How the US economy can look pretty good but feel pretty bad
It’s an unsettled environment. Many economic indicators are trending in a positive direction, but much is uncertain.
Tariffs. The war in the Middle East. Surging AI use. It’s enough to make households and businesses want to sit on their hands, but they have to make decisions anyway.
How all that nets out will shape what happens next in the $30 trillion economy, and no one piece of data captures the whole story. Let’s break it down.
[–>More than five years ago, a post-pandemic inflation surge sent prices for almost everything soaring, and the economy is still dealing with those effects today.<!–>
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[–>The sharp rise in prices, from some combination of supply chain disruptions, the release of pent-up demand and government spending, triggered the steepest Federal Reserve interest rate hikes since the 1980s. <!–>
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[–>Designed to slow price increases and demand by discouraging excess investment and spending, those rate hikes worked.<!–>
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[–>Inflation dropped almost as fast as it had risen. The U.S. central bank began to undo some of the monetary policy tightening.<!–>
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Inflation has eased from its peak…
Change in Consumer Price Index, year-over-year
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[–>But instead of continuing to head downward, progress on inflation slowed and even reversed course, particularly after President Donald Trump’s tariff hikes in 2025 sent goods prices higher and this year’s U.S.-Israeli war with Iran lifted fuel and food prices.<!–>
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[–>Inflation has softened again in recent months, reviving optimism that progress has resumed, but the probability for rate cuts anytime soon from the Fed remains low. That situation is likely to keep consumer borrowing costs for things like mortgages high, limiting many households’ prospects for homeownership.<!–>
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…but it’s falling slowly and wage growth isn’t keeping up
Wage growth, year-over-year
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[–>By this summer, inflation had been above the Fed’s 2% target for five and a half years. The longer it stays high, the greater the cumulative strain put on American households – and the greater the political stakes become.<!–>
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[–>Inflation cost Democrats dearly in the 2024 presidential election, with the issue cited in exit poll after exit poll as the top reason why voters chose Trump over then-Vice President Kamala Harris. But polls now show Trump’s inability to fully contain price pressures has soured Americans’ faith in his economic stewardship and put his Republican Party’s congressional majorities at risk in the upcoming midterm elections.<!–>
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[–>Deepening households’ malaise: Average hourly earnings, which had increased faster than prices for almost three years in the 2021-2025 period, are losing ground again. That trend is bad news for American workers because it means their weekly paychecks cover less of what they need and want.<!–>
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The unemployment rate is pretty low…
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[–>Economists use a huge range of measures to figure out how healthy the labor market is. But if they had to boil it down to just one, they’d typically point to the unemployment rate, most recently at 4.1%. It’s not at a record low, but since the end of World War Two, it’s been higher than that level more than 75% of the time. With most American jobseekers able to find work, the economy is near many estimates of full employment.<!–>
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[–>Another positive sign: Unemployment is not rising. The economy has been creating fewer jobs each month, and it even shed jobs in July. But that change has been balanced out by fewer people looking for work, partly as more baby boomers hit retirement and as immigration restrictions limit the size of the foreign-born labor force.<!–>
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…but it’s not all pretty
Net share of consumers that says “jobs are plentiful”
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[–>Shrinking participation in the labor force, for whatever reason, is not a signal of a robust job market, and there are other signs it may be weaker than the unemployment rate alone suggests. The layoff rate, at just over 1%, is low; but the hiring rate is also low, hovering near levels more typical of a recession.<!–>
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[–>Economists say businesses are cautious about bringing on new workers because of uncertainties – not only because of trade policy and ongoing hostilities in the Middle East that are pinching global oil supplies, but also because they don’t know how the artificial intelligence boom will affect their need for labor.<!–>
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[–>And people are feeling it. A Conference Board survey in August showed that the share of consumers viewing jobs as “plentiful” improved for the first time in three months but remained near its lowest level since February 2021.<!–>
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Households are spending…
Change in consumer spending, month-on-month
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[–>Despite a labor market that Chicago Fed President Austan Goolsbee calls “stable without being good,” and inflation that has been eating away at wages, household spending has been surprisingly strong. <!–>
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[–>Personal consumption spending surged at an annualized 3.2% pace in the second quarter. Some of that spending came from higher-income households benefiting from stock market gains. The S&P 500 stock index is up about 12% this year.<!–>
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[–>And though much of that spending was paid for with credit cards, Americans are not falling behind on their debt payments at an increasing rate, with delinquencies relatively stable over the last two years, a recent New York Fed analysis showed.<!–>
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…but they are also more pessimistic
University of Michigan’s consumer confidence index
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[–>Cost of living worries have hurt consumer confidence, with the University of Michigan’s Consumer Sentiment Index dropping this month after what had been two straight months of improvement. <!–>
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[–>So far those negative feelings, exacerbated by the ongoing war in the Middle East and the resulting higher gas prices, have not translated into spending cutbacks.<!–>
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[–>But it’s not clear how long that situation will persist. In July, U.S. retail sales fell for the first time in nine months, a decline some economists feel could presage softer GDP growth later this year.<!–>
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AI-related investment is up sharply…
Business spending on computers and software
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[–>The AI investment boom is everywhere. Business outlays on software and computers, together a rough proxy for the strength of AI investment, have accelerated. <!–>
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[–>High-tech equipment and industrial and construction supplies drove U.S. factory output to its highest level in more than four years last month, Fed data showed. <!–>
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[–>And labor productivity is also on the rise, climbing by an average 2.5% in each of the past four quarters. Economists expect the AI buildout to bolster worker productivity further, potentially easing inflation pressures because higher per-worker output means employers can raise pay without necessarily raising their selling prices to compensate. <!–>
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[–>Private forecasts put the buildout of data centers on track to account for 3.1% of GDP by next year, more than double the share last year. That growth is more than double the pace of the mid-2000s when the housing boom reached its hottest point, Apollo’s chief economist, Torsten Slok, estimates – creating a risk if AI demand disappoints and the boom unwinds.<!–>
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…but it’s not obvious in economic growth
Real GDP, compounded annual rate of change
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[–>It’s too early to know whether recent productivity gains reflect real increases in efficiency that could lead to a longer-term boost in the American standard of living, or if they are something less durable. A recent analysis from the San Francisco Fed suggested there is reason for “cautious optimism” but indicated it could be years before the data is definitive.<!–>
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[–>While economists point out that past technological change has generally meant more, not fewer jobs, regular Americans worry about the negative impact of AI on their lives. More than half of young adults are more concerned than excited about AI, a recent Pew Research Center survey showed, and 74% of Americans think AI will mean fewer jobs in the next couple of decades.<!–>
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[–>Despite the very real frenzy of AI adoption and investment, it’s still a small part of the overall economy. U.S. GDP growth slowed in the most recent quarter, as the trade deficit partly offset robust growth in consumer spending, which accounts for two-thirds of U.S. economic output.<!–>
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