US Economic Growth Is Up — So Why Is Sentiment Down?

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If you have a job right now, you're doing fine. And that's reflected in the low unemployment rate, the low layoff rate. If you don't have a job right now, you're kind of locked out because the hiring rate is also extremely low. The housing market, similar sort of thing. If you have a house or if you had one, you know, before 2020, 2021, you're doing great. You're seeing a lot of house price appreciation. But as we know, if you don't have a house right now, you probably are struggling to get into that market because interest rates are so high and house prices are so high. So we kind of have this situation where we do have a large group of people who are doing fine. And we also have a large group of people who are

kind of locked out of these like basic elements of the American dream, right? You get a job, you get a house, you get a car. And I think it helps explain why growth can be strong, but sentiment can be weak.

I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, Bloomberg's Matt Boesler and Christina Lindblad join me to unpack what the data says is happening in the U.S. economy and whether consumer sentiment tells another story. The Big Take On the face of it, there are lots of positive things happening in the economy, right?

But there are also some not so good signals, including but not limited to the inflation data we got on Wednesday, which showed that the CPI is up 3.7 percent from last year, mostly driven by energy costs. Christina, you edit global economic coverage for Businessweek. What's flashing green and what's flashing red for you in the economy right now?

Well, flashing green is we still have a lot of momentum from this huge investment wave we're seeing in artificial intelligence. And consumers have been more resilient for years now than people have expected them to be. What's flashing red is money's getting more expensive. for different actors. So the U.S.

faces higher financing costs. It's also affecting some of the hyperscalers and the companies that want to build all of these data centers. Definitely prices. So the cost of living, which was something that Donald Trump ran on as being able to or trying to control is going higher. And we can tell from polls that that's making people upset.

And I think you know, we were expecting maybe by this time this year that we were going to be seeing the housing market, you know, kind of unfreeze a bit. And that's definitely not going in the right direction either.

Okay. I'm hearing on balance a bit more red flashing lights than green ones for you. What about Matt from your perch covering the U.S. economy and the Fed? What are you seeing?

Yeah, I think I would agree with a lot of what Christina said. I think for me, it kind of all comes down to this AI data center build-out, right? So as long as that continues, things can keep going the way they're going in a pretty self-sustaining fashion. Consumer spending has been pretty strong, and we think a lot of that is upper-income consumers who are benefiting from these stock market gains that are, of course, being driven by the AI boom, right? And so it's a narrow source of growth, but it's a pretty good source of growth for now. And the question is, how long does that continue, right?

Just this week now, we're seeing a little bit of turmoil in the stock market. You know, the question when that happens is always, is this just a temporary breather or is this investors really pulling forward the timeline for how long they think this can continue? And so I think a lot of economists would say they see this continuing through maybe 2027 or 2028. But of course, that's something that's just kind of impossible to forecast. And so for me, it really all comes down to that.

Well, so let's dig into some of the economic data we got this week and last week. So we got inflation data, the CPI up 3.7 percent, but we also got data on wage gains. So the Trump administration has been talking up some encouraging recent wage growth numbers for Americans in blue collar jobs like manufacturing and construction. What about the rest of the workforce? What do we know?

Yeah, I mean, a lot of the job growth and the wage growth we are seeing is on that sort of goods producing side right now. And I think a lot of us presume that that is really also being driven by the AI build out, right? You have a ton of data center construction right now. You have a lot of manufacturing for equipment that is going into those data centers. And that's really keeping things afloat at a time when, as Christina said, the housing market is doing terrible.

So that's typically the source of job growth for those kinds of sectors. Those sectors are sailing through that housing weakness because of the data center story, right? On the services side, it's a lot slower. The big standout on the services side, obviously, is healthcare. That is something that has really been the major driver of job growth over the last several years. But there too, we're starting to see a slowdown. So That's a little worrying because if we lose that healthcare job growth driver, then we're not left with much else. And so that's definitely something. that we need to keep an eye on.

And according to BLS data released this week, average weekly and hourly earnings decreased around 0.5% month over month, and they're down from last year as well. How significant is this, Christina?

I think, of course, everyone is now looking at how real wages are performing, trying to figure out whether there is going to be consumer retrenchment, and that's going to be a concern. the prices of fuel have been so volatile and it looked like inflation, you know, was going to be back on track to descend. And now this month with this new print, you know, it just, it looks less hopeful. The picture looks so different than the beginning of the year. And, you know, the war in Iran is one of the biggest factors for that.

