America’s economy defies gloomy expectations

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. On September 17th the Federal Reserve cut interest rates by a quarter of a percentage point. Markets expect another cut 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.

Is the gloom warranted? 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. The slump has been modest and no longer seems to be worsening. America’s 1.4% annualised GDP growth in the first half of the year would be a happy surprise for many Europeans. And the 2% growth America has managed over the past year is 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. 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 hitting all-time highs, 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, but less worrying if it is shrinking. The unknown is how effective Mr Trump’s clampdown on migration, both legal and illegal, has been. Estimates suggest a big impact. The Congressional Budget Office (CBO) has 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, against 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). For his part, on September 17th Jerome Powell, the Fed’s chair, guessed the breakeven rate was “between zero and 50,000”.

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. A worrying recent jump in jobless claims turned out to fuelled by identity fraud in Texas, not genuine job losses. The two best measures of labour-market slack—the ratio of job openings to unemployed people and the rate of job-quitting—both point to a market that is about as strong as in the late 2010s (see chart 3).

America’s resilience owes much to its sturdy fundamentals. More immediate economic boosts are helping, too. The slowdown reflected uncertainty after the chaos of “Liberation Day” and subsequent tariff wrangling. Now the outlines of the import-tax regime look more certain. Tariff revenues, after rising sharply, seem to have stabilised in the past few months. Uncertainty measures have fallen, even if not all the way back to the levels of last year.

Indeed, despite the Fed’s cut, there are few signs monetary policy is much too tight: surveys suggest banks remain happy to lend, spreads on corporate bonds are narrow and inflation is above the Fed’s 2% target. Whether or not further cuts are advisable, they will add fuel to the fire.

Many of the threats to growth that are causing concern, such as newfound government enthusiasm for meddling with private firms, will take time to bite. The most pressing concern is thus 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. A compromised central bank would combine poorly with a sky-high budget deficit, and make dealing with another bout of inflation more difficult—a risk when the Fed is cutting rates. Then price rises, not growth, would end up the real worry. ■