The Economy Is Growing. So Why Is It Losing Jobs?
Traditional indicators are sending mixed signals. Atlas measures the physical economy directly to determine whether weak hiring reflects a broader slowdown or an economy producing more with less labor
Growth and employment usually move in the same direction. When businesses produce more, they generally need more workers or more hours of work. When demand weakens, hiring typically slows.
This summer, those indicators moved in different directions.
According to the Bureau of Economic Analysis (BEA)’s advance estimate, the U.S. economy expanded at a 1.5% annualized rate during the second quarter. That headline was relatively soft, but underlying private domestic demand was stronger. Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 3.9%.
Then came the July jobs report.
The Bureau of Labor Statistics (BLS) estimated that nonfarm payroll employment declined by 23,000 in July. BLS described that change as “little changed,” not as a collapse in employment. The report nevertheless showed that hiring had become subdued. Payrolls increased by an average of only 34,000 per month over the prior 12 months, and the May and June estimates were revised down by a combined 103,000 jobs.
How can the economy continue producing more while payroll growth stalls?
Timing is part of the answer. GDP measures activity from April through June, while the latest employment report covers July. The soft July payroll estimate could reflect conditions that developed after the second quarter ended.
Productivity offers another possible explanation.
More Output Does Not Necessarily Require More Workers
The latest productivity report provides the clearest bridge between the GDP and employment data.
During the second quarter, nonfarm business output increased at a 1.7% annualized rate. Hours worked increased only 0.3%. The difference produced a 1.4% increase in labor productivity, which BLS defines as output per hour worked.
The year-over-year comparison is even more striking. Nonfarm business output increased 2.5%, while hours worked rose just 0.2%. Recent output growth has therefore required very little growth in total labor hours.
That does not mean artificial intelligence eliminated 23,000 jobs in July. The data cannot support that conclusion. Productivity can improve for many reasons, including new equipment, software, automation, changes in business processes, or more efficient use of existing workers.
The composition of second-quarter growth illustrates one possible mechanism. BEA reported that the increase in investment primarily reflected gains in equipment and intellectual property products, including software and research and development. These data do not prove that investment caused the weak hiring figures. They do show how capital investment can allow output to grow faster than payrolls.
The July payroll weakness was also concentrated rather than universal. Local government education lost an estimated 50,000 jobs, retail trade lost 19,000, and financial activities continued to trend down by 14,000. Health care added 22,000 positions. Employment in construction, manufacturing, transportation and warehousing, information, and most other major industries changed little.
That is not evidence of a broad-based employment contraction. It is evidence of a labor market that has lost momentum, with the latest weakness concentrated in several sectors.
The distribution of the gains also deserves attention. Labor’s share of nonfarm business output was 52.9% in the second quarter, the lowest level in a BLS series beginning in 1947. Price-adjusted hourly compensation declined at a 3.1% annualized rate during the quarter and was down 0.1% from a year earlier.
Together, these figures support a narrower conclusion. Output per hour increased, total hours barely grew, and the share of output accruing to workers as compensation reached a series low. They do not tell us whether the divergence will be temporary or structural.
Which Signal Should We Trust?
The answer is not to choose between GDP and employment. They measure three parts of the economy.
GDP measures output.
The payroll report estimates the number of jobs on employer payrolls.
Productivity measures output per hour worked.
Read together, the three reports describe an economy that continued to produce more in the second quarter without a comparable increase in labor input.
This is where measuring the physical economy can add another perspective.
Atlas Analytics’ algorithms, ROY and JACK, combine satellite-derived measures of the built environment with traditional economic data to forecast GDP. It provides an independent way to assess whether observable economic activity is expanding or slowing while official GDP and employment estimates are revised.
If physical activity remains firm while hiring weakens, the current divide may reflect a more productive or increasingly capital-intensive expansion. If physical activity and employment both begin declining, the July report may instead prove to have been an early warning of a broader slowdown.
Geography also plays a role.
A national payroll number can conceal meaningful differences between states and industries, just as national GDP can. Atlas produces economic forecasts for all 50 states and the District of Columbia, allowing us to examine whether growth remains broadly distributed or is becoming concentrated in fewer markets.
For now, the data do not establish either a recession or an AI-driven labor shock. They show that output grew in the second quarter, labor hours barely increased, and July payroll employment was essentially flat to slightly negative.
The next few months will show whether this is a temporary hiring pause or a more durable change in the relationship between output and work.