The Economy Is Booming. Why Does It Feel Like a Bust?

0:05The U.S. is living through an unusual economic situation right now, a kind of split-screen reality. I think for the average person, the economy feels weaker than it actually is. The country is now in the throes of the highest inflation it's seen in three years, and people are feeling it. Last month, polling from the University of Michigan showed consumer sentiment is at its lowest point in more than 70 years. So I think we all just feel that prices have risen a lot, you know. Our colleague Harriet Torrey covers the economy, and she's experienced for herself what she's been reporting on. Like when she's at the gas station.

0:49It definitely cost me a lot more to fill up my Subaru than it did a few months ago. Or at a local shop, buying a$7 candy bar. Hi, can I get a bar of the Dubai chocolate, please? Okay, thanks a lot. Or when she was at the supermarket the other day, picking up dinner. Hi, could we get a large pepperoni pizza, please? Yeah, pepperoni and stuff. Oh, I don't need pepperoni! At the grocery store, I personally just find myself looking for deals a lot more. And I managed to spend$100 even though I only left the store with a pretty small bag of groceries. Ouch, how did that feel? Yeah, I mean, it's pretty depressing.

1:37But then there's the other side of the split screen. Economic metrics that seem to tell a very different story. The U.S. economy delivered a surprisingly strong jobs report in May. Wall Street's main indexes rallied on Monday. The unemployment rate, drumroll please, 4.3. That is a very, very nice historically low rate. There was a disconnect between the very strong economy and the economy's growth and people's very negative perception of the economy. I think the central mystery of this economy is that we have a boomy stock market, strong job creation, GDP growth that seems to be perfectly decent, and yet people feel really terrible about the economy.

2:24How is it that sentiment is so low when the economy, by so many measures, seems to be totally fine?

2:36Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, June 17th.

2:49Coming up on the show, the economic boom that feels like a bust.

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4:14If you look at a lot of the data coming out about the economy right now, the U.S. is on pretty solid ground. Take, for example, the jobs report. The monthly report that tracks how many people are getting hired and how many people are out of work. Yeah, so the jobs report for me was really strong, much stronger than expectations. because a lot of what we saw in the past couple of years was that healthcare was really the only sector that was adding jobs at a steady pace. But now, more jobs are showing up in other industries too. So we saw very strong job gains in leisure and hospitality and also a big increase in hiring in local government.

4:59Some economists said that was probably due to the World Cup. But also, you know, just heading into the summer months, places seem to be staffing up, getting ready for higher demand. It seemed to be a sign that the economy is starting to recover. Adding jobs is one way to grow the economy. Another way is to make workers more productive, as in produce goods and services more efficiently. And that's happening too. The Labor Department reported that productivity increased by more than 2 % last year. We have seen this very encouraging pickup in productivity recently, and that could be AI. It could also be changes to the way that people work.

5:39Of course, we saw a big shift to remote work during the pandemic. There was a lot of job shuffling that might have sort of shuffled people into roles where they're more productive, roles that they enjoy more. The longer that you stay in a job, the more productive you tend to become. And now we're seeing with AI that rather than necessarily depending on growing the labor force, the U.S. economy can grow purely thanks to increases in productivity. The GDP is also holding steady. So if that's the case and jobs and productivity are up, why do Americans feel so strapped right now?

6:20Well, for one thing, there's inflation. Through the first part of this year, inflation has been climbing rapidly. In March, inflation jumped to 3.3 percent. In April, it was 3.8 percent. And then in May... It jumped again to 4.2 percent, which was a three-year high. 4.2 percent inflation, a pretty rapid spike in just four months. This sudden increase can be traced back to one event, the war in Iran. The Strait of Hormuz is closed. A crucial waterway south of Iran that about 20 percent of the world's oil squeezes through. Gas prices are rapidly rising and are showing no signs of letting up. Before the invasion, gas prices were around$3 a gallon, regular gas prices.

7:07And what we saw after the invasion was that they ramped up very quickly and then peaked in around the middle of May at$4.50 a gallon. So that's a very big increase and it caused a lot of pain for consumers. The energy shock threatened to ripple through the rest of the economy. Because when fuel gets more expensive, it becomes more expensive to move everything from groceries to clothing. So it was a very quick increase in inflation. They say that inflation goes up like a rocket and comes down like a feather. So we're talking about inflation. We're talking about the price of goods. What about people's wages?

7:47How is that keeping pace with inflation, if at all? It's not. So people's wages adjusted for inflation are going down. For the second month in a row, year over year, average hourly earnings were negative. While prices had risen 4.2 percent compared to a year ago, average hourly earnings had only increased by around 3.4 percent. What that means is that if adjusted for inflation, the average American's earnings are back to where they were in January 2025. So effectively, since President Trump returned to the White House, they haven't seen an increase in their purchasing power because inflation has picked up.

8:30And is that why Americans are feeling the strain right now? Like, even if the metrics show the economy is technically strong, if wages aren't keeping pace with inflation, sort of is that the pain point? Yeah. And that's a big reason why consumer sentiment measures are around near record lows, because people feel very bad about the fact that their dollars are not stretching in the way that they had been. So in many ways, the economy is looking very strong and very robust. But even though unemployment is pretty low and the stock market has been booming, people are very worried about prices.

