DOGE cut jobs, but did it cut government spending?

The Department of Government Efficiency (DOGE) cut roughly 271,000 federal positions — about 9% of the federal workforce — in the first 10 months of the Trump administration (with nearly 60% of the decline occurring in October), returning headcount to late‑2014 levels. A Cato Institute analysis finds those personnel cuts did not reduce federal outlays, which rose by about $250 billion in 2025 versus 2024, underscoring that headcount reductions alone are unlikely to close the deficit without cuts to major entitlement and defense programs such as Medicare, Social Security, Medicaid and the military.

Analysis

Market structure: The 271k (≈9%) federal headcount cut is large but concentrated — payroll is only ~10% of federal budget — so direct fiscal savings are trivial versus the reported $250bn year-over-year spending increase. Winners: private government contractors (BAH, LDOS, SAIC) and staffing firms should see reallocation of work and higher contract spend; losers: local retail/real-estate in federal-heavy metros and incumbents with large federal headcount costs. Expect modest downward pressure on wages for mid-skill government-adjacent roles over 3–12 months, tightening pricing power for high-skill contractors.

Risk assessment: Tail risks include a policy shock — credible entitlement cuts or a sovereign rating action — that could spike 10y yields >100bp within 6–18 months; conversely, political backlash could trigger stimulus reversing any contraction. Near term (days–weeks) market effects are muted; medium (months) will be driven by budget debates, CBO reports, and Treasury issuance plans. Hidden dependency: layoffs often increase outsourced spending and vendor revenues, creating a lagged positive for contractors and cloud/IT services firms.

Trade implications: Favor duration shortening and financials: higher deficits imply upward pressure on nominal yields over 6–24 months — reduce long-Treasury exposure (TLT) and add modest long-bank exposure (JPM, BAC). Long contractor names (BAH, LDOS, SAIC) on 3–12 month horizon to capture shift from FTEs to contractors; hedge with small short positions in defense primes (RTX, LMT) if entitlement/military cuts gain traction. Use options to express convexity: VNQ put spreads and TLT short-dated call overwrites for protective income.

Contrarian angles: Consensus misses that firing civil servants often increases contractor spend and raises near-term private demand for tech/security services — this underprices BAH/LDOS upside over 3–9 months. Markets may also underprice sovereign/term-premium risk; long-duration assets (TLT, long-duration REITs) look structurally vulnerable if 10y > 3.5% (set as trigger). Historical demobilizations reduced headcount but not durable entitlement spending cuts — assume political difficulty of reducing Medicare/SS and position accordingly.

Key Decisions for Investors

• Establish a 1.5–2.5% portfolio short in long-duration Treasuries via short TLT (e.g., sell TLT or buy 3–6 month ATM TLT put spreads) sized to risk budget; target unwind if 10y yield falls below 2.75% or rises above 3.50%.
• Initiate a 1–2% long position in government contractors: split equally BAH, LDOS, SAIC (0.33–0.67% each) with a 3–12 month horizon; add if contract-billings guidance rises >5% QoQ or federal contractor backlog growth >10%.
• Rotate 1–2% from consumer discretionary in federal-heavy MSAs into US regional banks (JPM, BAC) to capture higher net interest margins if the 2s10s steepens by >25bps over 3 months; set stop-loss at 15% drawdown.
• Implement a tactical options hedge: buy 2–3 month VNQ 5% OTM put spreads (size = 0.5% notional) to protect against REIT drawdowns if 10y climbs >50bps from current levels.
• Short defense primes (RTX, LMT) on a 3–12 month view if legislative drafts explicitly target military base reductions; establish small 0.5–1% short positions and cover if bill language does not emerge within 90 days.