We've, seen real wages declining all year since the Iran war started with this surge in energy prices, and now what looks to be broadening out in inflation, potentially because those higher energy prices are working their way into the cost of other goods and services. But at the same time, we're still seeing pretty strong consumer spending. So that's telling you that businesses are able to pass those costs along to consumers. Consumers are still willing to pay those prices and continue to buy those things, even when the prices are going up and their purchasing power is being eroded.

And so to me, that kind of speaks to, yes, we have this supply shock that's driving up prices, but we also have strong demand that is keeping this whole thing going. And so as long as we have that strong demand, that is something that potentially keeps inflation elevated in and of itself.

I mean, Kyla Scanlon, who has a gift for creating new words, launched a new one this week. She calls it shrugflation. And I thought, yes, that's sort of a good way for how we see a lot of consumers acting You know, that in polls and surveys, they're saying, I'm bothered by inflation. It's, you know, money is tighter, but they continue and a lot of different income levels they continue to spend. And I think, like Matt said, you also have to take into account the wealth effect that we've seen from like, you know, valuations of stocks shooting up from home prices continuing to go up in many parts of the country.

Yeah, the consumer spending data is pretty staggering. Actual U.S. consumer spending hit a record high of $ 16. 79 trillion in the second quarter, but the consumer sentiment index has been at or near record lows. There is some shrugging going on for sure, but how do you explain that?

If you think about all the factors that would normally factor into how people see their own financial situation, there is data now showing that concerns about losing one's job or have risen. And I think with AI, that that playing out in the background, that is affecting people's psychology and it's hard to ignore. I mean, it's in the news all the time. So if you're not worried about your own job, there was, I think, a very striking interview that I saw where they were going to, you know, red states and talking to people who voted for Trump in the last election. And one gentleman who was older was a boomer was saying, I'm worried about my granddaughter.

You know, that she like graduated college and she can't find a job. So even people who we know from all the data are in a pretty good place, which is that generation, you know, is worried about sort of like they're the people close to them. And I think all of those things go and factor in into sentiment in a way that it doesn't in the hard data.

Yeah.

And beyond spending, Americans are also big borrowers. Of course, we got some data from the New York Fed recently saying that household debt is actually flattening out right now. It's down $ 13 billion in the second quarter. What's behind that? And is that a good sign?

Yeah, I think it is a good sign. I mean, it's just, you know, the bottom line is that the economy right now is growing faster than debt. And if you look at consumer credit, for example, as a share of GDP, it's actually at a like 26 or 27 year low, you know, so there's been a lot of broad-based deleveraging. And I think a lot of that had to do with all of the money that was sent out during the pandemic in the form of the checks and also the expanded unemployment insurance benefits. I mean, one of the most striking economic facts of that period was that household income actually went up During the pandemic recession, which is like, of course, something that's never happened before. And, you know, that's all because of the money that the

government pumped into the economy. It allowed a lot of people to pay down debt. That's something that we saw was a major rebound. of that. So you still have that kind of long tail that has kept the debt lower than it would otherwise be. At the same time, you also have a situation where the people who do have debt are increasingly falling behind on their payments. So we're seeing delinquency rates going up, even if it's on this kind of smaller base, right, of debt. And a lot of that obviously has to do with these really high interest rates that we have. So if you don't have debt, you're doing great right now. If you do have debt, you're starting to struggle.

More from my conversation with Matt and Christina after the break. For the first time in a long time, it is a buyer's market. Housing supply is rising. Sellers have begun to outnumber buyers. But at the same time, we're seeing this housing market freeze because mortgage rates are so elevated. Pending home sales were at their lowest since 2014, according to data from Redfin on September, not counting the beginning of the 2020 pandemic, which was a whole other story.

But Christina, what are you seeing in the housing market and how do you explain what's going on there?

I just think mortgage rates have risen to a level where only real cash buyers and people who may be sizing down are able to break in. And also, I mean, from one of the recent real estate stories that I edited, we looked at different communities and only in a few states where there is a government push to build starter homes, builders are starting to also tack away from that sector of the market towards higher end. So in the US, I have to say, over the last few years, it seems like the story for for which kind of autos get billed, which kind of houses get billed. It's about we're going to prioritize the higher income consumer because that's where the margins are and that's where the resilience is.

