. That's the key going forward. The 70,000 in accepted severance packages, the 30,000 in announced layoffs, that’s 100,000.
That's going to happen almost overnight. It's going to feel like it's happening overnight when in fact there's a little bit of a staggered delay, and that's something we want to talk about because that addresses the timing.
We've got a hundred thousand people who are probably going to be suddenly not on payrolls, and that's going to happen probably over the course of two months or so, but it's not going to really happen until we start to see this data in say, the May, June, July timeframe. Why do I say that? Well, there's delay.
First of all, a lot of these people are not going to immediately let go. They've got built up PTO, they've got sick leave, they've got administrative leave, blah, blah, blah, blah, boom. Here you go. Two, maybe even three months before they are technically no longer employed at the federal government level.
At the same time, you've got some processing issues. You take 100,000 people and you shove it into the unemployment offices and you say, go ahead and process paperwork for a hundred thousand people. They're going to be overwhelmed.
So you're not going to see this information show up immediately overnight in jobless claims or payrolls.
We are at the beginning of a wave, and that wave is going to peak first in jobless claims because jobless claims are more near time. You're going to start to see that probably happen peaking in, say May, moving up in April and into May.
But guess what folks? The June payroll data reflects the period from May 13th forward. So that's why I think you're going to start to see this primarily in the June July timeframe. You're going to see payrolls weaken over the next couple of months, but you're going to see them crash primarily in June, and the Fed likes to go away on vacation.
I have a feeling June is the month we want to pay attention to, and I think they're not going to do just a quarter point cut.
They might do more. The Fed might signal a quarter point cut and then a quarter point shortly thereafter. Whatever the case interest rates coming down because payroll's dropping fast is the formula, and that's just the federal level. Now we've got the private sector, and remember, if the federal government is cutting $10-20 billion in programs, what they're really doing is they're cutting payments to workers in the private sector.
They're cutting DEI/ESG initiatives, for example. They're cutting all these different places, and that basically means they're turning around to a private sector contractor and saying, thanks, but we don't need your services.
So the private sector is now going to be laying off tens of thousands, and they've already started the math teachers at schools, for example, afterschool music programs and things like that that are outsourced to the private sector. They might be trimming that staffing — the third leg of the stool if we've got the federal worker direct cuts.
We've got the private sector direct cuts, now we've got the state and local cuts. This is also significant. It's large. It's just going to be more delayed. When I say it's large, if you look at the total public sector, post office schools, actual government workers, you're talking 24 million employees, of which about 1.4 million came after covid, 24 million, you fired 250,000. That's less than … that's about 0.1% rather.
That's barely noticeable. At the state level though, is where the bulk of these workers sit, and it's a little bit harder to cut the state and local workers first because they've got a different budget cycle. Their budgets don't end for a few more months.
And so all these workers are still on the payrolls, and typically July is the start of the fiscal year for state and local entities. Then they have slush funds.
They have means. “Geez, we don't want to fire teachers or other kinds of folks, so we'll dip into our emergency funds.” That's going to happen unless you're California, which just doesn't know how to run a business and they're just terrible and they don't have a slush fund anymore.
Whatever the case, state and local layoffs are going to happen, probably easily 50,000 workers, but it's not going to happen until you get to July. And primarily it's going to take the form of contracts that are coming up in July, won't be renewed, blah, blah, blah, whatever the case.
So you have 170,000 plus workers being laid off at the federal level.
You've probably got another 50,000 at the private sector level and now another 50,000 or more at the government and state level, excuse me, at the state and local level of governments, add it all up. Play with some of the timing.
We are looking at really hard times with payrolls in June, July and even into August. So the Fed, I think is going to come out, as I said, in June with a cut. Then they're going to come back and they're going to do another cut, and they might even do a third.
We are looking at interest rates going down, and that is fuel for the markets. We're in it to win it. Folks get ready for payoff. You should be buying these dips.
Zatlin out. 
Andrew Zatlin
Editor, Moneyball Economics |
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