October 17, 2025

Economists everywhere are talking about the miniscule monthly increases in payroll employment and concluding that the economy is on the cusp of slower growth and possible declines in employment in the months ahead.  Fed Chair Powell has noted that the downside risks to employment are rising which the Fed used as justification for its rate cut last month.  But will the economy slow as much as most economists suggest?   At the end of this month we should see third quarter GDP growth of about 3.5% .  The economy continues to defy expectations and still has considerable momentum.  Furthermore, the stock market is at a record high level and is not acting as if the economy is about to losse momentum.  We also wonder if the labor market will be as weak as many fear.  After all, at 4.3% the unemployment rate is essentially at its full-employment threshold.  Everybody who wants a job has one.  The economy does not need as many jobs now because the labor force has stopped growing.  In addition, the inflation rate has not spiked in response to tariffs as many had feared.  Could it be that the widely held belief that tariffs are going to weaken GDP growth and boost inflation is simply wrong?  We think that is the case.

Payroll employment gains have shrunk from 168 thousand per month last year to about 30 thousand.  The demand for labor has clearly softened as employers deal with widespread uncertainty.  Tariffs are forcing them to adjust their supply chains.  It makes it difficult to calculate their cost of materials.  In many industries the deportation of immigrants is making CEO’s wonder where they can get the workers they require.  AI is forcing all business leaders to re-think the size of their work force.  Against that background firms are reluctant to boost the size of their workforce.  While they have not yet begun to fire workers they are shredding jobs via attrition.  Having said that, we wonder about the extent of the falloff in demand.

In addition to the jobs data evidence of the slowdown in the demand for labor is apparent from the dramatic decline in the number of job openings.  When the economy rebounded far more quickly than expected from the  2020 recession, employers were caught off guard and could not boost production quickly enough to satisfy demand.   As a result, job openings surged to a record high level of 12.1 million.  They have since declined to 7.2 million.  The slide is impressive.  But it is important to remember that it came from a record high level.  Prior to the onset of the recession job openings were 7.0 million and the labor market was chugging along nicely.  Nobody complained about a low level of job openings.  Today the same level of job openings is viewed as a sign of significant weakness in the labor market.  We would argue that it is merely returning to the sustainable pace that existed prior to the recession.

On the supply side of the equation the labor force has stopped growing.  In recent years it rose by about 150 thousand per month.  But it has been unchanged since January.  Why?  Because of the immigration policy implemented by the Trump administration.

Since January the foreign-born labor force has shrunk by 1.1 million workers as illegal immigrants were deported.  That is about 150 thousand per month.  Those workers had jobs prior to January and, presumably, in the absence of the change in immigration policy they would have still have jobs.  If these workers had not been deported, payroll employment gains in recent months would have been 150 thousand higher or about 180 thousand per month, and we would not be having a discussion about a weak labor market.  What this means is that the softness in the labor market is largely attributable to a policy change and should not be viewed as a sign of emerging economic weakness.

Then there Is the unemployment rate.  The reduced demand for jobs combined with a reduced supply of workers has resulted in little change in the unemployment rate.  At this time last year it was 4.1%.  In August of this year it was 4.3%.  It has only inched upwards in the past year.  One of the Fed’s goals is to seek full employment.  The Fed and most economists believe that that occurs when the unemployment rate is 4.2%.  At that level everybody who wants a job has one.  If the unemployment rate today is 4.3%, has been fairly steady at about that rate for the past year, and full employment occurs when it is 4.2%, it is hard to understand why Fed Chair Powell and his colleagues are so worried about a collapse in the labor market.

There is no question that if the economy falters in the months ahead workers would be laid off and the unemployment rate would rise.  But given a likely 3.5% GDP growth rate in the third quarter and the stock market signaling clear sailing ahead, it is unlikely that will occur.  The Fed’s own forecast is for 1.6% GDP growth for this year.  Given what happened to GDP growth in the first and second quarters, the Fed anticipates 1.6% GDP growth on average in the second half of the year.   That is hardly troublesome and makes it all the more difficult to understand the need for immediate and significant rate cuts.  Having said that, the Fed used labor market weakness as justification for the September rate cut and will undoubtedly cite it again as justification for the upcoming rate reduction at the end of this month and in December.

Stephen Slifer

NumberNomics

Charleston, S.C.