(Kitco News) – Even though the latest GDP data show a worsening job market, the employment side of the Fed’s dual mandate is unlikely to be the driver of any rate cuts this year, according to Bill Adams, Chief Economist for Comerica Bank.

Adams told Kitco News on Thursday that the U.S. economy is entering the second half of 2025 on shaky footing.

“Real GDP contracted more than initially estimated in the first quarter,” he said. “And the monthly economic data for May mostly point to a low-quality rebound in the second quarter. Second quarter real GDP will see less of a drag from the trade deficit, but that will be partially offset by more cautious spending by consumers and some businesses.”

Adams noted that the trade deficit widened further in May, while retail sales, industrial production, housing starts, and new home sales all declined during the month.

“Labor demand continues to soften, with continued jobless edging up to the highest since late 2021 despite relatively low initial claims,” he said. “Layoffs are relatively low across most industries, but hiring is weak. Workers who lose jobs, recent graduates, and people re-entering the workforce after breaks are having a harder time finding a job than a few years ago.”

But the soft labor market data might not translate into an increase in the unemployment rate, Adams said, because the Trump administration’s immigration policy will likely cause much slower labor force growth in 2025.

“Foreign-born workers accounted for four-fifths of labor force growth from 2020 to 2025; the native-born labor force averaged just a 20,000 monthly increase over that period,” he said. “The BLS doesn’t have funding to measure how immigration affects labor force growth month to month, and instead waits until the turn of the year to incorporate the prior year’s immigration data into revisions to the January level. That means that the BLS’s monthly measure of the labor force has probably overstated its growth since January.”

Adams noted that if both job growth and labor force growth slow at the same time, the unemployment rate could hold steady or even fall. “That happened in the UK as immigration slowed after the Brexit referendum,” he said. “Real GDP growth averaged 1.5% in 2018 and 2019, down nearly a percentage point from the 2013-2015 average of 2.4%, but the unemployment rate still fell 0.4 percentage points from the end of 2017 to the end of 2019.”

This means the declining GDP – including its weaker employment components – are unlikely to materially impact the Federal Reserve’s monetary policy calculus.

“The Fed has a maximum employment mandate, not a real GDP growth mandate,” Adams said. “The U.S. economy would probably have to experience significant outright job losses for the job market to pressure the Fed to cut rates, and that seems unlikely. Fiscal policy will be more accommodative in 2026 due to the tax cuts in the reconciliation bill, which will more than offset the drag from tariff tax increases enacted this year.”

If the Fed does cut in 2025, he believes it will be because inflation ends up being less of a problem than the Fed anticipated.

“Most economic forecasters’ base case is that inflation rises substantially in the second half of the year as tariffs show up in checkout prices,” Adams said. “But other parts of the consumer basket could offset the effect of tariffs. Oil prices have reversed their June climb following the truce in the Middle East, and are down nearly 20% from a year ago. Wholesale egg prices have settled down after a spike at the turn of the year. And most importantly, house prices and rents are basically flat year-over-year, which is starting to show up in slower growth of the shelter component of CPI—and shelter accounts for two-fifths of the core CPI index.”

“In other words, the Fed is more likely to cut rates because inflation is better than expected than because unemployment is worse than expected.”