Reassessing the U.S. Economy: What the Headlines Get Wrong

Reassessing the U.S. Economy: What the headlines get wrong

September 2026

We’ve spent the past couple of weeks reassessing the U.S. economy and wanted to share where we landed. The S&P 500 is up about 13% this year, yet the headlines read like something is breaking. That gap bothered us, so we worked through the major data points one at a time. We believe the economy is holding up well. Here is what we found.

GDP. The US economy grew 1.5% annualized in the second quarter. That was significantly worse than expected. But AI equipment bought from abroad subtracts from GDP while adding to investment, which means growth was understated by about a full percentage point. Underlying domestic demand grew 4.2%. That’s pretty strong.

The Atlanta Fed’s economic growth projection model says 4.6% this quarter. True, this number has been all over the place lately, and some of the strength is the import drag reversing. But it still suggests solid growth.

Jobs. Payrolls fell 23,000 in July, which was initially alarming. But the workforce shrank 1.3 million over the past year, so we now need close to zero new jobs each month to hold unemployment steady. Flat payrolls are the new balanced.

The old rule was 100,000 to 150,000 jobs a month. About one-third of the drop is immigration. Most of the rest is fewer births and an aging workforce. That’s the supply side. On the demand side, our best guess, looking at open jobs, quit & layoff rates, is that we’re still in a no-hire, no-fire job market. To be clear, a shrinking workforce isn’t good news. It lowers how fast the economy can grow over time. But that’s a problem for the next decade, not this year.

Consumer spending. Real (adjusted for inflation) consumer spending grew 3.4% in Q2, against a post-2010 norm of about 2.5%. That measure may be a little overstated because it counts what insurers and Medicare pay on households’ behalf. Real retail sales, what households actually spend on goods and restaurants, rose 1.65% over the past year. That figure is goods-heavy, while most spending now goes to services, so the truth sits between the two. Either way, spending appears healthy.

Consumer finances. Household debt fell $13 billion in Q2 to $18.8 trillion, and the share of debt that’s late on payments fell to 4.7%. Credit card default rates haven’t moved in two years. JPMorgan cut its full-year card loss forecast to 3.2%. Bank of America’s card charge-offs and delinquencies both declined. The consumer isn’t squeezed, though there is some evidence to suggest spending is concentrated at the top.

Wages. Average hourly earnings are up 3.2% from a year ago vs. 3.4% for inflation, so that’s a bit of a worrisome sign. But a different measure from the Federal Reserve that follows the same workers over the past 12 months yields 3.8% wage growth.

Inflation. Inflation spiked early this year, and the cause was energy. The Iran conflict pushed headline CPI to 4.2% in May, the highest in more than three years. We think that impact is temporary. Energy prices have fallen two months running, and the gauges have moderated with them. Headline CPI is back to 3.4%. Headline PCE, which the Fed prefers, is 3.7%. But set aside the handful of categories moving most violently each month, which lately has meant gasoline and fuel, and the underlying PCE trend is 2.3%. Strip food and energy from CPI and you get 2.5%, its lowest since March 2021. Energy explains the spike, and energy is fading.

Tariffs. Still blamed for inflation. But the Supreme Court struck them down in February and refunds have been flowing all year. Walmart used a $2.9 billion refund to cut prices on 11,000 items. Those refunds are a one-time boost that won’t repeat, and the replacement tariffs are smaller than what they replaced. We don’t see this as a major factor going forward.

Bond yields. The 10-year Treasury Note yield climbed to 4.78%, and this resulted in higher lending rates throughout the economy. The go-to explanation has been rising inflation, but bond market trading in TIPS securities suggests the ten-year inflation forecast hasn’t moved off of 2.25%. So real rates are rising, but not because of inflation fear. Why then? Some say higher yields are due to rising government debt and deficits and a more dangerous world. Others say the AI buildout is bidding up the price of capital and crowding out government borrowers.

Same yield, opposite meaning. In one scenario the real rate is up because lenders are scared. In the other it’s up because capital finally has somewhere productive to go. We think bond yields are rising for both reasons, but we’re leaning toward the latter.

Where this leaves us. Some of these debates look settled. The consumer is in decent shape, the job market is balanced rather than breaking, and the inflation spike was an energy event that is now fading. Others remain open. Interest rates are the big one, and the answer depends on whether higher yields reflect fiscal strain or an investment boom. Inflation is the other, since the energy story only holds if oil cooperates. We’ll keep watching the data and will update you as it comes in.