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<\/a>Labor Market Slowdown<\/p>\nRight now, the most pressing challenge facing the US economy is the labor market, economists say.<\/p>\n
\u201cThe labor market is more vulnerable today than at any point in this expansion,\u201d says Ryan Sweet, chief US economist at Oxford Economics. His base case is that the US avoids a recession, but he characterizes the economy overall as susceptible to a slowdown, thanks in large part to pressure from the labor market.<\/p>\n
Workers are feeling the pressure: a monthly, national survey<\/a> of consumer expectations conducted by the Federal Reserve Bank of New York recently found that workers\u2019 confidence in finding a new job, in the case of a hypothetical job loss, reached its lowest level since 2013.<\/p>\n Monthly payroll growth data for July<\/a> and August<\/a> came in significantly lower than analysts expected, and a slew of downward revisions to previous months\u2019 data means that, in hindsight, the jobs picture looks much worse than it did a few months ago.<\/p>\n Those revisions showed that payrolls actually declined by 13,000 jobs in June\u2014a warning sign of an impending jobs recession, says Marisa DiNatale, senior director of economic research at Moody\u2019s Analytics. Negative numbers in the payroll data, especially in consecutive months, \u201calmost always indicate that we are in a recession already or very close to one,\u201d she says. DiNatale puts the odds of a broader recession at roughly 50\/50 over the next year.<\/p>\n In addition, annual revisions to payroll data between March 2024 and March 2025 showed that the economy added more than 900,000 fewer jobs than previously estimated over the course of those 12 months.<\/p>\n The trend of downward revisions to hiring could continue, Pantheon\u2019s Tombs says. \u201cWe might find that for the last couple of months, payroll growth has been overstated,\u201d he says. \u201cPayrolls are certainly flashing a red warning sign for the economy.\u201d<\/p>\n Low Hire, Low Fire<\/p>\n Muddying the picture is an unusual dynamic taking shape in the labor market. The \u201cbreakeven\u201d level of jobs\u2014economists\u2019 term for the number of new jobs that need to be created each month to keep the unemployment rate steady\u2014is now significantly lower than it has been over the past few years.<\/p>\n That means monthly job gains upward of 150,000 or even 200,000 are not likely to be the norm anymore. Analysts are getting used to a new baseline where significantly smaller monthly gains are more typical\u2014an environment some are calling \u201clow hire, low fire.\u201d<\/p>\n On the one hand, demand for workers has fallen dramatically as businesses pause hiring amid an uncertain economic outlook. DiNatale points to Job Openings and Labor Turnover data showing that hiring has fallen to its lowest rate since 2013.<\/p>\n On the other hand, the labor supply has shrunk, with fewer people seeking to enter the workforce. New Trump-era immigration restrictions are a component of that shift.<\/p>\n Immigration Restrictions Reduce Labor Supply<\/p>\n A steady flow of foreign-born workers into the United States helped supercharge the labor force in recent years, especially in the aftermath of the pandemic, but new policies under President Trump are changing that dynamic.<\/p>\n \u201cLess immigration is corrosive on the economy,\u201d Oxford Economics\u2019 Sweet says. \u201cEconomic costs can continue to mount.\u201d<\/p>\n Pantheon\u2019s Tombs estimates that the changes to immigration policy account for a roughly half-percentage point drag on gross domestic product growth. \u201cIt\u2019s a factor in the slowdown,\u201d he says.<\/p>\n Unemployment Steady, for Now<\/p>\n Steadily declining supply and demand in the labor market mean that the overall unemployment rate hasn\u2019t changed much over the past few months. That\u2019s a silver lining. Economists often point to a relatively low unemployment rate as a sign that economic conditions are not yet dire.<\/p>\n \u201cWe aren\u2019t seeing massive amounts of layoffs,\u201d DiNatale adds. She says that weekly unemployment claims have ticked modestly higher but are \u201cnot at a concerning level yet.\u201d<\/p>\n If layoffs do materialize, Pimco\u2019s Wilding expects them to affect smaller and midsize firms more than larger companies, which have more robust operations and balance sheets, can more easily offset tariff costs, and benefit from tax credits. \u201cCan [smaller firms] weather this adjustment without more significant layoffs? That\u2019s the risk,\u201d when it comes to recession, Wilding says.<\/p>\n AI Investment Masking Weakness<\/p>\n While the weakening jobs market is dominating the headlines, there are other economic forces at play. One positive for the economy has been the massive amount of investment related to artificial intelligence technologies.<\/p>\n As demand around AI continues to grow, American firms have been pouring money into new infrastructure such as software tools, physical data centers, and utilities capacity. That surge in investment has juiced the stock market and \u201cmasked weaknesses elsewhere in the economy,\u201d says Sweet of Oxford Economics.<\/p>\n Pimco\u2019s Wilding expects the tech investment cycle to add a full percentage point to GDP growth this year, while at the same time \u201call other investment [by businesses] in the economy is pretty stagnant.\u201d<\/p>\n Tech investment is \u201ccushioning the more cyclical parts of the economy that are turning down right now,\u201d Wilding says. She adds that there is reason to believe the cycle can continue; demand for AI and related technologies shows no signs of slowing.<\/p>\n Tax Bill Offsets<\/p>\n Also tempering the gloom are expectations that the new tax bill passed by the Trump administration will boost balance sheets for both consumers and businesses in 2026, leading to stronger growth in the upcoming year.<\/p>\n \u201cWe\u2019ve had a lot of the pain upfront in the form of tariffs,\u201d says Pantheon\u2019s Tombs. \u201cBut by the spring, we\u2019ll be most of the way through that shock to households, and they will be starting to see some benefit from the tax cuts.\u201d<\/p>\n Businesses are also expected to benefit from new tax breaks designed to encourage investment. Oxford Economics\u2019 Sweet expects to see the strength in technology investments continue next year and even broaden out to other industries. \u201cThat should help keep the overall economy away from a recession,\u201d he says.<\/p>\n On the other hand, DiNatale says that elements of the legislation could also be negative for growth, like the reduction in eligibility for Medicare and Medicaid. She expects many of the offsets for consumers to have the biggest effect on the high end of the income spectrum rather than the lower end, where they would be more impactful.<\/p>\n GDP Holding Up<\/p>\n For now, one of the most basic measures of economic growth still looks positive. Gross domestic product, the total value of all goods and services produced in the United States, increased 3.3% in the second quarter after falling into the negative in the first quarter, thanks to tariff disruptions.<\/p>\n Tombs is forecasting 1.5% annualized GDP growth in the third quarter\u2014far from the rule of thumb that defines a recession as two negative quarters of growth. He points out that US firms are still \u201creasonably upbeat,\u201d with plenty of cash on hand. \u201cCorporate confidence has been supported in the last few months by the rebound in stock prices and loosening in financial conditions,\u201d says Tombs.<\/p>\n