Weaker-than-expected payroll growth in July and August, combined with pretty significant downward revisions to earlier data has fuelled expectations of Federal Reserve (Fed) interest rate cuts. Markets are now pricing over 1.5% of easing by the end of 2026 with 0.75% assumed to come this year. With GDP growth holding up and core inflation still at 3.1% - well above the Fed’s 2% target - this looks optimistic. Unless, of course, the goldilocks “soft landing” turns hard and veers towards recession, in which case aggressive rate cuts would be more justified.
There’s also the possibility of a middle ground: slower growth with stubborn inflation, or what many are now calling stagflation-lite. Traditional stagflation is feared by the markets as central banks are limited in their ability to support growth, while keeping inflation under control. By contrast, stagflation-lite - where real GDP growth is weak but still positive, and inflation remains above target but manageable - provides more scope for central banks to be flexible.
Source: HSBC Asset Management, Bloomberg, Macrobond, September 2025
A glass half full
For now, investors are taking an optimistic stance, betting the labour market will stay resilient and inflation controlled. With a hiring and firing freeze common across US corporates, this doesn’t seem unreasonable. As a result, consumption - which makes up almost 70% of GDP – should remain supported.
Still, if recent weakness in the labour market persists, questions around growth sustainability will get louder. That said, structural shifts in US consumption patterns point towards the impact being less severe than in the past.
Labour market cooling, but at risk of cracking
Average monthly job growth over the past three months has collapsed to just 35,000 – down from around 150,000 through 2024 and early 2025. Yet unemployment has barely moved, sitting at 4.3% - largely due to labour supply tightening, through the clamp down on illegal immigration.
This means there’s now a lower breakeven level of monthly job growth required to keep the unemployment rate steady. Headlines of ‘labour market cooling’ look less alarming as they first appeared. However, if corporate sales and margins come under pressure from on-going policy uncertainty or tariff pass-through, then today’s freeze on firing could thaw quickly - cracking labour market resilience and putting real strain on total consumption.
Baby boomers’ spending power
A notable shift is underway in the composition of US consumption, making it less sensitive to changes in the labour market. Americans aged 65+ (baby boomers) now make up over 21.5% of total spending, up by over a third since the global financial crisis.
Their spending power is being buoyed by positive real yields from cash held in money market funds, along with favourable wealth effects from equities and property - especially via their 401k retirement plans.
Source: Bureau of Labor Statistics – Consumer Expenditure Survey
Clearly this means consumption is more sensitive to movements in the US equity market. But given the magnitude of gains enjoyed by baby boomers seen in their retirement portfolios over recent years, we’d assume there’s a solid cushion to withstand any near-term volatility.
No need to panic (yet) – Fed rate cut
Together, the Fed’s concern around softening in the labour market is fair – it’s part of their dual mandate. But with consumption increasingly driven by less economically sensitive cohorts there’s less need to panic.
The Fed’s approach of remaining vigilant and data-dependent feels like the right approach, but the market’s expectations of 1.5% in cuts may be running ahead of themselves.
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