In the United States, an unusual disconnect is emerging: the economy is growing, but the labor market is weakening, and this is worrying the Federal Reserve, which is responsible for controlling inflation and supporting employment.
U.S. companies have sharply slowed hiring this year, cautiously committing to future projects due to uncertainty about the consequences of President Donald Trump’s sweeping economic policy. In June and August, the economy shed jobs, and the three-month pace of payroll growth through September was about 62,000, according to the Labor Department.
Meanwhile, productivity remains high, and gross domestic product is solid, reflecting the overall level of production of goods and services in the economy.
The growth-employment divergence – a puzzle for the Fed
This dichotomy – the growing economy and a noticeable softening of the labor market – creates a tricky situation for Fed policy decisions, complicating whether cooling or support for the economy is needed.
“The divergence between sustained economic growth and weak job creation creates extremely challenging conditions for policy.”
According to Fed officials, growth, supported by solid consumer demand and substantial investments in artificial intelligence, should be driving hiring, especially now that the Fed has begun lowering borrowing costs. Yet this has not happened yet, and there are fears that it may not.
“As for monetary policy, next year the main theme will be how to deal with expansion without creating employment.”
Following new stock-market highs, many U.S. companies remain optimistic about the potential of artificial intelligence. Yet this confidence has not yet translated into expanding their payrolls.
According to the Department of Commerce, business spending on information systems and software amounted to 4.4% of GDP in the second quarter, slightly below the 2000 peak during the dot-com boom. Steady consumer spending also supports companies’ profitability this year.
“Companies are investing significant sums in new technologies, but sometimes that means cutting other costs, including hiring.”
A possible pause in government operations due to a partial shutdown could have reduced GDP this quarter, but overall most of these losses are expected to be recouped early next year.
The U.S. labor market remains affected by significant changes in trade and immigration policy since the start of the year, which influence labor supply and demand, said James Ragan, Director of Wealth Management Research at DA Davidson.
“This year, employment has been challenging precisely because of changes in trade and immigration policy that affect both sides – the supply and demand for labor.”
Although the outlook for rate cuts is not always certain, the Fed expects that there may be a few more cuts later in 2026, according to its latest economic projections as of September.
“Fortunately, we do not expect many cuts, because that could turn an unemployment-driven expansion into a recession; the economy can grow without creating many jobs, but productivity growth must be moderate.”
In a speech last month, Fed Governor Christopher Waller called the divergence between GDP and employment growth a “conflict” that must be resolved sooner or later.
“Something has to give – either economic growth slows to align with a softer labor market, or the labor market strengthens to match stronger economic growth.”
Meanwhile, the robust growth keeps the Fed cautious about further rate cuts, and there is notable caution in considering the committee’s next moves.
“Given the two rate cuts already in place, it would be hard for me to cut rates again in December unless there is clear evidence that inflation is falling faster than expected or that the labor market is cooling faster.”
Source link