Why Is Business Getting Stronger While Consumers Remain So Uneasy?

Reading the Economy — Day 7

Something unusual is happening in the U.S. economy. Over the past two years, the S&P 500 has risen dramatically, business borrowing has accelerated, new orders for manufactured goods have strengthened, unfilled orders are climbing, and exports have improved.

Corporate profits are rising too. Yet consumer confidence remains deeply depressed.

That raises a deceptively simple question:

Why are corporate profits, asset markets, business borrowing, and capital spending strengthening while workers and consumers remain so uneasy?

The answer may tell us something important about the kind of economy we are actually living through.

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Two Economies in the Same Chart

The latest leading indicators do not tell a conventional recession story. On the business and financial side, many signals are improving: the S&P 500 has risen from around 5,000 to roughly 7,500 over the past two years, commercial and industrial loan growth has turned sharply higher, real exports have increased, and new orders have accelerated while unfilled orders continue to accumulate.

Today's durable-goods report reinforces that picture. Orders for durable manufactured goods rose again in July, and importantly, the improvement was not confined entirely to transportation equipment. Measures more closely associated with underlying business investment have also been strengthening.

Meanwhile, today's GDP report brought another striking piece of evidence: real GDP grew at a relatively modest 1.5% annualized rate during the second quarter, but profits from current production increased by $400.9 billion, following an increase of just $74.4 billion in the first quarter. Real final sales to private domestic purchasers increased at a 4.2% annualized rate.

Corporate America is not behaving like it expects an imminent collapse:

• Businesses are borrowing and investing
• Orders are increasing
• Profits are rising
• Markets remain strong

But households seem to be telling us something very different.

Consumers Are Looking at a Different Economy

Consumer confidence has fallen dramatically from where it stood roughly two years ago. The latest Conference Board survey reveals an especially interesting split.

In August, consumers actually became more positive about current conditions (the Present Situation Index rose 6.8 points to 121.2). But their expectations for the future deteriorated sharply: the Expectations Index fell 5.8 points to just 68.2 as consumers became more pessimistic about future business conditions and the labor market.

That distinction is key. Consumers are not necessarily saying “things are terrible right now,” but rather:

I'm not sure things will be better six months from now.

The labor market may provide part of the answer.

Employment Security Is Not the Same as Employment Opportunity

At first glance, the labor market looks stable: unemployment remains relatively low, initial claims are not signaling a major wave of layoffs, and companies do not appear to be firing workers aggressively. But hiring has slowed dramatically.

That creates an unusual environment where a worker may have a job and still feel insecure. The relevant question is not simply “Can I keep the job I already have?” It is also:

• What happens if I lose it?
• Can I find something better?
• Can I change careers or negotiate higher pay?
• Can I leave a bad employer?
• Can a young worker enter the labor market and get started?

Those questions are about opportunity, not merely employment. An economy can provide relatively high employment security while offering far less employment opportunity.

If layoffs are low but hiring is weak, workers become reluctant to leave existing positions. Job switching falls, bargaining power weakens, and employers have less reason to compete aggressively for labor.

Perhaps Businesses and Workers Are Benefiting Differently

Suppose companies are becoming more profitable, capital markets remain strong, access to business credit is improving, and businesses are increasing capital expenditures. None of those developments automatically requires companies to hire large numbers of additional workers.

That raises another question:

Are companies increasingly investing in capital, technology, and productivity instead of labor?

Core capital-goods orders—equipment businesses buy to expand or improve productive capacity—have been strengthening. Investment can make workers more productive and create new industries, but it can also allow companies to produce more with fewer additional employees.

With the extraordinary expansion of AI, computing infrastructure, automation, software, advanced machinery, and other productivity-enhancing technologies, if companies can grow earnings and output without expanding payrolls proportionately, traditional measures of corporate health and worker opportunity will increasingly diverge.

The Stock Market Complicates the Picture Further

The stock market has risen dramatically, creating real wealth. But stock-market wealth is not distributed evenly across households.

High Asset Owners: Experience a rising stock market as increasing prosperity.

First-Time Buyers & Renters: Experience the same economy through high housing costs, weak job mobility, depleted savings, and uncertainty.

Corporate profits and business investment are real, but so are housing costs and depleted savings. Economic strength can exist without being experienced uniformly.

Consumers Are Under Pressure—but They Are Not Collapsing

It would be easy to take weak confidence and construct an overly bearish story, but the data do not fully support that either. Today's BEA report showed personal income rising 0.4% in July, disposable personal income rising 0.5%, and consumer spending continuing to increase.

Consumers are borrowing, but broad household credit conditions do not yet indicate a systemic breakdown. Layoffs remain contained, unemployment is low, and consumers' assessment of their current situation improved in August.

Households are still financially capable of maintaining their lives while becoming increasingly uncertain about their ability to improve them.

That is a very different economic condition than an outright collapse.

Housing May Help Explain the Anxiety

Housing adds another dimension: construction remains subdued, housing starts have weakened, mortgage costs remain restrictive, and affordability remains challenging.

For existing homeowners, high home values represent substantial accumulated wealth. For people trying to enter the market, those same high prices represent an enormous barrier. Again, the same economic condition means opposite things depending on where someone stands.

Maybe the Economy Isn't Weak

We often assume that weak consumer confidence must mean the economy itself is weak. What if the economy is not broadly collapsing, but rather businesses really are becoming stronger and more productive—while those gains occur in places that do not create the same sense of economic opportunity for ordinary workers?

That would produce the exact combination we see now:

Strong corporate profits + Rising asset prices + Increasing business borrowing + Stronger capital spending
alongside
Weak consumer confidence + Limited hiring + Low job switching + Subdued housing + Uncertainty

The economy could be simultaneously healthy in aggregate and uncomfortable for many of the people living inside it.

What Should We Watch Next?

We do not have enough evidence yet to conclude that capital investment is permanently replacing labor or that economic gains are structurally disconnected from worker opportunity. These are hypotheses that need to be tested.

As business investment continues to rise, we should watch key indicators:

• Does hiring eventually follow capital spending?
• Do real wages accelerate?
• Does worker mobility improve?
• Does consumer confidence recover?
• Or do corporate performance and worker opportunity continue moving farther apart?

Perhaps the mystery isn't why consumers have failed to notice that the economy is strong—perhaps they are noticing something that traditional measures of economic strength don't fully capture yet.