October 24, 2025
Solid Growth Without Jobs — How Can That Be?
The Federal Reserve’s Open Market Committee will meet on Tuesday and Wednesday and will almost certainly opt to lower the funds rate by another 0.25% to a range of 3.75-4.0%. One hot topic of debate at that meeting will undoubtedly be the apparent dichotomy between robust GDP data for the third quarter and virtually no increase in employment. Fed Governor Christopher Waller said this past week that this is not a sustainable situation. In his words, “Something’s gotta give – either economic growth softens to match a soft labor market, or the labor market rebounds to match stronger economic growth.” However, there is a third possibility that Governor Waller does not mention – productivity. Given the rapid adoption of AI we suggest that in the quarters and years ahead businesses can continue to boost output at a steamy pace with little change in headcount. A sizeable increase in productivity growth in the third quarter could square the circle between rapid GDP growth and seemingly weak employment.
Enough data are available to feel comfortable that GDP growth in the third quarter will be robust. The Atlanta Fed’s widely followed GDPNow model suggests growth could be 3.9%. We peg it at 3.3%. The Blue Chip consensus forecast is for 2.5% growth. Following wild distortions in GDP growth in the first two quarters of the year caused by changes in business behavior in response to tariffs, it was widely expected that third quarter growth would slow considerably. That did not happen. Consumer spending remains solid with growth of 1.7% or so in the third quarter as the rising stock market is likely enhancing their willingness to spend. And, driven by the need to invest in AI technology, business spending on computer hardware and software appears to have expanded at a double-digit pace in the third quarter.
On the flip side the employment data have weakened. In the past three months jobs growth has slipped to 30 thousand per month from 168 thousand last year. The question is why? Does the reduced pace of hiring reflect a sharp drop-off in demand? To a certain extent, yes. But a sharp drop in labor demand does not square with the rapid pace of GDP growth in the third quarter. Or could the slower pace of jobs growth be attributable to a drop in the supply of available workers? Yes, With the loss of 1.1 million foreign born workers since January, we believe this is the primary cause of the slower jobs growth.
With virtually no increase in employment in the third quarter, how can the economy expand at roughly a 3.0% pace? Easy. Rapid growth in productivity. A 3.0% increase in productivity would square the circle. Productivity growth can be volatile from quarter to quarter but, in this case, we believe we are seeing the beginning of a series of outsized productivity gains. To smooth out some of this volatility we show a 3-year growth rate below. Note that in the second half of the 1990’s and early 2000’s productivity growth was consistently in a range from 3.0-4.0% for six consecutive years! What caused that? The introduction of the internet in 1995. Why can’t the same thing happen again? Arguably, this technological breakthrough could have a bigger and more lasting impact on the economy than the internet.
Governor Waller believes that the dichotomy between the GDP and employment data will ultimately be resolved in favor or weaker employment growth. We disagree. We would argue that the two can coexist for a protracted period of time as productivity raises the economy’s potential growth rate (its speed limit) from roughly 2.0% today to 3.0% or so in the years ahead. This is hugely important because potential growth is a proxy for growth in our standard of living. Sustained growth of 3.0% without an increase inflation sounds a lot better than 2.0%.
Stephen D. Slifer
NumberNomics
Charleston, S.C.
Follow Me