No Recession, Just Musk and DOGE Uncertainty

Economist Claudia Sahm believes there is little or an unlikely chance of a recession due to “DOGE” efforts. The magnitude of the layoffs, let-goes, retirements, etc. are not enough to bring on a recession. After reading this I am beginning to think, this is more of a scare tactic by Musk and Trump (he would not have thought of this). This is what Trump wants.

Moreso than layoffs, what will happen are disruptions of programs. Unemployment, Social Security, VA checks, etc. This will set people off balance and cause public chaos. The news will chatter a lot which will upset people even more. I believe we are in for a wrong go of it.

Hopefully, the courts will prevail in the future. Hopefully, SCOTUS and Roberts come to his senses too.

DOGE recession? “Stay-At-Home Macro” (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.

Unlike private-sector businesses and even state and local governments with balanced budget requirements, the federal government is insulated from the boom and bust in market demand during recessions. There are outside factors that influence the size of its workforce. Political scientist Paul Light argued in 2017 that “war and peace play a much more important role in shaping the true size of the federal government’s blended workforce than grand announcements of caps, cuts, and freezes on federal hiring.”

How much DOGE will reduce federal employment this year is an open question. Given the chaotic process, it’s unclear how large reductions are already. There are four main components to the effort.

• A 90-day hiring freeze. It was enacted at the start of the administration with some exemptions. Last year, gross hiring in the federal government averaged 36,000 per month. Nearly all of that was offset by 32,000 per month in separations (retirement, quitting, layoffs), as opposed to expanding the workforce.

• Deferred resignation (Fork-in-the-Road) program. The White House says that 75,000 workers took the offer to resign but be paid (without working) through the end of September. Some fraction of them are people who would likely have retired or left the government this year regardless of the program.

• Firing of probationary workers. According to The New York Times, at least 20,000 probationary workers—typically workers with less than a year in their position—have been fired as of February 26. There are more than 200,000 probationary federal workers in total.

• Reduction in force. Agencies have until March 13 to submit a plan to reduce their headcount significantly. Offices with “functions not mandated by statute or other law shall be prioritized” for reduction. There are no numeric targets, but as a rough gauge, about two-thirds of the federal employees are deemed “essential” during government shutdowns. Relative to probationary workers, most career federal workers have more legal protections from layoffs, or at least there are more requirements about the process.

About 100,000 workers have either taken deferred resignation or been laid off so far. Even if the total reduction doubles by the end of the year, it would still fall far short of a recessionary shock.

Federal government employees are not the only workers directly affected by DOGE’s efforts. Another aspect of DOGE is canceling federal government contracts to “reduce waste, fraud, and abuse.” The process for reviewing contracts was formalized in an executive order last week. The DOGE website currently reports $105 billion in savings, though their accounting is almost certainly an overstatement.

In fiscal year 2023, there were about three times as many federal contractors and grant employees as civilian federal employees (including the Post Office). DOGE canceling or modifying federal contracts and grants put that employment at risk. Elon Musk has set a goal of $1 trillion in savings this year, which most budget experts consider unrealistic. Still, these efforts will lead to a reduction in employment in the private and nonprofit sectors.

But even if DOGE reduces federal employment by 200,000 and canceling contracts reduces contact and grant employment (by a proportional) 600,000, the total is below (though close to) a recessionary shock. Moreover, the reality of the net employment reductions from DOGE this year is likely to be considerably smaller.

DOGE’s approach is risky

DOGE has adopted a “move fast and break things” approach, which amplifies the recession risks in two key ways:

First, it concentrates the economic effects temporally, and

Second, it creates uncertainty that can weigh on growth and employment.

During the Clinton administration in the 1990s, federal employment declined by about 350,000 under the National Partnership for Reinventing Government. But that decline was spread over six years, with annual reductions of about 50,000. The main tools were targeted monetary incentives to resign and attrition, not involuntary layoffs. Spreading out the employment reductions over time and using voluntary separations reduces the jump in unemployment levels at any point. Moving more slowly gives workers time to find alternate employment.

DOGE has prioritized speed over having a well-defined plan, which creates uncertainty. DOGE and Elon Musk, its public face, have embraced that uncertainty. The mass emails to federal employees have conveyed the sentiment that nearly anyone could lose their jobs. Until the reduction in force process is complete, the risk of being laid off for most federal employees is notably higher than last year. The fear of losing one’s job can cause a pullback in spending, even among those workers who will keep their jobs. That’s the ‘animal spirits’ multiplier that is common in recessions.

Similarly, the chances of losing funding are higher now among companies and non-profits receiving federal government contracts and grants. There are reports of some universities like Stanford University, implementing a hiring freeze due to uncertainty about whether there will be cuts in funding.

It’s a bad time to break things

The job hiring rate is lower than expected, with a 4% unemployment rate. Layoffs have been very low. The assumption that people laid off by DOGE directly or indirectly will get “absorbed” quickly in the private sector may be false.

The uncertainty surrounding the Trump administration’s economic policy is high even without DOGE. The wide-ranging threats about tariffs have pushed measures of trade policy uncertainty to an all-time high in February.

The uncertainty about tariffs is weighing on business and household sentiment, which could delay investment and spending. The uncertainty from DOGE is more narrowly targeted than tariffs, but it adds to the unusual amount of policy uncertainty.

Growth and employment were set to moderate some this year, even without the actions of DOGE. While DOGE is unlikely to cause a recession, it will likely restrain employment growth some this year. That restraint would layer on top of restraint from other economic policies from the administration—like the new 25% tariff on Mexico and Canada—and the Fed’s high rates. Against that backdrop, even a moderately-sized DOGE could be a substantial downside risk to the economy.

In closing

Will the next recession be the DOGE recession? Probably not, but the ingredients are there: mass layoffs of federal government workers, large cuts in government contracts and grants, a rapid pace, and heightened uncertainty about who will be affected.

The fast-moving process of DOGE is adding unnecessarily to the risks. In a recent Cabinet meeting, Elon Musk admitted that “we will make mistakes. We won’t be perfect, but when we make a mistake, we’ll fix it pretty quickly.” Once they take hold, recessionary dynamics are difficult and costly to “fix.” It’s better to take steps to manage the risks and avoid the recession.

*Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months. Sahm Rule Recession Indicator (SAHMCURRENT) | FRED | St. Louis Fed