By Jeffry Bartash
Low unemployment fuels spending, and more spending keeps unemployment low
Tariffs, trade wars, lingering inflation and high interest rates – all of these drains on the economy have not been enough to plunge the U.S. into recession.
How come? Simple. Most people who want a job have one, allowing them to spend more than enough to sustain a five-year-old economic expansion.
A pair of reports on Thursday – jobless claims and retail sales – underscore the secret sauce of a very resilient U.S. economy.
Let’s start with layoffs.
The number of people who applied for unemployment benefits in mid-July fell to the lowest level in three months, showing there has been virtually no increase this year in what’s been a historically low rate of layoffs.
That’s why the U.S. unemployment rate has barely budged. It fell slightly to 4.1% in June and is just a tick higher than the pre-tariff level of 4.0%.
How remarkable is that? The U.S. has only enjoyed 4% unemployment for a few short periods in the past half-century.
A stable labor market in which layoffs are low allows most Americans to feel secure enough in their jobs to spend like they normally do – on new cars, vacations, eating out, personal care and so forth.
Consider consumer spending. In June, retail sales snapped back with a surprisingly strong increase. Keep in mind that part of the rise in spending was likely the result of consumers buying certain goods before tariffs led to price increases.
“Inflation fears may actually be boosting retail sales today as consumers make purchases before even higher prices hit in the months ahead,” said chief economist Scott Anderson of BMO Capital Markets.
Yet there’s little proof households are scaling back in a way that would threaten the economy.
“We have solid growth. We have a solid labor market. Consumers are spending,” San Francisco Federal Reserve President Mary Daly said in a TV interview Thursday on Bloomberg.
The economy is by no means great, of course.
Although unemployment is low, it’s become much harder to find a job if you don’t have one. Most businesses aren’t hiring until they get a better sense of how much the trade wars will hurt sales and profits.
A softer labor market is evident in the rising number of people who are receiving jobless benefits. These so-called continuing claims have risen to a four-year high and people are staying on the unemployment rolls for longer.
Some of the increase in consumer spending, what’s more, reflects the effect of tariffs and inflation more broadly. Since everything costs more, people are paying more.
Tariffs aren’t going away, either. They will continue to add uncertainty and hold the economy back.
Whatever the case, a steady if unspectacular increase in consumer spending this year has generated enough demand for goods and services that businesses see little need to eliminate jobs.
The reluctance to lay off workers also stems in part from a chronic labor shortage whose origins predate the pandemic – a shortage that could get worse in light of the Trump administration’s effort to deport unauthorized immigrants.
As such, most companies appear content to hold on to their current employees until the economy speeds up again.
“‘Labor hoarding’ has been a widespread trend over the last couple of years as businesses fear that they will struggle to find labor of all skill levels when business conditions pick back up,” Thomas Simons, chief U.S. economist at Jefferies LLC, said in a note to clients.
Former President Bill Clinton used to say, “The best social program is a job.” Well, the best antidote to tough economic times or a recession is high employment and low layoffs – precisely what the U.S. enjoys right now.
-Jeffry Bartash
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07-19-25 0952ET
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