AMERICA´S ECONOMY DEFIES GLOOMY EXPECTATIONS / THE ECONOMIST

The slowing slowdown

America’s economy defies gloomy expectations

As the Federal Reserve prepares to cut interest rates, growth is holding up

People crossing the street near Times Square, Manhattan, New York City / Photograph: Getty Images

Only America’s most confident economic bulls will have remained upbeat this far into 2025. 

Any flickerings of optimism that survived the tariff chaos of spring and this summer’s growth slowdown will have taken another hit in early September, when employment figures came in weak for the second time in a row. 

America added less than 30,000 jobs on average in June, July and August, the Bureau of Labour Statistics (BLS) announced.

Yields on Treasury bonds have slumped by 0.2 percentage points over the past fortnight, as worries about growth and the job market have spread. 

At the Federal Reserve’s next meeting, on September 17th, an interest-rate cut looks nailed on. 

Markets expect another in October, and then another after that in December. 

The easing that Donald Trump has long sought is on the way, even if for more depressing reasons than the president expected.

How warranted is the gloom? 

Growth has certainly slowed. 

But dig deeper in the data and you do not have to be an uber-bull to see reasons for hope. 

Although the slump has been real, it has also been modest and no longer seems to be worsening. 

The 1.4% annualised GDP growth that America posted in the first half of the year would count as a happy surprise for many in Europe. 

And the 2% growth America has managed over the past year looks better yet in comparison (see chart 1).

On top of this, Americans are still spending. 

The latest figures, covering July, suggest that real household consumption has ticked up after a sluggish start to the year. 

Surveys of services activity suggest a similar trend; retail sales have remained solid throughout the year. 

The Atlanta Fed’s tracker indicates that the core components of GDP—private spending and investment—are on track to rise by an annualised rate of over 2% in the third quarter. 

Stockmarkets are still hitting all-time highs, both contributing to and reflecting the surprisingly strong economic picture.

What of those hair-raising jobs numbers? 

Those, too, look less troubling in context—slower jobs growth is a problem if America’s population is rising quickly, but far less worrying if population growth is stalling or shrinking. 

There, the great unknown is how effective Mr Trump’s clampdown on migration, both legal and illegal, has been. 

Early estimates suggest a big impact. 

The Congressional Budget Office (CBO) recently revised down its estimate for net migration in 2025 from 2m to 400,000. 

Researchers at the American Enterprise Institute and the Brookings Institution, two think-tanks, peg the figure at between -500,000 and 100,000. 

Customs and Border Protection reported just 8,000 “encounters” with illegal migrants on the southern border in July, compared with 100,000 in the same month last year and nearly 200,000 the year before.

Slower population growth lowers the “breakeven” rate of job creation (that needed to keep the employment rate stable), meaning even weak employment figures could be consistent with a healthy economy. 

Last year’s population estimates from the Census Bureau suggest 90,000 new jobs would be needed to hit the rate, according to calculations by Jed Kolko of the Peterson Institute for International Economics, another think-tank. 

Include the CBO’s newer migration estimate and the figure falls to 50,000. 

If you assume net migration is zero it slips to below 30,000—in line with current numbers (see chart 2).

So although the labour market is softening, it is not cratering. 

The unemployment rate is still at 4.3%, well below levels seen in the 2000s and 2010s. 

And the two best measures of labour-market slack—the ratio of work openings to unemployed people and the rate of job-quitting—both point to a jobs market that is about as strong as in the late 2010s (see chart 3).

The economy’s resilience owes much to its strong fundamentals. 

More immediate boosts are helping, too. 

The summer’s slowdown reflected enormous uncertainty after the chaos of “Liberation Day” and subsequent tariff wrangling. 

Now the broad outlines of the import-tax regime look more certain. 

Tariff revenues, after rising sharply, appear to have stabilised in the past few months. 

Uncertainty measures have fallen accordingly, even if not all the way back to the levels of last year.

Indeed, despite the Fed’s looming cuts, there are few obvious signs that monetary policy is much too tight: bank surveys suggest they remain happy to lend, spreads on corporate bonds are narrow and inflation is well above the Fed’s 2% target. 

Whether or not a series of rate cuts is advisable, it will add more fuel to the fire.

Many of the threats to growth that are causing concern, such as the newfound enthusiasm in government for meddling with private firms, will take time to bite. 

The most pressing concern is therefore political: Will Mr Trump ramp up his campaign against the Fed? 

His administration is appealing against a court ruling that blocked its bid to fire Lisa Cook, a Fed governor, for alleged wrongdoing on mortgage applications. 

A compromised central bank would combine poorly with a sky-high budget deficit, and also make dealing with another bout of inflation more difficult—a risk when the Fed is about to cut interest rates. 

Then price rises, not growth, would end up the real worry.