record highs<\/a> in the stock market suggests that many American businesses are optimistic about the value of AI. However, that confidence has so far not translated into an expansion of their workforce.<\/p>\nBusiness spending on information processing equipment and software accounted for 4.4% of GDP in the second quarter, according to Commerce Department data, slightly below a peak reached in 2000 when businesses ramped up similar investments during the dot-com boom. Solid consumer spending this year has also kept company profits afloat.<\/p>\n
\u201cFirms are investing a lot in this new technology, but sometimes that means reducing other expenditures, such as hiring,\u201d said Eugenio Alem\u00e1n, chief economist at Raymond James. He added that strong AI investment likely persisted in the third quarter and should peak sometime next year.<\/p>\n
The government shutdown likely dented GDP in the current quarter that stretches from October through December, but the US economy is widely expected to recoup most of those losses early next year.<\/p>\n
Meanwhile, the US labor market has been stymied by Trump\u2019s significant policy changes since the beginning of the year.<\/p>\n
\u201cIt\u2019s been a challenging year for employment precisely because of the changes in trade and immigration policy affecting both labor supply and demand,\u201d said James Ragan, director of wealth management research at DA Davidson.<\/p>\n
It\u2019s unclear whether rate cuts can eventually counteract the corrosive effects of major policy changes that have stoked uncertainty to bolster hiring, economists say.<\/p>\n
\u201cFortunately, we\u2019re not seeing a lot of layoffs, because that\u2019s how you turn a jobless expansion into a recession,\u201d Sweet said. \u201cThe economy can grow without creating a lot of jobs, but productivity growth has to be decent.\u201d<\/p>\n
Fed officials are expected to deliver a few more rate cuts through 2026, according to their latest economic projections from September.<\/p>\n
A jobless expansion could quickly translate into a recession.<\/p>\n
\u201cYou\u2019re very vulnerable to anything that goes wrong,\u201d Sweet said. \u201cThe labor market is your line of defense, and if that starts to fray, then it\u2019s game over.\u201d<\/p>\n
It also raises the risk the Fed commits a policy mistake.<\/p>\n
In a speech last month, Fed Governor Christopher Waller described the divergence between GDP and job growth as a \u201cconflict\u201d that should work itself out \u2014 for better or worse.<\/p>\n
\u201cSomething\u2019s gotta give \u2014 either economic growth softens to match a soft labor market, or the labor market rebounds to match stronger economic growth,\u201d he said.<\/p>\n
And if job growth remains inconsistent with GDP, that puts the US economy in a precarious position.<\/p>\n
Persistently strong economic growth also makes Fed officials less confident that they should be lowering interest rates, and there\u2019s already plenty of hesitance to continue with rate cuts within the central bank\u2019s rate-setting committee.<\/p>\n
\u201cWith two rate cuts now in place, I\u2019d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly,\u201d Dallas Fed President Lorie Logan said Friday at an event in Zurich, adding that there are signs that \u201cpolicy most likely isn\u2019t very restrictive.\u201d<\/p>\n
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