The Unassuming Economist

From a post by Claudia Sahm:

“Narratives about the U.S. economic outlook have darkened in the past month as concerns about lower growth and higher inflation mount. A stream of headlines on the federal government layoffs and contract cancellations from the Department of Government Efficiency (DOGE) have contributed to the unease.

The threat of DOGE to essential government services and those workers most directly affected by its actions is real, but is it a threat to the overall economy? Could DOGE cause a US recession? It’s unlikely. The scale is too limited, though it will weigh some on overall growth and employment this year. Even so, by moving quickly and maximizing the uncertainty, DOGE amplifies its aggregate risks.

A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the National Bureau of Economic Research. Size, breadth, and duration are important.

The U.S. labor force — people working or looking for work — is currently about 170 million people. It would require nearly 200,000 more unemployed workers to raise the unemployment rate by 0.1 percentage point. (It is worth noting that not all laid-off workers end up unemployed. Some retire or otherwise leave the labor force; some will find new employment quickly.) There is no official threshold for the unemployment rate in a recession, but historically, as reflected in the Sahm rule, the unemployment rate rises at least a half percentage point early in a recession. That’s an increase of almost one million more unemployed.

It is unlikely that DOGE triggers a recession.

Civilian federal employment (including the Post Office) is currently 3 million or less than 2% of the labor force. Changes in federal employment normally have little to do with the business cycle. There are temporary spikes every ten years due to the collection of the Census. Reductions in federal employment, such as during the Clinton administration in the 1990s, tend to occur in expansions.”

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