So I want to segue now to talk about the stock market a little bit because the stock market is doing very well. The S & P is up more than 12% since the beginning of the year. That's, of course, one of the big economic success stories that, again, the Trump administration has been touting heading into the midterms. What is driving those gains?

Yeah, so of course, AI is the big story, right? A few companies are doing extraordinarily well. You're also seeing that filter through to a lot of like industrials and other sorts of companies that are supplying the AI boom, right? The other big story, obviously, is energy right now because oil prices are so high. The energy companies are making a lot of money off of this situation that we have with the war. Beyond that, We kind of have a situation where most stocks are rising. So there's like real breadth to the stock market rally, but a few stocks, those AI stocks, those energy stocks are just doing extraordinarily well.

So the concentration is like really in the gains as opposed to the breadth. Now there's also interesting things going on on the consumer side that kind of tie back to our discussion about how consumers are doing. There, you kind of see a split too, where the consumer stocks that are supplying energy high-end services, things like travel, the hotel stocks, they're generally doing well. The consumer stocks like the Home Depots of the world, the home builders, and so on, anything that the auto companies, anything that is tied to interest rates and that sort of American dream kind of story, those are the stocks that are not doing well because people just can't afford to buy homes right now. They can't afford to buy cars. And I

think you kind of see that split there where the upper income consumer is doing well and the more middle class consumer is doing less well.

The K-shaped economy showing up in the stock market.

Exactly.

This has been a topic of conversation for most of the year about how a very narrow group of companies are driving the performance and people... Depending on the day of the week, go back and forth between I want to be fully exposed to this or I want to like go and look at my portfolio and make sure that I'm not overly exposed to this. I mean, this week we saw in the semiconductor index a big decline and also it's down for the year as a whole, I think.

Right. It's nice to be exposed to it when it's having a good day.

Yeah.

And also we're talking about, you know, it's such a forward-looking industry. I mean, the stock market's always more forward-looking than the, you know, economic indicators and often than not.

Right, it's betting on the future.

But this is like, you know, we're betting on a whole new technology that we don't even totally understand what it's good.

For, right? And it can be true, of course, that AI stocks are doing well, industrial stocks are doing well, stocks tied to high-end consumers are doing well. And also true that If the AI boom fizzles out, then everything is going to be going down, right? Because that's really like the first thing, right, in the chain. Like that's the key thing that is kind of propelling the momentum for everyone forward right now.

I have to ask about the midterms because these elections are coming up in just 19 days at this point. How is this all going to play for voters?

One data point on this that is really interesting to me is that if you look at some of the consumer sentiment surveys, like the University of Michigan survey, for example, they break out sentiment by Republican respondents versus Democratic respondents. And it's certainly the case that sentiment among Republicans is still higher than it was during the Biden years. But it's also a fair bit lower than it was during Trump's first term. So that tells you that even sentiment among Republicans is not great right now. And of course, that probably does connect back to what Christina was talking about with inflation. It affects everyone. And just the fact that the inflation that we're seeing right now can be

tied so directly to very visible initiatives that President Trump has been out championing, first with tariffs and then with this war. And it's easy to imagine a scenario where if he had just come into office and not done either of those things, Inflation might be at or even perhaps below 2% at the moment, and his popularity would be through the roof.

Yes, because the AI boom would be, you know, still be playing.

So my last question is about the Fed, because they have indicated that there will be one more rate hike this year, and there's one more meeting before the midterms. What kind of impact could a rate decision from the Fed meeting have, both for the consumer and in terms of how it might motivate voters?

We really already have seen the impact of these rate hikes that the Fed is expected to do because they're already priced into the market, which means longer-term interest rates already reflect those expected rate hikes. And so what we've seen in particular over the last, say, four, five, six weeks is a surge in mortgage rates as markets have come around to the view that the Fed is going to have to hike. So they've gone from under 7% to up to 7.5% now. And That's something that like we're not seeing in the monthly housing data yet because it comes out with like a month lag. But we're very much expecting to see in upcoming reports on housing that this is just going to be another hammer blow for a market that was already severely depressed because rates

were so high even before this latest mortgage rate shock.

This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

US Economic Growth Is Up — So Why Is Sentiment Down?

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