Interview, Webinar
Making Sense of Weak Job Growth Alongside Solid GDP Growth
- U.S. GDP growth resilience is attributed to weaker-than-expected foreign retaliation, a depreciating dollar that offset export impacts, and stock market stability despite tariff increases reaching eight times the level of 2019.
- Forecasts have been revised upward from the 1% range back to the high-1% range for the current year, contrasting with initial spring expectations of a more negative tariff impact.
- The ongoing U.S. government shutdown, now at three weeks with predictions extending another three weeks, is mechanically subtracting approximately 0.10 percentage points from quarterly annualized GDP growth per week.
- If the shutdown extends beyond a month, spillover effects may increase the growth drag to 0.15–0.20 percentage points per week due to contractor layoffs and revenue losses.
- The labor market has slowed meaningfully, with unemployment rising by 0.10 percentage points in each of the last two months, though GDP growth remains solid at roughly 2%.
- Productivity growth has rebounded to a historical average of 2% (up from 1.5% in the previous cycle), allowing for positive GDP growth despite a contraction in labor supply growth due to reduced immigration.
- Immigration levels have dropped from approximately 3 million in 2023 to an estimated 0.5 million for the current year, creating a scenario where labor demand growth is outpacing labor supply growth.
- While a "jobless growth" scenario is currently viewed as a solvable issue, there is speculation that AI adoption could make maintaining aggressive full employment targets more difficult in the coming years.
- AI's contribution to GDP growth is estimated at 0.10 percentage points, with much of the surge in business technology equipment investment appearing to be front-loading ahead of anticipated semiconductor tariffs rather than organic productivity gains.
- The impact of AI on the broader labor market remains limited to specific sectors, such as computer science, with no clear pattern of job displacement across the wider economy yet visible in current data.
- Core inflation excluding tariff effects is running at approximately 2.5% and is projected to trend closer to the 2% target as supply chain disruptions fully resolve and wage growth normalizes.
- Tariffs have raised the price level by 0.4% so far, with an additional 0.6% increase expected from future measures, potentially peaking year-on-year inflation in the high 2% range or around 3% over the next 2–3 quarters.
- The Federal Reserve is expected to proceed with a "package of risk management" rate cuts of 25 basis points in September, October, and December, despite the lack of official economic data due to the government shutdown.
- Policymakers may deviate from the cut schedule after the December meeting if post-shutdown data reveals significant deviations, but the current bias favors adhering to the existing plan.
- Alternative data indicates job growth may have picked up slightly in September, though other labor tightness metrics suggest the market continued to soften during the month.
- Forecasters note that alternative data is effective for gauging labor market conditions but remains a poor substitute for official statistics when estimating GDP growth.