Something is not adding up in the US economy, and this is worrying those responsible for fighting inflation and keeping the labor force robust. This year, American companies have noticeably slowed their hiring pace, showing hesitancy in investments due to uncertainty about the full impact of President Donald Trump’s economic measures. The economy shed jobs in June and August, and the average job growth over the three months ending in September was only about 62,000, according to the Department of Labor. At the same time, labor productivity—a key driver of economic output—remains high. And the Gross Domestic Product (GDP), reflecting all goods and services produced in the economy, maintains its resilience. This divergence between a growing economy and a weakening labor market creates a dilemma for decision-makers at the Federal Reserve (Fed), complicating their task of determining whether the economy needs cooling down or, conversely, stimulation. “The divergence between confident economic growth and weak job creation has created a particularly difficult environment for policy decisions,” the Fed noted at its October meeting, according to minutes published on Thursday. A growing economy, supported by resilient consumer demand and significant investments in artificial intelligence (AI), should be spurring hiring, especially now that the Fed has begun lowering borrowing costs. However, this hasn’t happened, and there are fears that it won’t. “Regarding monetary policy, the narrative next year will revolve around how to manage ‘jobless growth,'” said Ryan Sweet, chief US economist at Oxford Economics, in an interview with CNN. “How do you try to encourage businesses to hire more people?” Why GDP is High and Job Growth is Weak The recent series of record highs on the stock market suggests that many American companies are optimistic about the value of AI. However, this confidence has not yet translated into expanding their workforces. According to the Commerce Department, business spending on information processing equipment and software was 4.4% of GDP in the second quarter, slightly below the peak reached in 2000 when companies were aggressively building similar investments during the dot-com boom. Resilient consumer spending this year has also helped support corporate profits. “Firms are investing heavily in new technologies, but sometimes this means cutting back on other expenses, such as hiring,” noted Eugenio Alemán, chief economist at Raymond James. He added that robust AI investment likely continued into the third quarter and should peak sometime next year. The government shutdown likely lowered the GDP figure for the current quarter, covering October through December, but there is a widespread expectation that the US economy will recover most of those losses early next year. Meanwhile, the US labor market is being constrained by significant shifts in Trump’s policies since the beginning of the year. “It has been a challenging year for employment precisely because of changes in trade and immigration policies affecting both the supply and demand for labor,” said James Ragan, director of wealth management research at DA Davidson. Economists note that it is unclear whether rate cuts will ultimately offset the disruptive impact of major policy changes, which have increased uncertainty and hindered hiring momentum. “Fortunately, we are not seeing mass layoffs, as that’s how ‘jobless growth’ turns into a recession,” Sweet said. “The economy can grow without creating a lot of jobs, but productivity growth needs to be at an appropriate level.” According to the Fed’s latest September economic projections, Fed governors are expected to implement a few more rate cuts through 2026. The Problem of “Jobless Growth” “Jobless growth” can quickly turn into a recession. “You are very vulnerable to anything that goes wrong,” Sweet explained. “The labor market is your line of defense, and if it starts to break, then it’s game over.” It also increases the risk that the Fed will make a policy mistake. In a speech last month, Fed Governor Christopher Waller characterized the divergence between GDP growth and job creation as a “conflict” that must resolve itself—for better or worse. Wait, I thought the economy was in terrible shape. What happened? “Something has to give—either economic growth will slow to match the weak labor market, or the labor market will pick up to match the stronger economic growth,” he said. And if job gains remain inconsistent with GDP, it puts the US economy in a precarious position. Consistently strong economic growth also diminishes the confidence of Fed officials in the need to cut interest rates; there is already considerable reluctance within the Fed’s rate-setting committee to continue cutting rates. “Given the two rate cuts already in place, I would find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly,” said Dallas Fed President Lorie Logan on Friday at an event in Zurich, adding that there are signs that “policy is likely not restrictive enough.”
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