Something feels off in the US economy. It’s causing concern among those responsible for managing inflation and jobs. Despite a vibrant economy, hiring is slowing down. Companies are being cautious with their investments, unsure how recent policies will affect their future. The Labor Department reported job losses in June and August, with job growth slowing to an average of just 62,000 in the three months leading up to September.
Interestingly, worker productivity remains high. Despite fewer jobs being created, the gross domestic product (GDP), which measures all goods and services made, continues to grow. This creates a puzzling situation for policymakers at the Federal Reserve, who must decide whether to cool off the economy or encourage more growth.
Federal Reserve officials noted this challenge in their recent meetings. They pointed out that there’s a disconnect between solid economic growth and weak job creation, complicating policy decisions. Many are questioning how to stimulate hiring, especially now that interest rates are being lowered.
Ryan Sweet, chief US economist at Oxford Economics, highlighted that addressing this “jobless expansion” will be key in the coming year. Even with a strong economy and consumer spending, hiring hasn’t picked up as expected. Recent records in the stock market suggest optimism, particularly regarding AI investments, but this confidence hasn’t yet led to more hiring.
According to Commerce Department data, businesses spent 4.4% of GDP on information processing equipment and software in the second quarter of this year. This is close to levels seen during the dot-com boom in the early 2000s. Interestingly, while companies invest heavily in technology, it may lead to reduced spending on hiring. Eugenio Alemán, chief economist at Raymond James, noted that these investments will likely peak next year.
Recent statistics also show consumer spending has remained strong, helping sustain company profits. However, uncertainty around new trade and immigration policies has affected the labor market. James Ragan, director of wealth management research at DA Davidson, pointed out that these policy changes have made hiring difficult.
Experts are concerned whether interest rate cuts will be enough to mitigate these challenges. Sweet noted that while the economy can grow, it requires decent productivity growth to avoid slipping into recession. Fortunately, layoffs have been less common this year, providing some stability.
Looking ahead, the Federal Reserve may lower rates further through 2026. However, a jobless expansion could easily turn into a recession, making the economy vulnerable to any disruptions, as Sweet emphasized. Maintaining a strong labor market can be essential for economic health.
Waller, a Fed governor, addressed the current economic conflict between GDP growth and job creation, suggesting that one must eventually align with the other. Persistent strong growth could make Fed officials hesitant to keep lowering interest rates, especially if job growth continues to lag behind.
Dallas Fed President Lorie Logan echoed this sentiment, noting it would be challenging to cut rates again without clear signs of falling inflation or a cooler labor market. This ongoing economic uncertainty highlights the precarious position the US economy finds itself in and the delicate balance policymakers must maintain.
