Economic traffic: Labor market and AI capex shifting lanes
October 24, 2025
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2 min
October 2025 highlights
Who Knows What Tomorrow May Bring: While the consensus narrative has finally coalesced around the fact that the labor market is cooling, the debate as to whether that softening is a function of labor supply or demand rages on. The collapse in labor force growth is certainly pressuring the break-even rate of payrolls growth lower, but the continued softening in wage growth suggests that labor demand is the true culprit of the slow but steady buildup of slack.
Feelin’ Alright: While income tends to be the fuel behind consumption, the growing net worth of upper-income consumers fueled by healthy cash yields and surging portfolio values appears to be supporting resilient consumption. While there are indeed strains on lower-income earners, upper-income consumers drive the bulk of consumer spending, providing a strong floor beneath consumption growth. It will likely require more than a linear softening in labor markets to derail their spending patterns.
Gimme Some Lovin’: The AI boom has been and remains a powerful driver of both markets and economic activity. On the surface, artificial intelligence (AI) capex, which represents just 6% of GDP, appears to be contributing as much to growth as consumption, which is nearly 70% of the economy. But the vast majority of those investment dollars are spent on imported goods. In other words, netting out imports, the impulse to growth from domestic investment in information processing equipment and software is more muted. The economy is not completely at the mercy of the success of the AI buildout.
The Low Spark of High Heeled Boys: There’s a bubble in bubble talk. As investors search for catalysts in the shutdown-induced data vacuum, the latest narrative is that AI is indisputably a bubble. It very well may be a bubble, but bubbles can go on for longer and further than anyone expects. But if it truly is a bubble already, it’s an odd-looking one given that earnings have fueled almost the entirety of the year-to-date advance for the Magnificent 7.
Dear Mr. Fantasy: The bubble chatter of late has been so prominent that even the cyclically adjusted price-to-earnings ratioisn (CAPE) ratio has returned to the spotlight. The theory behind the ratio makes sense – measure valuations using a 10-year average of real earnings to smooth out earnings volatility through cycles. The problem: We live in a nominal world that discounts future earnings, not past profitability. Constructing a forward-looking realized CAPE ratio paints a far less concerning picture. But the bigger point: Over the short-run, valuations are little more than a barometer of risk appetite.
