The labor market has behaved strangely since the pandemic. President Trump’s anti-immigration drive has reduced the number of available workers. Employers are reluctant to hire for new roles. Unemployment is rising but not out of control by historical standards. Hiring remains tight, in a “low-hire, low-fire” environment.

Second, America’s institutions—the courts, the central bank, its federal agencies—have been influenced by the politics of the Trump Administration. Economists are no longer sure they can act independently to provide the checks and balances that have historically made the US economy a transparent, and therefore trustworthy, place to do business.

The former Fed Section Chief who once served as Obama’s senior economist does not think a blow-out event would destroy the American economy. However, his fear is that concurrent events will change these two fundamental factors, and that the usual responses from policymakers may not be fit for purpose.

If a path can be charted, Sahm fears we’ll be moving the wrong way down the line.

Tectonic plate one: Work

Many economists are watching the “knife” in the labor market. They see the “breakeven number” (the number of job creation needed to stop unemployment from rising) going lower and lower, offset by significant immigration, which reduces the labor supply.

Sahm isn’t too worried about monthly changes. Businesses found a solid step between the tariffs, according to the Fed’s first Beige Book of the yearmeans that the low-fire, low-hire approach of employers is no longer scary. Sahm’s concern is longer term: What does it mean for people who are looking for work but can’t find work, and whether they will be ignored by policymakers who are only alert to technical numbers that signal a decline.

“I worry when I hear ‘Well, we don’t have layoffs, so we don’t have a recession,'” Sahm said. luck in an exclusive interview. “But you have a very low hiring rate. It may not be an aggregate phenomenon, it may not be a broad-based decline like we see in a recession, but it has real implications for workers entering the labor market.”

“Something is happening here,” added Sahm. “It’s obviously not good for people looking for work, but we can’t just say, ‘Oh, if we avoid a recession, everything will be fine.’ We may be facing more structural changes, and that is not hard to predict; they are difficult to assess at present because the structural changes may be very slow. “

Changing AI roles is, of course, a factor. Fed Chairman Jerome Powell is monitoring the situation “very careful.” JPMorgan CEO Jamie Dimon said the LLM-driven layoffs may lead to civil unrest. Yet hand-wringing over AI’s impact doesn’t explain the depressed hiring rates we’re seeing today, Sahm said.

An optimist might suggest that a low hiring rate is a respite from the more restrictive conditions during the pandemic. Between 2022 and early 2024, the Beveridge curve—usually a downward slope that illustrates the relationship between job openings and the unemployment rate—is more of a straight line: In theory, for every job opening there is someone who needs a role. Fewer openings at the moment may simply indicate that employers have found the talent they need, and don’t want to add individuals who—in a tight market—can demand the pay and conditions they want, a phenomenon observed by ADP chief economist Dr Nela Richardson.

The data too does not illustrate an economy that needs fiscal stimulus to generate activity—although that’s what it’s getting this year in the form of the One Big, Beautiful Bill Act. Analysts are also banking on interest rate cuts from a more dovish Fed chairman, but Sahm also feels that this will not start with slow hiring: Sahm describes the behavior of how a government can “traditionally” stimulate a weak economy, “kind of (a) response to the recession ahead.

“But against the backdrop, as best we know from the data, business activity looks OK, consumer activity looks OK. I’m concerned that stimulating more demand isn’t what’s holding back hiring—something else is.”

Sahm’s own creation does not demand action: Currently, the recession indicator sits at a mild 0.35. He warned policymakers against relying too much on the tool in the current cycle, saying that their attention should be focused – “perhaps more” – on the labor market because “it does not hold the average pattern, which means that our average tools to fight (it) like a recession may not be the right ones.

Tectonic plate two: Institutions

For all the ingenuity and commitment required to build America into the world’s leading economic force, the country will not retain the title if it not for the strength of its institutions. President Trump witnessed the market explode when he threatened the independence of the Federal Reserve with comments about Chairman Powell’s firing, and Wall Street has reinforced the importance of an autonomous central bank ever since.

But Trump did not stop pressuring the Fed, with Chairman Powell is currently being investigated by a grand jury of the expensive renovations of the central bank buildings.

“I think we can look out and say up to this point with a high degree of confidence, that it’s the economy that’s driving interest rates,” Sahm said. “What I’m struggling with is (that) the increase continues, and the Fed itself is going through a change this year with a change in leadership. If Powell has two or three more years in his tenure as chair, I’m more confident than I would be in the fact that he has four months left.”

As with the labor market, Sahm’s concern is that institutions like the Fed—where he spent more than a decade of his career—are lawmakers allowed to drift.

“We’re not on a good path, and while I applaud Jay Powell for standing up and having a statement and pushing, in the long haul that’s not enough to check the pressure,” he added. “I don’t know where it’s going to go, and (where) the economy is going to be. We may see inflation come down faster, we may come to an environment where lowering interest rates makes sense and we’re going to diffuse the issues through that.

“But I don’t have a good feeling about it.”