BREAKINGVIEWS-Economic levitation trick will be hard to sustain

By Gabriel Rubin

WASHINGTON, Dec 16 (Reuters Breakingviews) - The U.S. economy has turned into a whodunnit, or maybe a whatnotdunnit. In April, after President Donald Trump stood with a large posterboard and announced the end of decades of free trade, JPMorgan analysts put the odds of a recession at 60%, echoing similar estimates elsewhere. Nine months later, there are few signs of a downturn: real GDP for the year is on track to expand by 1.9%, layoffs are low and inflation has settled in below 3%.

And yet, pessimistic forecasters weren’t completely wrong: market palpitations made the Trump administration roll back some of the most draconian measures by striking bilateral deals, carving out exemptions and postponing enforcement of new levies on imports. An average goods-related tax rate of 17%, however, is hardly a reprieve, and more businesses are passing the cost on to consumers. Tariff expenses that show up more broadly in 2026 will determine how much spending can hold up, particularly among people not benefiting from increases in stocks and other asset prices.

The main determinant of spending power, however, is employment. On the surface, the U.S. labor market is mostly good news: the unemployment rate has only slowly ticked up from its postpandemic 3.5% low and remains lower than 5%. Those figures mask a “curious kind of balance,” as Federal Reserve Chairman Jerome Powell described it in August. There’s very little movement among jobs, with hires per layoff at the lowest rate in over a decade. Quits are heading toward levels last seen in May 2020, suggesting that a no-hire, no-fire, no-quitting labor market has taken hold.

Consumer sentiment, however, is at benchmarks associated with recessions, according to the University of Michigan. Along with the frozen labor market, the housing market is stuck below prepandemic levels of new originations. Average 30-year mortgages cost more than 6% annually, despite recent Fed interest-rate cuts, and the average age of a first-time U.S. homebuyer is now more than 40.

There's a split between the haves and have-nots. Those in high-income brackets keep spending and project confidence about the economy, while low- and middle-income consumers have pulled back. Wage growth for the lowest-earning contingent of the labor market also flatlined more quickly than groups who pocket more, suggesting less competition for low-skilled workers.

While the buildout of artificial intelligence-related infrastructure has not transformed the broader macroeconomy the way it has equity markets, investments in data centers are an area of strength making up for some of the weakness in residential investment.

If tariffs eat into profit margins and keeping workers on payrolls becomes unjustifiable, companies are likely to raise prices and shed staff. There’s no immediate need to do so, with growth chugging along and expected to hit 2.3% next year, the Fed says. But if the AI buildout stalls and consumers get spooked, the mysteriously balanced economy could easily tip toward the doomsayers.

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CONTEXT NEWS

The U.S. unemployment rate ticked up to 4.6% in November, according to combined official monthly data released on December 16 after its collection was delayed by the 43-day shutdown concluded in November.