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Economic Insight
16.10.2025
The US labor market has been in a decreasing-hiring and low-firing mode, resulting in job growth reaching a near standstill. However, unemployment remains low given that both labor demand (mostly due to the chaotic tariff policy) and labor supply (due to less immigration) have weakened. Looking ahead, while downside risks to the labor market are indeed elevated, demand for labor should strengthen with peak tariff uncertainty behind us, interest rate cuts, and the fiscal boost in 2026. In contrast, the outlook for the labor supply remains muted, keeping a lid on job growth. The obvious question would be whether US economic growth can remain resilient if job growth fails to pick up substantially. We think the answer would mostly depend on whether the ongoing productivity gains (a key feature of the US economy) can be sustained. We believe that ongoing technological advancements, including in the AI field, in which the US remains a leader should drive additional productivity gains and help offset the drag from the limited expected job growth.
The US labor market has been in a decreasing-hiring and low-firing mode
The US labor market has been in a decreasing-hiring and low-firing mode, resulting in net job growth reaching a near standstill, averaging just 27K per month in the four months through August and several industries reporting a fall in employment. This weakness in hiring can be seen in the monthly JOLTS data, which shows a steadily decreasing hiring rate, falling to a recent low of 3.2% in August. We attribute this decrease in hiring to both demand and supply factors. On the demand side, the chaotic tariff and trade policy that prevailed for most of this year has led to a spike in uncertainty, naturally driving companies to be cautious in their hiring plans. In addition, the higher tariffs, which are taxes on imports, are obviously a headwind to companies’ margins, especially for those with limited ability to pass that higher cost to consumers, resulting in a decreased hiring ability or appetite.
Moreover, some recent studies have started to show that there is evidence, though still initial, that AI and the increased use of technology at large are likely contributing to less hiring, especially in entry-level jobs, further depressing the demand for labor. In fact, the unemployment rate for the 16-to-24 years old age bracket has increased from 6.6% in April 2023 to 10.5% in August 2025 while the overall unemployment rate increased by much less (from 3.4% to 4.3%) in the same period, pointing to the likelihood of that trend actually occurring.
Decreased hiring is partly due to labor supply issues while the resilient economy is keeping layoffs low
On the supply side, the effective closure of the US-Mexico border and the ongoing crackdowns on unregistered migrants have resulted in a fall in the foreign-born labor force. After reaching a peak in March 2025, this has fallen by nearly 1.5 million (4.4%) through August, chopping off around 1% of the total labor force. The y/y growth in the foreign-born labor force has turned negative in July-August after being mostly in a 2% to 6% range since 2023. Moreover, the household survey of the BLS monthly jobs report shows that foreign-born employment has dropped in four of the last five months. These indicators show that the supply side is, undoubtedly, playing a big role in the recent weakness in monthly job growth. This is very much opposite to the prior trend when the post-Covid surge in immigration fueled job growth with foreign-born workers accounting for 55% of total job growth, as per the household survey, in the three years to 2024.
Interestingly, job losses have also been limited, putting the labor market in a “curious balance” as per Fed Chair Powell. This low-firing mode can be seen in various indicators such as a broadly steady layoffs rate as per the JOLTS data, generally modest new weekly jobless claims, and obviously an unemployment rate (latest at 4.3%) that is still close to full employment despite the recent tick up. This low-firing mode can be attributed to a still-resilient economy so far this year with a measure of underlying GDP (final sales to private domestic purchasers) growth holding up well, standing at 2.9% annualized in Q2 and forecast to remain broadly at that level in Q3. In all cases, layoffs remaining low is unsurprising, as even in economic downturns, rising layoffs usually come later in the cycle, after employers delay or cancel new hirings.
Demand for labor should strengthen with peak tariff uncertainty behind us, Fed rate cuts, and fiscal boost
Looking ahead, while downside risks to the labor market are indeed elevated and putting aside the impact from the current government shutdown, we believe there are several factors that should support demand for labor, pushing up job growth numbers. Despite the pending Supreme Court ruling on the legality of Trump’s country-specific tariffs and the recent setback with China, which we think is a temporary matter, peak tariff uncertainty should continue to be behind us. This lower level of uncertainty is expected to drive stronger corporate demand for labor and should be positive for business investment, which actually remained solid this year (annualized growth of 5.7% in 1H2025) supported by capital spending on AI and technology. Another tailwind should come from further Fed easing in the remainder of 2025 and in 2026, despite the uncertainty around the extent of that easing, especially in 2026. In addition, the fiscal boost of Trump’s “Big Beautiful Bill” should start to kick in in early 2026, injecting fresh stimulus to the economy.
On the other hand, given the immigration dynamics, the outlook for improvement in the labor supply remains muted, even with interest rate cuts which cannot help much, keeping a lid on the extent of the possible increase in job growth. The upside is that an ongoing resilient economy should keep layoffs low, in continuation of the current trend. Hence, a plausible scenario could unfold whereby job growth improves modestly, and with still low layoffs, the unemployment rate can continue to be under control. Actually, current estimates of the break-even rate of job growth (the one that will keep the unemployment rate stable) stand at 30K to 80K per month, sharply below its level in 2021-2024, but not far from the average since May (27K). In contrast, if the economy loses steam and layoffs increase, the unemployment rate is bound to increase fast, given the already-muted hiring.
With limited job growth, on-going gains in productivity are needed to keep economic growth resilient
The obvious question is whether US economic growth can remain resilient if job growth fails to pick up substantially. We think the answer, to a large extent, would depend on the growth in productivity, which is defined as real output per hour worked. We note that structural productivity gains have been a key feature of the US economy and its outperformance of most other advanced economies, supported by tech superiority and steady flow of high-skilled immigrant workers. For example, since 1Q2023, productivity growth has averaged a strong 2.4% q/q annualized, allowing GDP to expand much faster than hours worked. We think that ongoing technological advancements, including in AI, in which the US remains a leader should drive additional productivity gains and help offset the drag from the limited expected job growth.
Another factor that we believe has helped in keeping private consumption, and hence GDP, resilient, and can continue to do so despite a loosening job market, has been a powerful “wealth effect” from record-high stock prices (S&P 500 up 13% YTD) and home prices. With estimates indicating that more than 60% of the US adult population is invested in the US stock market (market cap. of around $65 trillion, close to 220% of GDP) private consumption can possibly continue to be a strong lever for the economy as long as the market does well, and even with an ongoing soft labor market. Hence, the “bad news is good news” phenomenon (whereby weakness in the economy or labor market increases the likelihood of Fed rate cuts, driving up the stock market) can contribute in sustaining that divergence between the labor market and economic growth.