The ‘unsettling phenomenon’ hitting Trump’s economy
By SAM SUTTON
12/23/2025 08:00 AM EST
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A growing economy is a good thing. Politically speaking, it may not mean much moving forward.
The Commerce Department is set to release its preliminary estimate for third-quarter growth this morning, and the consensus among analysts is that the economy expanded at an annual rate of 3.2 percent. That’s softer than the 3.8 percent notched this spring, but it would be an impressive tally — and one that suggests President Donald Trump’s administration is meeting the lofty projections that were set by his allies at the outset of his second term.
As it stands, Trump’s pro-growth economic agenda hasn’t translated into higher payrolls or bigger pay raises. And that’s a sign that the U.S. could be experiencing what Mohamed El-Erian has described as an “ unsettling phenomenon”: the decoupling of gross domestic product growth from employment.
What we’re increasingly seeing is “more output with the same or fewer workers,” El-Erian, a professor at the Wharton School and chief economic adviser at Allianz, told MM on Monday. The arrival of artificial intelligence is diminishing “labor intensity” as a driver of economic growth, he said. And if workers aren’t benefiting from the upside, that will make GDP far less salient to the U.S. political landscape moving forward.
“The increasing decoupling of GDP from employment is such a consequential issue,” El-Erian said. “It’s a big story economically, socially and politically — it will be huge in six- to 12-months’ time — but it’s not being paid enough attention to now.”
To be sure, AI is not the one and only reason why employment has remained lukewarm despite solid levels of economic output. The rise of the gig economy has created challenges for government statisticians tasked with capturing the labor market, El-Erian said. Digital forms of commerce, other forms of automation and outsourcing are also at play.
But AI adoption policies haven’t been fully thought through, and if “companies see AI purely in terms of cost minimization, then labor displacement becomes a real risk, foregoing the much bigger promise of labor enhancement,” he said.
That has not happened (at least not yet). And with regard to today’s third-quarter GDP estimate, economists expect the shrinking trade deficit, technology-related capital investments and steady consumer spending — particularly among the wealthy — to mask the economy’s weaknesses.
But if AI is on the cusp of causing meaningful, permanent disruptions to the labor market, that would pose a serious political challenge for Trump at a time when a majority of voters already hold negative views of his stewardship. High prices and affordability issues have chipped away at Trump’s favorability ratings, and the chilly prospects for finding a new job are dragging on consumer confidence.
One more thing: Tech leaders have already warned that potential AI-related shocks to the workforce could require a fiscal response. So even if the AI yields major improvements in productivity and output — which would alleviate some of the government’s long-term debt woes — policymakers could respond by sending funds right back out the door to displaced workers.
“AI doesn’t solve U.S. fiscal problems, but it may delay the reckoning,” said Josh Lipsky, the chair of international economics at the Atlantic Council and the senior director of the think tank’s GeoEconomics Center. “The irony is that for all the growth benefits and new jobs it promises, one of the first real impacts is immediate negative shock on certain parts of the labor market.”
It’s TUESDAY — Your MM host thanks El-Erian and Lipsky for tolerating the sounds of “Bluey” in the background during today’s interviews. And best of luck to everyone else whose daycare closed for the holiday season. And as always, send all your econ policy thoughts, Wall Street news, personnel moves or general insights to me at: ssutton@politico.com. |
