Job creation has slowed sharply. Does a recession hinge on tariffs?
The economy is looking shaky. Growth is slowing. Inflation is rising. For the first time since the pandemic, the nation has more jobless workers than available jobs.
On Friday, the U.S. Labor Department delivered more bad news: Job growth is stalling. In August, the economy added only 22,000 jobs. Revisions to previous months showed that the economy actually lost 13,000 jobs in June. That鈥檚 the first contraction since 2020.
Is a recession next?
Why We Wrote This
Just 22,000 jobs were created in August, and revisions to prior Labor Department reports show a pronounced slowing in the job market since April. Avoiding a recession may depend, more than usual, on policymakers and even the courts.
Economists say the answer, usually in the hands of consumers, businesses, and the Federal Reserve, may this time involve decisions by two other key players: the U.S. Supreme Court and Congress.
鈥淚t is a resilient economy,鈥� says Mark Zandi, chief economist of Moody鈥檚 Analytics. 鈥淲hat鈥檚 ailing it is policy: the higher tariffs and the highly restrictive immigration policies. ... If those policies can be reversed or even moderated and with a little bit of luck, I think we can get through without a recession.鈥�
First up is the Supreme Court, which may well determine the legality of most of President Donald Trump鈥檚 tariffs. Having lost twice in federal courts, the administration this week asked the high court to decide by Sept. 10 whether to take the case and to hear it by the first week of November. The tariffs, which amount to taxes on U.S. businesses and consumers, stay in place for the time being.
At issue is a 1977 law, the International Emergency Economic Powers Act, which Mr. Trump has used as legal justification for his sweeping tariffs. The act gives the president power to regulate imports in an emergency that poses an 鈥渦nusual and extraordinary threat鈥� to the nation鈥檚 security, foreign policy or economy. The administration argues that the language allows tariffs. A divided Federal Court of Appeals ruled 7-4 otherwise.
If the Supreme Court backs the president, it would allow Mr. Trump to issue even more tariffs, and the U.S. economy would be more likely to fall into recession, Mr. Zandi says. If instead it strikes down his tariffs, the economy has a better chance of escaping recession.
Most companies would say 鈥淗ooray鈥� in that case, 鈥渂ecause it is a very small set of businesses that truly benefit from the tariffs,鈥� says Brett House, an economics professor at Columbia Business School. 鈥淗ouseholds [would] say 鈥榊eah!鈥� as well, but uncertainty will continue to reign.鈥�
The uncertainty, which has loomed since the president began imposing the tariffs, would be prolonged as he would have to scramble to find other ways to save a central plank of his economic policy, argues , economics professor at Dartmouth College.
鈥淚 think the enhanced uncertainty is a big deal,鈥� he writes by email.
It would continue to act as a drag on the economy as businesses might further delay their investment plans, he adds.
Until recently, the labor market has proved a resilient support for the economy, churning out an average 150,000 new jobs per month. But the last two employment reports, especially revisions to previous months, shows a dramatic slowdown beginning in May. Job creation has slowed to 27,000 a month in that period, barely keeping the economy afloat. The unemployment rate also edged up in August to 4.3%, its highest level in nearly four years.
And the slowdown is unusual. Typically, when the economy slows, inflation goes down. This allows the Fed to step in, lower the cost of borrowing for businesses and consumers, and boost economic activity. This time, however, inflation is rising.
After the big price rises during the early years under President Joe Biden, inflation began a long, slow decline that bottomed out at 2.3% in April. Since then, inflation has begun to creep back up. In July, it hit a 2.7% annualized rate.
This puts the Fed in a bind. In addition to supporting the economy, it鈥檚 supposed to keep inflation low. The inflation rate doesn鈥檛 look out-of-control by historic standards, so Wall Street expects the Fed to prioritize the economy by lowering interest rates, at the end of its two-day meeting.
A series of rate cuts should boost the economy, Mr. Zandi says. He predicts it will be followed next year by a stimulus package, enacted by a Republican-controlled Congress in an election year. That could boost inflation even more.
At some point, the Fed will likely have to step in and start raising interest rates, he adds. Otherwise, the high inflation that plagued the last administration could come back to haunt the current one.
Editor's note: A quotation from Brett House was expanded for clarity on Sept. 5, the day of the article's initial publication.
