U.S. trade deficit hits record $131B as markets grapple with policy shifts

Employment

Last week gave investors more clarity on the labor markets, beginning with the ADP report missing expectations and showing job growth of just 77,000 private payrolls. Once again, this report was significantly different from the Bureau of Labor Statistics (BLS) numbers. The BLS report showed job growth of 151,000, more in line with expectations, albeit falling slightly short. Private education and health services continue to drive job growth (+73,000), and investors should watch this closely in the coming months, as a portion of these jobs are indirectly funded through government spending. The new administration also announced plans to reduce federal government employees, and these reductions started to show up this month as federal government employment declined (-10,000) on the month.

Wages also showed movement. Average hourly earnings increased 0.3% on the month and 4% on the year, down from the 0.5% increase last month. This supports Chair Powell’s assertion that the Fed does not expect the labor markets to drive inflation. Jobless claims fell last week to 221,000, a notable improvement from the prior week’s 242,000, which concerned many economists. Overall, the employment picture in the U.S. remains stable, but these reports point to a cooling job market.

Employment change by industry with confidence intervals, February 2025, seasonally adjusted, in thousands, 1-month net change

Other key releases and news

There were several other notable releases over the week, beginning with the ISM manufacturing index. The headline index was slightly in expansionary territory at 50.3. However, looking at the underlying components of the index, it should be viewed more cautiously. Prices paid jumped to 62.4 while new orders declined to 48.6, pointing to potentially slower growth and a possible uptick in inflation. ISM services came in slightly above expectations at 53.5, but again prices paid remained high at 60.4, albeit slightly lower than last month.

Given all the news surrounding tariffs and trade, it is worth highlighting that the most recent U.S. international trade in goods and services report showing a record trade deficit of $131.4B. Some of this deficit is likely a result of companies front-running the implementation of tariffs, but the surge in imports will have negative implications for Q1 GDP. Several large research firms have already lowered their GDP forecasts, with many now expecting growth between 0% and 1%. Additionally, the Atlanta Fed GDPNow tracker is now showing a decline in Q1 GDP of -2.4%. While the tracker’s figure will likely change as more data comes in, and includes items that will not be counted in the official GDP report, it is a significant directional change.

Internationally, several developments also made headlines as countries responded to the change in U.S. policy. As the Eurozone has faced slow growth and made progress on inflation, the European Central Bank (ECB) cut interest rates by 0.25%, a widely expected move. However, ECB President Christine Lagarde warned of heightened uncertainty and made it clear a pause may be necessary.

In an unexpected move, Germany introduced a $500B Euro infrastructure spending package and reform to its borrowing rules, which opens the doors for a massive increase in defense spending. This announcement sent the European equity markets higher and sent the yield on the 10-year bund up about 35 bps. As changes in U.S. policy will continue to reverberate throughout the world, the volatility we have seen is likely to continue in the coming months.

The week ahead

The Job Openings and Labor Turnover Survey (JOLTS), CPI, PPI, and consumer sentiment are all set for release this week.