When Good News Feels Bad

Here's a puzzle for you: Inflation is at 2.7%, the economy is expected to grow 2% in 2026, and yet American consumers are more miserable about their economic prospects than they were during the 2008 financial crisis. Something doesn't add up, right?

The University of Michigan's latest Economic Conditions Index dropped to 50.4, according to data highlighted by The Kobeissi Letter on Sunday. That's 5 points below the 2022 low and a full 8 points below where sentiment bottomed during the financial crisis. Even more striking: the index sat 11 points higher back in 1980, when inflation was screaming along at 13.5%.

So what gives? Americans are dealing with an affordability crisis that raw inflation numbers just don't capture. Big-ticket purchases feel more out of reach now than at any point on record, even though headline inflation has cooled dramatically from its 2022 peak.

"An ongoing affordability crisis and a weakening labor market continue to weigh on household finances, dragging consumer sentiment lower," The Kobeissi Letter noted. Professional forecasters see modest 2% growth ahead, up from 1.3% in June, but consumers aren't feeling it. "Consumers have rarely been this pessimistic about the economy," the post concluded, suggesting that headline GDP numbers are masking deeper anxieties about household finances.

The K-Shaped Split

The reality is that the American economy is splitting in two. Economists call it a K-shaped recovery, where one group zooms upward while another struggles downward.

Mark Zandi of Moody's Analytics points out that millions of Americans are "already living on the financial edge," while wealthier households continue pulling ahead. His analysis shows that 22 states plus Washington, D.C., accounting for a third of U.S. GDP, are already in recession even as the national numbers avoid that label.

JPMorgan Asset Management sees the same divide. The AI-driven rally on Wall Street has fattened portfolios among affluent households, fueling spending on luxury goods. Meanwhile, middle-income households and rate-sensitive sectors remain "soggy," caught between stubborn prices and a cooling job market that's making financial breathing room harder to find.