Payden & Rygel: No evidence that DOGE will derail growth
Growth concerns have grabbed the market's attention due to fears of federal cutbacks in spending and employment, the Economics Team from Payden & Rygel indicates. 'We don’t see evidence, yet that DOGE will derail growth (i.e., cause a recession or even a substantial slowdown).'
After months of focusing on inflation risks, the bond market re-awakened to the possibility of economic growth risks amid the Department of Government Efficiency (DOGE) headlines. The experts from Payden & Rygel are concerned about downside risks to growth, primarily due to the side effects of tariffs and policy uncertainty. The team recently reduced the probability of a trend-like growth scenario from 65% to 50% and raised the risk of a sub-par growth scenario as well as a garden-variety recession scenario.
However, the team indicates that DOGE's actual economic impact might be more muted than investors think for several important reasons:
'First, the actual pace of Federal spending hasn’t slowed at all. We closely track government spending through real-time payment data from the U.S. Treasury. So far, DOGE has yet to dent the actual government spending trend compared to 2023 and 2024. In fact, at its current pace, nominal Federal spending is on track to top $6 trillion for the sixth consecutive fiscal year in 2025! In inflation-adjusted terms, fiscal year 2025 expenditures are even running faster year-to-date than fiscal year 2021.
Second, real government spending cuts are rare. In inflation-adjusted dollar terms, we’ve identified one phase when the government cut back spending: the 2010-2014 “fiscal austerity” period. During that period, government expenditures and gross investment (the line item of government in GDP) actually detracted from the quarterly annualized GDP growth rate by 0.5 percentage points on average. However, the U.S. avoided a recession from 2010 to 2014, as the U.S. consumer contributed +1.5 percentage points to quarterly GDP growth from 2010 to 2014, offsetting the austerity drag.
Third, “discretionary spending” totaled $1.8 trillion in fiscal year 2024, accounting for only 14% of annual government expenditures. Thus, it is difficult politically to make substantial cuts. Significant spending cuts will require cuts to “mandatory” expenditures.
Fourth, Congress—not DOGE nor the President—determines spending. Executive orders are not a durable method for changing the U.S. fiscal situation. Interestingly, although Trump has signed 72 executive orders year-to-date, 92 lawsuits have also been filed challenging executive actions.1 If DOGE wants to achieve its proclaimed “$2 trillion goal” in spending cuts, it will require Congressional action, not just the stroke of the Presidential pen.
Fifth, government-related labor market data don’t portray a worrying picture—yet. In 2024, total government jobs accounted for around 8% of net nonfarm payroll employment gains. However, 72% of those government job gains were at the state and local government level (think: your teachers and school bus drivers, not IRS agents).
Further, Federal employment has been shrinking as a share of the total employment, now making up only 2% of the workforce, compared to 4.3% in 1960. Most Federal employees work in defense and security-related departments, which account for about 49% of the total Federal workforce as of September 2024.3'
There’s a catch according to Payden & Rygel: Federal contractors. Since 1984, the number of contractors employed by the Federal government has grown and now outnumbers Federal employees, the Economics Team indicates. The share of contractors grew even more in 2023, and the number of contractors employed is now double that of Federal employees on payrolls.3 'As such, a cutback in contractors could pose a larger threat to the labor market than Federal firing alone.'
The experts conclude that the complicated structure of Federal employment may explain why DC-area unemployment claims have surged in recent weeks (albeit from low levels) even though actual Federal employee layoffs remain subdued.
The final reason, according to Payden & Rygel's Economics Team is that, considering there are roughly 1.7 million new layoffs per month in the U.S., the cumulative 6.7 thousand layoffs recorded in D.C. plus the 2.3 thousand layoffs of all Federal employees over the last four weeks, all else equal, would only push the unemployment rate up by 0.005 percentage points.
They conclude that investors are now likely too focused on DOGE-related downsides that may not materialize.
Endnotes
1. Litigation Tracker: Legal Challenges to Trump Administration Actions. Just Security. Reiss Center on Law and Security at New York University. https://www.justsecurity.org/107087/tracker-litigation-legal-challenges-trump-administration/
2. Federal workers in the department of air force, army, defense, homeland security, and navy accounts for 49% of total Federal government jobs. See FedScope - Federal Workforce Data - OPM.gov.
3. E. Kamarck. (January 2025). Is government too big? Reflections on the size and composition of today’s federal government. [Research]. Peterson Institute for International Economics. https://www.brookings.edu/articles/is-government-too-big-reflections-on-the-size-and-composition-of-todays-federal-government/#omb-circular-a-76-362