The U.S. economy shows a concerning mismatch: headline GDP points to near 3.9% third-quarter growth while jobs have largely plateaued since January. This gap suggests growth figures are overstated and likely to be revised down. The article argues that weakening labor markets, tariff-driven price pressures, and fading inflation justify continued Federal Reserve rate cuts to sustain the expansion.
“The Disconnect Between Growth and Jobs”
The economy behaves like a machine with finite capacity. When output runs above that capacity, wages and prices tend to rise; when it runs below, growth and inflation ease. If GDP were truly expanding at nearly 4% annually, payrolls would be accelerating, not stalling.
The slowdown in job creation since January highlights that headline growth may be overstated. Employment plateauing while GDP appears strong signals that revisions are likely as more complete data arrive.
“Reading the Warning Signs”
Leading indicators are already pointing toward softer momentum. Business surveys repeatedly cite tariff uncertainty as a meaningful drag on investment and hiring decisions, and frequent renegotiations have left firms cautious.
The government shutdown has also obscured hard data releases for employment, spending, and production. In their absence, soft data from businesses and consumers consistently suggest growth is decelerating toward potential rather than accelerating above it.
“Inflation Takes a Back Seat”
For the Federal Reserve, inflationary pressures now look less broad-based and more tied to tariffs than to domestic demand. Tariff-driven price effects are real but are not the same as demand-led inflation that monetary policy can reliably address.
Viewed across the Fed’s three analytical lenses—demand, supply, and expectations—each points to easing inflationary risk. Demand has softened alongside the labor market, supply-side tariff pressures lack the self-reinforcing dynamics seen after the pandemic, and market-based inflation expectations remain near the 2% target.
“The Path Forward”
Given a weakening economy with contained inflation outside of tariff effects, the case for additional interest rate cuts is clear. Easing would help shore up the labor market before a further deterioration triggers broader weakness.
Investors should prepare for multiple scenarios: reduce equity exposure if growth weakens markedly; favor cash and inflation hedges like commodities if inflation reaccelerates; but maintain current allocations if a modest slowdown lets policy support the expansion. Overall, the data support continued Fed easing to manage downside risk.
