November 7, 2025

Even in a week when no government economic data were released signs of stress in the economy have begun to emerge.  It started with the elections on Tuesday with surprising wins by Democrats in the elections for governor of New Jersey and Virginia coupled with Zohran Mamdani’s election as mayor of New York City.  It was followed on Thursday by the Challenger job layoffs report which showed an impressive jump in October.  Then the  FAA announced a 10% cut in flights at major U .S. airports beginning on Friday which resulted in thousands of additional flight delays and cancellations.   The stock market has taken notice and fell about 4% in a week.  There is no doubt that the government shutdown is taking a toll which will weaken GDP growth in the fourth quarter.  But are these signs the beginning of the long-awaited economic slowdown?  Or will it be a temporary drop off triggered by the shutdown?  Or could it be some of both?  Many of the problems will go away once the government gets back in business.  But longer term we need the federal government to end the political gridlock and begin to tackle the long list of problems that need to be addressed such as health care, immigration, inflation, government spending, and tariffs.  These problems are not the result of too high interest rates and Fed policy.  Rather, they have been caused by the inability of the House, the Senate, and the President to overcome the current political gridlock.  With mid-term elections one year away, it is difficult to see these longer-term issues being addressed in any meaningful way between now and then.  We hope we are wrong.

Democrats won the gubernatorial elections in New Jersey and Virginia by surprisingly wide margins.  In exit polls voters expressed worries about taxes, inflation, and the economy in general.  But also some of the votes were clearly anti-Trump and his Administration’s policies

Mamdani’s rise in the polls and subsequent election as mayor of New York City was based on concerns about the extremely high cost of living in the city – especially housing.  He is trying to lower the cost of living by promising fare-free buses, freezing stabilized rents, providing universal child care, and increasing the minimum wage.  These benefits would be paid for by raising taxes on both the wealthiest 1% of New Yorkers and big corporations.  While these policies are likely to make the problems worse rather than better, the election results clearly emphasize the extent to which New Yorkers are concerned about the cost of living and are willing to vote for change.

The Challenger Report on job cuts typically gets overshadowed by the reports on payroll employment, the unemployment rate, job openings and separations, and the weekly data on initial unemployment claims.  But those reports have not been available for a month so economists and investors are trying to find hints about the direction of the economy and inflation from lesser known reports.  The 153,000 layoffs in October were about three times as high as they were in October of last year. Andy Challenger, the firm’s chief revenue officer, said  “October’s pace of job cutting was much higher than average for the month. Some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending, and rising costs drive belt-tightening and hiring freezes.”  Up until now firms have chosen to reduce headcount via attrition and not replacing an employee who left the firm.  Is this the beginning of a new and more disquieting phase?  It is not clear.

But note that the surge in layoffs reported in March 2025 resulted in a barely discernible increase in the official unemployment rate.

On Thursday the FAA announced a 10% cut in flights at 40 major airports to ensure that a shortage of air traffic controllers does not become a dangerous situation.  Airlines have responded by canceling thousands of flights and most of the remaining scheduled flights are experiencing long delays.  It is hard to blame the air traffic controllers who have been asked to work but have not been paid since the end of September.  Many are not showing up for work because they need to work side jobs to help pay the bills.  These cutbacks come on the popular Veteran’s Day weekend when many workers have the day off, and with the Thanksgiving Day  surge in air traffic looming.  The drop in travel could significantly impact consumer spending in November and fourth quarter GDP growth.

These developments have made stock investors nervous.  After reaching another record high level on October 28 the S&P 500 index has fallen about 4%.  That is not a big move and could easily be erased by a couple of good days, but it shows investors are beginning to worry.

The markets remain convinced that the Fed will cut rates for a third time next month despite Fed Chair Powell’s warning that another rate cut in December was not a foregone conclusion.  He said it was “Far from it.”  The problem in the economy is not too high interest rates.  The funds rate currently is 3.75-4.0%.  Most Fed officials think the neutral level for the funds rate is about 3.0% but a significant minority peg the neutral rate as somewhere between 3.5-3.9%.  Interest rates seem to be about right.

The problems perceived by voters are inflation, the scheduled cessation of Obamacare tax credits at the end of the year, the end of food aid known as SNAP benefits for many  low-income Americans during the shutdown, Trump’s immigration crackdown  which many believe has gone too far, bloated government spending, and tariff decisions which have caused supply chain challenges and raised the cost of imported goods for businesses and boosted prices for consumers.  These problems originate from the inability of the House, the Senate, and the White House to work together to solve them.   Republicans and Democrats alike make decisions today based solely on the potential for some political advantage in next year’s election.  What is in the best interest of the country no longer seems relevant.

On the assumption that the government shutdown ends soon, the damage to the economy should be minimal and short-lived.  Fourth quarter GDP growth is bound to be reduced by the shutdown, but it should be countered by a rebound in growth in  the first quarter.  Productivity gains caused by the continuing adoption of AI will boost growth for the foreseeable future.  Inflation should be stable in the months ahead.  And both short- and long-term interest rates may edge lower in 2026.  The overall picture seems favorable.

But that does not mean everybody American is going to be better off.  Consumers who own stock or a house are happy and likely to keep spending.  But those at the lower end of the income scale who do not own stocks or a house with little ability to purchase either any time soon are worrying about a tradeoff between paying the rent or buying food for the family.  The  ever widening gap between the so-called haves and the have nots is widening, and the recent election results in New Jersey, Virginia, and New York City indicate clearly that more and more families (and voters) are struggling.  Republicans and Democrats would be well-advised to heed the warning.

Stephen Slifer

Number Nomics

Charleston, S.C.