The United States economy is presenting a confounding puzzle that has profound implications for economies worldwide, including India. In the third quarter of 2025, official data showed the US economy growing at a robust annualised rate of 4.3 per cent, its fastest pace in two years. Yet, simultaneously, the Bureau of Labor Statistics reported that the unemployment rate climbed to 4.6 per cent, with payroll growth showing little net change since April. This divergence between strong economic expansion and a softening labour market is forcing a major rethink of traditional economic models.
The Three Competing Explanations for the US Puzzle
Economists and policymakers are locked in a debate over how to interpret these conflicting signals. Three primary interpretations have emerged. The first, a pessimistic view, suggests the Gross Domestic Product (GDP) figures are overstated and will likely be revised downwards in the future. Historically, GDP data undergoes larger revisions than employment figures, and when they clash, jobs data is often deemed more reliable. However, this theory is challenged by the strength of consumer spending, which alone contributed 2.4 percentage points to the overall growth.
The second, more optimistic, interpretation flips the script. It argues that the GDP data is accurate, and the weak labour market readings are misleading. Proponents point to solid private-sector job growth, suggesting that headline figures are being dragged down by cuts in federal government employment. They believe the job market will appear healthier once these temporary factors subside. Notably, Federal Reserve Chair Jerome Powell has added a layer of complexity, suggesting that official job growth numbers may themselves be overstated by roughly 60,000 positions per month.
A Productivity Surge or a Structural Shift?
The third, and most conceptually intriguing, explanation posits that both datasets are broadly correct. This scenario suggests the US economy is genuinely growing robustly but is producing this growth with minimal additional labour input, implying a massive surge in productivity. The driver appears to be concentrated investment. In the first half of 2025, investment in information technology and data centres—accounting for 4 per cent of GDP—was responsible for a staggering 92 per cent of the GDP growth. If this tech infrastructure spending is excluded, the annualised growth rate was a mere 0.1 per cent.
This represents a form of growth where computation substitutes for labour—capital-intensive sectors generating enormous output with relatively few workers. It raises a critical question: is the traditional, tight relationship between GDP expansion and employment generation breaking down? Experts urge caution, noting that a single quarter of unusual data does not confirm a full-blown, AI-driven productivity revolution, but the trend is unmistakable and significant.
Policy Dilemmas and Stark Lessons for India
For the US Federal Reserve, this divergence creates an acute policy headache. With core inflation stuck near 2.9 per cent and the labour market weakening, the central bank faces a classic bind. Cutting interest rates to support employment risks re-igniting inflation, while holding rates steady could tip a fragile job market into a recession. Chair Powell has acknowledged navigating a “very unusual” economy, with the Fed's current projection signalling only one potential rate cut in 2026.
For India, observing this American conundrum offers two vital lessons. First, it validates the country's long-standing struggle with jobless growth. India has grappled for years with GDP expansion that fails to create commensurate employment. The US experience demonstrates this is not solely a developing-country affliction but may be a structural feature of modern, capital-intensive, and technology-driven growth globally. This underscores that for India's demographic dividend to pay off, growth must be explicitly labour-absorbing; targeting GDP numbers alone is insufficient.
The second lesson is institutional. The vigorous debate in the US is possible because of credible, independent statistical bodies like the BLS, which revises data transparently. Policymakers and economists can interrogate the numbers and offer competing interpretations using the same reliable dataset. India is making progress, with the revamped Periodic Labour Force Survey (PLFS) providing higher-frequency indicators. However, significant gaps remain, including questions around national accounts measurement, delays in the Census, and controversies around consumption surveys. As the article notes, “You cannot navigate a fog if your instruments are unreliable.”
The American economic puzzle will likely take years to fully resolve, and the official data for late 2025 may look very different upon future revision. For India, the imperative is clear: it must strengthen its statistical foundations and honestly confront uncomfortable data. The alternative is to operate in comfortable ignorance, a luxury no major economy can afford. The insights from the US experience, articulated by Rohit Lamba of Cornell University in December 2025, provide a crucial framework for India's own policy challenges ahead.
