washington
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Something is not stacking up in the U.S. economy, which is unsettling those charged with controlling inflation and keeping the labor market healthy.
U.S. companies have been hesitant to invest this year without fully understanding the effects of President Donald Trump’s sweeping economic policies, and hiring efforts have slowed significantly. The economy lost jobs in June and August, and the average pace of job growth in the three months through September was only about 62,000, according to the Labor Department.
However, the productivity of workers, the main driver of economic output, remains high. And gross domestic product, which represents all the goods and services produced in the economy, remains strong.
The dichotomy of an expanding economy and a softening labor market is a challenge for Federal Reserve policymakers, complicating efforts to determine whether the economy needs to be cooled or stimulated.
“The disconnect between solid economic growth and weak job creation created a particularly difficult environment for policymaking,” Fed officials said at the October meeting, according to minutes released Thursday.
A growing economy with resilient consumers and big investments in AI should boost hiring, especially now that the Fed has started lowering borrowing costs. However, this has not happened, and there are concerns that it may never happen.
“In terms of monetary policy, the focus next year will be on how to deal with rising unemployment,” Ryan Sweet, chief U.S. economist at Oxford Economics, told CNN. “What can I do to get companies to hire more people?”
A series of recent record highs in the stock market suggests that many US companies are optimistic about the value of AI. However, that confidence has so far not led to an increase in the number of employees.
Business spending on computer equipment and software accounted for 4.4% of GDP in the second quarter, according to Commerce Department data, just below the peak in 2000, when companies ramped up similar investments during the dot-com boom. Strong consumer spending this year also sustained corporate profits.
“Companies are investing heavily in this new technology, which in some cases means cutting back on other spending, such as hiring,” said Eugenio Aleman, chief economist at Raymond James. He added that strong investment in AI is likely to continue in the third quarter and will peak sometime next year.
The government shutdown likely depressed GDP for the current quarter, from October to December, but the U.S. economy is widely expected to recover most of its losses early next year.
Meanwhile, the U.S. labor market has been hampered by President Trump’s sweeping policy changes since the beginning of the year.
“This has been a challenging year for employment, as changes in trade and immigration policy have affected both labor supply and demand,” said James Regan, director of wealth management research at DA Davidson.
Economists say it’s unclear whether rate cuts will ultimately be able to counteract the corrosive effects of sweeping policy changes that have increased uncertainty about boosting jobs.
“Fortunately, there aren’t that many layoffs, because that’s what turns rising unemployment into a recession,” Sweet said. “An economy can grow without creating large numbers of jobs, but productivity growth must be moderate.”
Fed officials are expected to cut rates several more times through 2026, according to their latest economic forecast in September.
Employment growth could quickly lead to a recession.
“People are very vulnerable when something goes wrong,” Sweet said. “The labor market is a line of defense, and if it starts to fray, it’s game over.”
It also increases the risk that the Fed will make policy mistakes.
In a speech last month, Federal Reserve President Christopher Waller called the discrepancy between GDP and employment growth a “conflict” that should resolve itself, for better or for worse.
“Something has to give. Either economic growth slows with a weak labor market, or the labor market recovers with strong economic growth,” he said.
And if job growth continues to lag GDP, the U.S. economy will be in a precarious position.
Additionally, continued strong economic growth has weakened Fed officials’ confidence that they should lower interest rates, and there is already considerable hesitation within the central bank’s rate-setting committee about continuing to cut rates.
“We’ve had two rate cuts now, and unless there’s clear evidence that inflation falls faster than expected or the labor market cools more quickly, it will be difficult to cut rates again in December,” Dallas Fed President Rory Logan said at an event in Zurich on Friday, adding there were signs that “policy is probably less restrictive.”
