situation: Government figures released this month after delays related to the government shutdown provide a snapshot of an economy that looks strong on the surface but fragile on the inside.
Gross domestic product (GDP) expanded at an annualized rate of 4.3% in the third quarter, the fastest pace in two years. Solid increases in consumer spending and exports offset declines in housing and business investment.
But the top-line numbers are hiding signs of cooling.
Unemployment is rising and inflation remains high. Wage growth has slowed and household savings are lower than at the beginning of the year, suggesting incomes are not keeping pace with rising costs.
“Top-level growth of 4.3% looks good on paper, but under the hood there are some worrying signs,” Boston University economist Brian Bethune said in a note.
Still, the odds of a recession remain low, at 30%, according to economists tracked by Bloomberg, down from 40% after President Trump imposed “Emancipation Day” tariffs in April.
Recruitment: The labor market is depressed, and that trend is expected to continue next year.
Employers added more than 1 million fewer jobs in the first 11 months of this year than last year. This is despite GDP growth remaining close to its highest sustainable pace.
Although layoffs have remained relatively stable, the influx of job seekers pushed the U.S. unemployment rate up to 4.6% in November, the highest level since 2021.
Federal Reserve Chairman Jerome Powell does not expect the unemployment rate to rise any further, an assessment shared by most private forecasters.
He told reporters earlier this month that employment “couldn't have seen a sharper decline.”
The Fed's optimism stems from its belief that interest rates are now low enough to stabilize the labor market. (Policymakers lowered the base lending rate by 1.75 percentage points to a range of 3.5 to 3.75 percent from September 2024 onwards.)
AI: Artificial intelligence promises to reshape the economy, but the impact on workers remains big unknown.
Products like ChatGPT and Google Gemini have improved dramatically, accelerating their adoption by businesses and consumers. Spending on AI hardware, software, and data centers has fueled economic growth. And the AI craze has spread to the stock market, raising concerns that the bubble is about to burst.
More importantly, AI poses the threat of mass job losses. Many companies are already cutting back on hiring as they consider how to implement technology. Some are laying off workers in anticipation of further widespread use of AI.
“Despite concerns about widespread job losses, the adoption of AI is expected to have only a small and relatively temporary impact on employment levels,” Goldman Sachs researchers said in an August report.
At the other end of the spectrum, Dario Amodei, CEO of AI maker Anthropic, said AI could eliminate half of entry-level white-collar jobs and push unemployment to 10 to 20 percent within five years.
“Without intervention, it's hard to imagine that there won't be a significant employment impact. And what I'm concerned about is that the impact will be far-reaching and faster than anything we've seen with technology to date,” Amodei said in an interview on CBS News' “60 Minutes” that aired in November.
Fee: A cooling labor market and a rapidly advancing AI transition are all playing out against the backdrop of disruptive trade policy.
Economists initially warned that President Trump's tariffs – a basic import tax of 10% plus tax rates of up to 40% on nearly all of the US' trading partners – would spark inflation or trigger a recession. That didn't happen. The president rescinded some tariffs and postponed others, causing companies to rush to build up inventories while absorbing some or all of the increased costs.
Tariffs are expected to have a small impact on GDP in 2026. The Conference Board expects year-on-year growth to slow to 1.3% in the fourth quarter of next year from 1.7% this year.
Tariffs also keep inflation higher than it would otherwise be, as U.S. companies pass more of the increased costs on to customers. In September, the Fed predicted that its preferred measure of inflation, which excludes volatile food and energy costs, would rise 2.6% next year, up from its 2.4% forecast in June. The central bank's target is 2%.
Final thoughts: Weak labor markets, AI disruption, and tariff headwinds create uncertainty, but not an imminent recession.
But Americans could become dissatisfied with a slowing economy and high prices, especially if the tariffs don't bring about the increase in U.S. jobs promised by President Trump. If that happens, the midterm elections could give the ruling party, the Republican Party, a harsher rebuke than usual.
Welcome to 2026. Don't be surprised if it feels a lot like 2025.
Larry Edelman can be reached at larry.edelman@globe.com.
