The already rapid growth rate of the American economy is accelerating. Growth in real GDP has gone from 3.8 per cent in the second quarter to 4.3 per cent in the third, and, according to the Federal Reserve Bank of Atlanta, might well hit 5.4 per cent in the fourth quarter.
Consumers continue to drive the economy forward. In a report delayed by the government shutdown, the Commerce Department reported that personal spending, which makes up about two thirds of the economy, rose 3 per cent in the third quarter and 3.3 per cent November.
Retailers report sales up 3.54 per cent in December over last year. “Consumers ended on a strong note,” said analysts at the Bank of America. On the theory that all’s well that starts well, 2026 should be a good year, at least in the early quarters. Tax cuts contained in the Big Beautiful Bill, but not reflected in payslip deductions in 2025, might add $90 billion to the $270 billion in tax refunds in a typical year according to financial services company Piper Sandler.
Uncertainty related to tariffs has diminished, and fears of a horrific negative impact have proved unfounded, in good part because evasion, exceptions and adjustments of supply chains have lowered effective tariff rates to 14.1 per cent, far below the eye-watering levels implied by early announcements.
As a study by economists from Harvard and the University of Chicago puts it, “… the implemented policy remains much smaller than the announced policy …”. And the bond vigilantes have yet to demand higher interest rates for their money despite uncertainties created by Trump’s nightly postings on Truth Social.
But here is the odd development. The growing economy is accompanied by a softening labour market. The economy added roughly half as many private sector jobs last year as it did in 2024, the unemployment rate rose from 4.1 to 4.4 per cent during the year, and job openings, at 7.1 million, are down 885,000 this year. The broad consensus is that we are in a “no hire, no fire” economy. “Cooling, not collapsing”, is how Goldman Sachs’ economists describe this labour market.
It is this situation that the Fed planned to attack by lowering its benchmark interest rate. Before, that is, the latest inflation data were released. The inflation rate, as measured by the Consumer Price Index (CPI), is proving “sticky”. Inflation in December remained at the November level of 2.7 per cent, far above the Fed target. More importantly, with an election around the corner and “affordability” an issue, grocery prices rose 3.1 per cent during the year. The report on producer prices was even hotter, up 3 per cent year-on-year, suggesting that goods in the pipeline en route to consumers will raise the CPI even more.
This combination of a hot economy and a soft labour market is producing a productivity revolution, a growing economy that produces no increase in jobs, and even tolerates a decrease. Since 1947 output per hour worked, or labour productivity, has increased at an average rate of about 2 per cent. In the third quarter of last year it reached 4.9 per cent, allowing the economy to grow without needing a single additional hour of labour input.
Perhaps the reason is the rapid spread of AI. Alexander Bick and his economic policy colleagues at the Federal Reserve Bank of St. Louis found that in 2024 44.6 per cent of adults age 18 to 64 used generative AI, the sort that produces output that normally requires human intelligence. That figure jumped to 54.6 per cent last year. That massively exceeds the adoption rate of the first mass-market computer (19.7 per cent) and the opening of the internet to commercial traffic (30.1 per cent).
Correlation does not imply causation, so call it coincidence that job creation fell by more than half in the year in which AI spread so rapidly. If AI continues to conquer new worlds, the recent productivity improvement, call it jobless growth, will be the norm. Estimates of the job impact vary. Some experts believe history will repeat itself, and the new technology will end up a net job creator.
Geoffrey Hinton, the Nobel prize-winning “Godfather of AI”, a British expat living in Canada, is not so sure. He believes AI “will create massive unemployment,” replacing paralegals, personal assistants, translators and software engineers among many others.
There you have it. Trump will set sail, not literally of course, for Davos and the World Economic Forum with the wind at his back as he addresses an audience of some 1,000 of the world’s power elite this week.
His economy, and he believe it is his, is growing rapidly. Inflation remains more sticky than explosive. The unemployment rate is low by historic standards. Tariffs have not wrecked the economy as many predicted. America’s imports are down and exports are up. Promises of inbound investment run to the trillions. American technological and innovation leadership is producing a productivity explosion. Threats to America’s near abroad are being eliminated. What’s not to like, except, for some, Trump himself.
Irwin Stelzer is a business adviser