While US markets suffered a near heart attack over President Donald Trump's tariff plans in April, they have since roared back, with the S&P 500 rallying by a whopping 33 percent from its lows. Meanwhile, the US economy is on track for 3.9 percent annualized Gross Domestic Product (GDP) growth as the third quarter (Q3) comes to a close.

On top of this, the US Federal Reserve has resumed easing, even in the face of the loosest financial conditions in almost four years. Why? Because Chair Jerome Powell and team are worried about the labor market.

So why is the labor market ostensibly so weak when the economy is booming, corporate capital expenditures are soaring and the stock market is racing to record highs?

While Q3 tallies for different cuts of stocks, bonds and even the US dollar all showed positive plain sailing through the quarter, the eye-popping 60 percent rise in the so-called "Magnificent Seven" big tech mega-caps from this year's low returns us to a familiar culprit.

JPMorgan economists recently highlighted the 11 percent annualized capital expenditure (capex) growth through the first half of 2025, noting that this growth remained strong in Q3 even as labor demand seemed to evaporate.

US payroll growth, which will be updated with September data on Friday, has softened considerably to an average of only 29,000 jobs per month in the three months through August, compared with 82,000 during the same period in 2024.

"Accelerating capex amid a stall in job growth is hard to incorporate into the outlook," JPMorgan wrote late last week in a note titled "The odd decouple". "Such a juxtaposition is not evident over any US expansion in the past 60 years."

Taken at face value, some cuts of the labor market are flashing a recession signal, one that equity and credit markets seem to be dismissing out of hand even if US Federal Reserve officials seem spooked.

TS Lombard economist Dario Perkins recently spotlighted a chart that he says "terrifies the Fed", which shows that the six-month change in "core" US payrolls, excluding government and healthcare jobs, is near zero. A negative reading of this measure has preceded every recession over the past 60 years.

"The Fed is doing what it always does when employment stops growing – panicking about 'stall speed'," Perkins wrote.

So why isn't the stock market bothered?

It's partly because investors think the US Federal Reserve will now move fast to ease monetary policy to head off the problem and also that the jobs picture is down to immigration reversals and productivity gains, and the US Federal Reserve will ease anyway just in case.

The JPMorgan team puts forward two possible narratives to explain the dichotomy between booming capex and stalled jobs growth.

The optimistic view is that AI and other new technologies are being implemented successfully, allowing hiring to slow along with the falling labor supply.

That sort of precise macroeconomic syncing seems improbable. Still, it does chime with the immigration curbs and deportations that have reportedly pushed the "breakeven" payroll growth, the monthly jobs gain consistent with an unchanged unemployment rate, below 50,000.

And that's why some economists now think the monthly payroll report could soon turn negative, without necessarily scaring financial markets.

By contrast, JPMorgan's alternative pessimistic take on the decoupling of jobs and capex is that the drop in hiring reflects broad business caution, while capex growth is in the final throes of a narrow AI-led boom that's set to fade.

If that's true, then a slowing labor market may start to weigh on household purchasing power, compounding the hit from any import tariff- and dollar-related inflation.

The final quarter of the year may not fully resolve this issue, of course.

For one, a possible government shutdown may mean we may have to wait weeks to even see the full September jobs report that will either confirm or negate the Q3 trend.

For the capex part of the equation, the upcoming earnings season may prove more informative. Not only will we see details about the AI-related spending by the so-called "hyperscalers," such as Microsoft, Alphabet and Amazon, we'll also learn more on how much the industrial world is benefiting from the rapid construction of data centers and other physical infrastructure.

HSBC's US equities team, for example, reckons the Q3 earnings season should confirm or even amplify the tech investment thesis. Of the "Magnificent Seven's" roughly US$1 trillion of cash firepower, it sees $414 billion going to capex, with room for Apple to catch up to the others.

It's unlikely to provide a satisfying answer to the current economic conundrum, however, as some slowdown in the AI capex spend seems inevitable. How long the apparent contradiction of hesitant hiring and confident company investment can coexist in the interim will likely remain the dominant question of the final quarter.

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The writer is a columnist for Reuters.