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Will AI And Stimulus Save The US Economy As Job Market Softens?

Posted By: ndeeney
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Stocks have provided exceptional returns so far in 2025. These above-average returns have been driven primarily by expectations of continued earnings growth, underpinned by economic growth and optimism about the impact of artificial intelligence (AI). With the job market becoming more treacherous, is the optimism warranted?

Market Signs

As discussed previously, the concerns about excessive corporate capital expenditures (capex) to support the AI boom returned last week following earnings reports from Oracle (ORCL) and Broadcom (AVGO). With worries centered in the tech space, the Magnificent 7 underperformed, and small stocks outperformed.

As evidenced by the outperformance of more economically sensitive stocks over less economically exposed defensives, the markets are pricing in low odds of an economic downturn. This view is further reinforced by the robust gains in bank stocks, which typically suffer during recessions when loan losses rise.

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Two primary economic worries:

  • Low consumer confidence, and
  • Softening labor market.

Consumer Confidence

Though it has bounced off its lows, consumer confidence has plunged to levels seen during some recessions. The complicating factor in low consumer confidence is that US consumers often don’t act in line with their feelings. There have been periods with similar funks in consumer confidence without a resultant economic downturn. Consumers seem annoyed with the persistent inflation, perhaps exacerbated by President Trump’s tariffs, but will they act on it? In any case, the cellar-dwelling consumer confidence is a flashing caution light.

Jobs

The most critical issue is the labor market. Despite low consumer confidence, US consumers have generally continued to spend and propel the economy when they have had the earnings to do so, without excessive fear that their jobs are in jeopardy. The unemployment rate rose to 4.4% in September, up from its April 2023 low of 3.4%.

While the absolute level of unemployment remains relatively low, the Sahm Rule, which has a robust track record of predicting recessions, uses a 0.5 percentage-point rise in the three-month average of the unemployment rate above its lowest level in the past twelve months as a trigger. The September data took the indicator to 0.23 percentage points above the low, which is below the level needed to predict a recession but is moving in that direction.

The lingering effects of the government shutdown on economic data releases have added to the fog around the extent of the slowdown in the job market. One weekly data point is continuing claims for unemployment benefits, which have continued to climb, reflecting the increasing difficulty the unemployed face in finding a new job.

Alternative Jobs Data

While the non-governmental economic datasets don’t have as extensive a history, they avoided the shutdown and can provide further color, since government statistics are subject to data-collection challenges and thus to massive revisions.

Interestingly, new job postings on Indeed began declining before the unemployment rate bottomed and have continued to recede.

While the government reports US job openings monthly, LinkUp provides a weekly measure for the top 10,000 global employers. The story is similar to the job postings, with this measure peaking before the low in unemployment and continuing to weaken since.

Despite the gloom in the labor market and consumer confidence, there are three primary reasons for economic optimism:

  • Corporate profits, and
  • Capex spending, and
  • Fiscal stimulus.

Corporate Profits

Corporate profits have continued to rise. This isn’t just the largest companies or the technology sector’s profit growth, as when the earnings growth of the S&P 500 is discussed. The NIPA measure of earnings included the profits from public and private companies, both large and small.

With data stretching back to the 1940s, the US has never had a recession when corporate profits are higher year over year. While the growth rate has slowed, it remains positive.

Capital Expenditures

Capital expenditures, as measured by private non-residential fixed investment, have always declined during recessions. Currently, capital expenditures (capex) continue to rise.

Every recession since the 1940s has seen the US GDP decline due to a drop in capital expenditures. Recently, the contribution to GDP growth from capex has been rising.

While it cannot be accurately measured, data center construction to support AI advancements is almost certainly responsible for a sizable portion of this capex increase. If the expectation of increased artificial intelligence productivity is part of what is weighing on the labor market, this increased capex helps offset it within the US economy. Of course, this capex spending could become a double-edged sword if the AI boom fails to deliver the expected profits and productivity.

US Fiscal Policy

While the economic headwinds from the administration’s tariffs impacted in 2025, most of the stimulus benefits from the One Big Beautiful Bill Act (OBBBA) don’t begin until 2026. According to Strategas, the tariffs are currently about $300 billion, which amounts to about 1% of US GDP, which is a significant drag.

Strategas estimates that Federal tax refunds will jump a whopping 44% over 2025 levels in 2026, providing an increase in corporate and consumer income starting in February 2026.

The estimated fiscal tailwind is meaningful, at 0.9% of GDP, and essentially offsets the tariff drag, according to Strategas.

What To Watch This Week

Several economic releases remain delayed, and those that are reported are more complex due to the lingering impacts of the government shutdown.

Tuesday’s monthly jobs report will include October and November data, providing updated figures. Still, the information will remain messy as the data was collected later than typical and overlapped with the shutdown and the deferred-resignation option offered by the Department of Government Efficiency (DOGE).

October retail sales will also be released on Tuesday and closely watched for clues about the holiday shopping season, as the consumer is crucial to the outlook for US economic growth. Again, there are added complexities in interpreting the release. Auto sales should be a drag with the electric-vehicle credit expiring at the end of the third quarter. In addition, flight disruptions during the shutdown likely dented travel spending.

The consumer inflation (CPI) reading on Thursday will include some of October’s data and the full November report. Some goods may see tariff-boosted prices, but discounts in other sectors, such as travel, affected by the shutdown, could help offset those increases.

14 S&P 500 companies are scheduled to report earnings. Micron Technology (MU), Accenture (ACN), and Nike (NKE) are three of the notable earnings releases.

Summary

As expected, the Federal Reserve lowered short-term interest rates by 25 basis points (0.25%) last week, bringing the Fed’s rate cuts during this easing cycle to 1.75 percentage points. Markets are expecting two more rate cuts in 2026, which is above the Fed’s dot-plot forecast of one cut in 2026. Monetary policy works with long and variable lags to stimulate the economy, so there is added comfort that the Fed began to act before the labor market deteriorated further.

Fundamentals and the betting odds still point to the base case of no recession being the right one at the moment. The softening in the labor market and limited visibility due to the delayed economic data from the shutdown are worrying, so the situation should be monitored closely. The significant stimulus from the One Big Beautiful Bill Act (OBBBA) in the first quarter of 2026 should help build in more margin for error.

Increasing artificial intelligence adoption should provide reassurance to those concerned about rising AI capex spending, as it is a crucial driver of technology profits and GDP growth. While the avoidance of recession remains our base case, markets have priced in an extremely low probability of a negative economic and earnings outcome. Fading that extreme optimism with the ownership of some high-quality defensive companies likely makes sense at the moment.