The U.S. economy is going through interesting times. The labor market is weakening, but Federal Reserve Chair Jerome Powell sees artificial intelligence (AI) and automation as important factors supporting growth. According to him, these technologies are contributing to a "structural" productivity boom, even as jobs decline. This article draws on information from recent analyses and statements to explain the situation simply and clearly.
The weakening labor market and its signals
In recent months, the U.S. labor market has been deteriorating. The unemployment rate rose to 4.4% in September, up from a low of 3.4% in April 2023. At a press conference following a 0.25 percentage point interest rate cut, Jerome Powell mentioned that the economy may be losing around 40,000 more jobs per month than official reports from the Bureau of Labor Statistics indicate. This means the labor market may already be contracting.
Other data confirm this. For example, the number of new job postings on the Indeed platform has been declining since unemployment hit its low. Similarly, data from LinkUp, which tracks job openings at the 10,000 largest global employers, show a decline from the peak. Continuing unemployment claims are rising, suggesting that people are finding it more difficult to secure new jobs. Jerome Powell said that AI is "part of the story" behind this deterioration, but not yet the main part—it is emerging more gradually.
Consumer confidence is also low, at levels similar to those seen during some recessions, although people continue to spend thanks to their incomes. According to an analysis by Bill Stone of Forbes, people appear frustrated by persistent inflation, possibly also due to President Trump's tariffs, but so far this has not dramatically affected their behavior.
Productivity is reportedly rising thanks to AI
Despite problems in the labor market, Jerome Powell highlighted strong productivity as a key factor. He said he never expected to see productivity growth above 2% while the labor market was contracting. Productivity is measured as real gross domestic product (GDP) divided by total hours worked. It has been rising in recent years, and Powell attributes this to greater automation and the use of AI in businesses.
According to him, this is leading to a "structural" boom in the economy. The Federal Reserve revised its projections: for 2026, it expects GDP growth of 2.3%, up from an earlier estimate of 1.8%. For 2025, it projects growth of 1.7%. Inflation according to the PCE index should fall to 2.9% by the end of 2025 and to 2.4% in 2026. Unemployment should peak at 4.5% this year and then decline to 4.4% next year.
Bill Stone, in an analysis for Forbes, emphasizes that capital investment, such as the construction of data centers for AI, is supporting this growth. Capital expenditures (capex) continue to rise and contribute to GDP. No U.S. recession since the 1940s has occurred without a decline in this spending, but it is currently rising. If AI delivers the expected gains, it could offset job losses.
Economic stimulus
Another positive factor is stimulus from the government's One Big Beautiful Bill Act (OBBBA). According to estimates by Strategas, tariffs in 2025 amount to $300 billion (approximately CZK 6.9 trillion), equal to about 1% of GDP, and are slowing the economy. But in 2026, tax refunds are expected to rise by 44% compared with this year, bringing additional income to both businesses and individuals starting in February.
This fiscal boost should amount to 0.9% of GDP and offset the losses from tariffs. Bill Stone notes that corporate profits continue to grow—not only among major technology giants such as Oracle or Broadcom, but also among small and private businesses, according to NIPA data. The U.S. has never experienced a recession when profits were growing year over year, and they remain positive now.
Impact on interest rates
The Federal Reserve cut rates by 0.25 percentage point, for a total of 1.75 percentage points in this cycle. Jerome Powell said that rates are now within the "likely range of neutral." For 2026, officials expect a median rate of 3.4%, implying only one more cut. Markets are pricing in two, possibly because they expect a new Fed chair under Trump.
Powell added that higher productivity could mean higher neutral rates in the long term if the economy accelerates too much. But for now, no one on the Fed's board wants to raise rates. Stocks reacted positively: the Russell 2000 index rose by nearly 2%, the Dow by more than 1%, and the S&P 500 and Nasdaq ended strongly.
Potential risks
The situation is not without risks. Bill Stone warns against excessive optimism in the stock market, where small-cap stocks have performed better than technology giants such as the Magnificent 7. The Sahm Rule indicator, which predicts recessions, rose to 0.23 percentage point above its low, but has not yet reached the 0.5-point threshold that signals a problem.
Because of the recent government shutdown, data are delayed and inaccurate. Reports on jobs for October and November, retail sales, and CPI inflation will be released this week. Companies such as Micron Technology, Accenture, and Nike will report their results. Stimulus from the OBBBA should provide a larger cushion in the first quarter of 2026.
