November 14, 2025
The data desert is about to end, but the debates about the pace of economic activity, the rate of inflation, the state of the labor market, and the proper level of interest rates will linger. Our suspicion is that when the dust settles and all of the missing data tidbits are released the economy will still be chugging along at about a 2.5% pace. If that is the case, the economy is doing just fine, right? Not really. The overall pace of consumer spending seems acceptable, but it is being driven by the accelerated spending of higher income families who are benefitting from the increase in stock prices and the value of their home, while those on the younger and lower end of the income spectrum are struggling. Jobs growth has slowed to a crawl which is making it more difficult for unemployed workers to be rehired and for younger adults to find an entry level position. But the unemployment rate is 4.3% which means that everybody who wants a job has one. So is the labor market weak or not? The inflation rate is stuck at about 3.0% which is considerably faster than desired. Should the Fed ignore the fact that inflation is not moving more quickly towards its 2.0% target? The Trump administration is pushing hard on the Fed to cut rates quickly and dramatically. But what is a neutral level for the fed funds rate? The Administration believes it is about 1.0%. The Fed suggests it is 3.0% or even higher. Even if the Fed cuts rates, will lower rates help? Monetary policy is ill-suited to alter the distribution of income, and it is unable to fix a labor market problem caused by the reduced supply of labor. Looking at overall GDP growth the economy seems to be doing just fine. But that easy answer of how the economy is doing is misleading. The honest answer is — it depends. We seem to have developed a dual economy
Third quarter GDP growth should end up at a steamy 3.3%. Fourth quarter growth will be reduced by the government shutdown and climb by perhaps 2.0%. But when government employees return to work first quarter GDP growth will rebound and should end up at about 3.0%. With average growth of 2.7% in those three quarters it is easy to conclude that the economy continues to do well. But there are a number of questions about the health of the economy.
First, GDP growth is being driven to a large extent by consumer spending which represents about two-thirds of the GDP pie. Consumer spending in the third quarter should be moderate and acceptable at 1.7% and it is showing few signs of slowing down. But its growth is largely attributable to higher income families whose willingness to spend is being fueled by the run-up in stock prices and the dramatic increase in the value of their home in recent years which has boosted consumer net worth to a record high level.
But younger and lower income families who do not own stocks or a home are struggling to make ends meet as inflation reduces their purchasing power and AI makes finding a job more challenging. Stories abound about families who often have to choose between paying the rent and buying food for the family or filling the car with gas. But if overall spending is acceptable, should we care about the widening distribution of income? If the answer is yes, how can policy makers fix the problem?
Second, the state of the labor market is unclear. Jobs growth has slowed dramatically as firms are reluctant to hire given economic uncertainty. At the same time AI is boosting layoffs and making it more difficult for younger workers to find entry level positions. The demand for labor has clearly slowed. But at the same time many previously employed foreign-born workers have been deported which has reduced the supply of labor. With both reduced demand for and supply of workers the unemployment rate is 4.3%. It remains close to its 4.2% full employment threshold which suggests that everybody who wants a job has one. Should we care about the fact that it is more difficult for a particular group of workers to find a job?
Third, there is the problem with the inflation rate. Fed says it wants it to be 2.0%. But it continues to track at a 3.0% pace with few signs of slowing down. Despite the faster than desired current rate of inflation the Fed has chosen to lower interest rates because it fears potential weakness in the labor market in the months ahead. Is preventing the labor market from weakening more important than reducing inflation? Has the Fed given up on its 2.0% inflation target? Should we care? Or should we simply learn to live with a 3.0% pace?
Finally, at what level is the federal funds rate “neutral” and thereby neither stimulating nor reducing the pace of economic activity. It is unclear because that rate is unobservable. As a result opinions amongst economists can vary widely. The current funds rate is 3.8%. Trump suggests that the neutral rate is about 1.0%. The Fed believes it is about 3.0%, and a significant minority of FOMC members believe it is somewhere between 3.5-4.0%. The difference between 1.0% and 4.0% is huge. Which estimate is more accurate? The current level of the funds rate is close to most estimates of a neutral rate. While the Fed probably has room to cut rates a bit further (if it ignores the inflation rate), it is unlikely to go far.
Finally, will lower rates solve the problems described above? The only tool available to the Fed is its control over short-term interest rates. Lower rates can stimulate aggregate demand, but they will not significantly alter the distribution of income. And if the weakness in the labor market is primarily attributable to the shrinkage of the labor force caused by immigration policy and the forced deportation of illegal immigrants, monetary policy is not going to help.
When asked, we say that the economy is doing okay given the relatively robust pace of GDP growth. But we seem to have a dual economy where those families lucky enough to own stocks and their own home are doing fine, but younger, lower income families who do not own those rapidly appreciating assets are getting left behind. We have managed to develop a dual economy. The most honest answer to the question of how the economy is doing is, it depends.
Stephen Slifer
NumberNomics
Charleston, S.C
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