9:14A spokesperson for the White House said the Trump administration's agenda is to deliver economic relief to Americans. and that President Trump has, quote, always been clear about the fact that oil and gas prices, and thus overall inflation, will rapidly drop as soon as the Iran situation is resolved. Normally, when consumer sentiment is down, the economy starts to see signs of slowing. But Harriet says that's not happening, because even while many Americans complain about feeling broke, spending hasn't slowed. Why not? That's after the break.

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11:07On the sparkling beaches of South Padre Island in Texas, where Harriet recently spent a long weekend, you can slurp down oysters on the half shell and gaze across the water at the multi-billion dollar SpaceX rocket tower. It's this beach resort very close to the border with Mexico, very popular for spring break. America is in the grips of 4.2 percent inflation, but you wouldn't necessarily know it here. Yeah, I mean, it was, it seemed to be booming. The beaches were full of people. The restaurants were packed. Everyone was out and about and having a great time. And, You know, this is a place that's full of nice hotels, great seafood restaurants, and there are a lot of Teslas on the road.

11:52It's clearly enjoying a huge influx of people and spending.

12:00South Padre Island isn't the whole U.S. economy, of course. But Harriet kept running into the same puzzle in her reporting. For all the anxiety about inflation, for all the complaints about higher prices, Some people keep opening their wallets. Yeah, so you hear economists talk a lot about the K-shaped economy. What is a K-shaped economy? In a K-shaped economy. America's K-shaped economy is here to stay. Basically, the economy isn't treating everyone the same way. One arm in the K points up, the other line points down. And what that means is that you have people at the upper end of the income spectrum and people at the lower income spectrum, and their fortunes are increasingly divided.

12:47And it's the households at the top that are driving the economy. So upper-income households have been the beneficiaries of a huge run-up in asset values, like the stock market, but also, you know, housing valuations have increased a lot in many places in recent years. So they feel very wealthy. They have 401ks that seem to be doing extremely well. And that has a wealth effect that allows many people to spend with abandon. But for lower-income households, a lot of people are feeling the pain. We have seen that the savings rate, that's at a multi-year low at this point. It's fallen. And that is a sign that people are dipping into their savings in order to fuel their spending.

13:33And it's a sign that people are stretched. You know, we've got high gas prices. There's been this big run-up in inflation. Food costs are very high. Housing costs are high. So it's a real struggle. Typically, when prices are rising too fast, the Federal Reserve steps in. And it reaches for its usual playbook, hiking interest rates. An important number the Fed usually looks at to make that decision is a stripped-down metric called core inflation. That figure includes the cost of medication, housing, apparel, everything that isn't gas or food prices, which tend to be more volatile. But right now, remember, we're in a situation where those gas prices are what's driving inflation.

14:18In a foreign war, that's not the kind of problem the Fed can solve with a rate hike. Well, the Fed, you know, doesn't turn the oil on and off. So it can't really impact the external shocks that are causing this inflationary spike. And with that, I appreciate your attention. I'm happy to take your questions. Today, at his first press conference as the new Fed chair, Kevin Warsh stayed the course, keeping interest rates unchanged. He also acknowledged the impact of the war in Iran on what's happening in the U.S. economy. I won't be breaking any news here to suggest I'm quite interested in what's happening in the Middle East.

14:55That does have some effect on our day job. It doesn't mean it's our responsibility, but I think we're going to keep a wide lens.

15:07This comes just a few days after President Trump announced what he described as a peace deal with Iran. Markets reacted quickly. Oil prices fell on hopes the crisis might be over. While gas prices are still higher than before the war, they've started edging down. Consumer sentiment has also started to recover a little bit, though it's still low. If this deal holds and the strait does reopen, how quickly could relief show up for Americans? These things, of course, do take time. You know, even with an agreement to reopen the strait, there are various things that have to happen. You know, mines have to be cleared and so on.

15:45It's going to take a bit of time to ramp up oil flows, to rebuild inventories and things like that. But definitely this is a good development for the economy. So as that conflict resolves, hopefully things can get back to normal, even if it does take a bit of time for all of these developments to pass through into gas prices.

16:08If so many people feel like the economy is bad, does it matter that the economy is actually pretty good? I mean, yes, it definitely matters. So expectations are a big part of the economy, not just sentiment, but also things like inflation expectations. Because if you think that inflation is going to keep going up, that does have an impact on your behavior. Like, for instance, you might go to your boss and say, I need a raise because everything is more expensive. And so it has sort of a real world effect of pushing up wages, pushing up prices. If people expect higher prices, they tend to happen in a way.

16:46So the way that people feel about the economy is definitely important. Harriet, when you step back from all these indicators, what is the best way to describe the mood of this economy? Well, back in 2022, the term vibe session was all the rage when consumer sentiment readings were rock bottom. And yet they continue to spend. And it feels a little bit like Vibe Session 2.0, where the economy seems to be growing. And yet we still find people reporting that they feel really, really bad about the economy. And maybe you'll just have to get used to$7 for Dubai chocolate. Was it at least worth it? It was.

17:31It was so delicious. Sometimes it just is. You know, you want to enjoy it.

17:42Before we go, we're looking for your questions about AI in the workplace. Are you confused about using AI at work? Do you want to know if it'll really help you with your career? Or do you wonder if you should even bother? Send us a voice note with your questions to thejournalatwsj.com. That's thejournalatwsj.com.

18:08That's all for today, Wednesday, June 17th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Justin Leihard.

18:21Thanks for listening. See you tomorrow.

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