SITREP

Will the Fed treat the widening gap in economic experiences as something that matters for policy, or assume that continued growth will eventually lift all households? And can that assumption continue to hold with the current state of the Treasury market and mounting US debt?

These are the questions I am asking heading into Jackson Hole. But before asking which economy the Fed will target, it helps to know what households are actually reporting. Lately, I felt the vibe myself; I even incorrectly assumed that real GDP must be falling.

I was wrong. The economy is growing. Real GDP per person has actually risen for five straight quarters, including the first two quarters of 2026. Yet the University of Michigan consumer sentiment index fell to 44.8 in May and recovered only to 49.5 in June. Both readings were below every month from January 2008 through December 2010. The lowest reading in that three year window was 55.3 in November 2008, shortly after Lehman Brothers collapsed and global credit markets froze. So consumer sentiment has been sitting below 08 collapse levels while the economy and GDP have been rising. Let that sink in.

That does not mean today's economy resembles the 2008 financial crisis. No, it does not. But consumer sentiment measures more than personal finances and feelings. It also measures how people read business conditions, how they feel about the economy's direction, and whether they are getting left behind or not.

That last part matters. The Federal Reserve's latest household survey found that 73 percent of adults said they were doing okay financially or living comfortably in late 2025, unchanged from 2024. But at the same exact moment, only 26 percent rated the national economy good or excellent, down from 50 percent in 2019. So when asked, people were far more negative about the economy around them than about their own finances.

So the gap in perception and the vibe of the economy is more complicated than "GDP is up, but everyone seems to be feeling worse." The national mood is unusually weak, while personal financial strain is being felt and experienced by households with lower incomes and small or no cushions.

The University of Michigan's data paints the picture. The sentiment index was 42.7 among households in the bottom third of incomes, 48.6 in the middle third, and 55.8 in the top third (Table 2 of the May 2026 booklet). Again for scale, the worst overall month of the entire financial crisis era printed 55.3. The bottom two thirds of households are now sitting below that mark, and the top third sits barely half a point above it. And this is not a new development. The bottom third first fell below that 2008 collapse floor in April 2025 and has reported below it every month since, fourteen straight readings, slowly grinding lower the whole way. This gap, and how long it has been allowed to sit there, at a time when many of the people in that third feel support is harder to reach than ever, might help explain some of the anger, feelings of being ignored, and resentment running through our communities.

The Fed's household survey also shows the same divide in day to day financial security. The share of adults doing okay or living comfortably ranged from 45 percent among families earning less than $25,000 to 91 percent among those earning at least $100,000. Over the previous year, financial well-being fell four percentage points in the lowest income group, slipped one point in the next, rose one point among families earning $50,000 to $99,999, and was unchanged at the top.

Bill payment data show an even steeper difference. Thirty-four percent of adults with family income below $25,000 did not pay every bill in full during the month before the survey. That fell to 26 percent for families earning $25,000 to $49,999, 13 percent for those earning $50,000 to $99,999, and 7 percent for families earning at least $100,000.

We now have people living in two completely separate realities, but it is only one economy.

Income data add another complication. Real disposable income per person reached its 2026 high in January, fell through April, and has been climbing since. The July figure released this morning was the third straight monthly gain, but it was still below January. Today's report also showed prices still running hot, with PCE inflation at 3.7 percent over the year and core at 3.3, both well above the Fed's 2 percent target. I think we all feel and see this daily, and most of us would probably argue it feels like more than 3.7.

The latest distributional estimates only run through 2025, and they do not support a claim that all income growth went only to the top. The Bureau of Economic Analysis estimates that nominal personal income grew across every income quintile last year, from 4.1 percent for the bottom quintile to 5.8 percent for the second, with 4.6 percent at the top. These are experimental annual estimates, not adjusted for inflation, and they cannot tell us how the spring 2026 decline was distributed. The evidence does not show that lower income households received no income growth. But it does show they have much less room to absorb higher prices, housing, fuel, insurance, debt payments, or an unexpected bill.

Meanwhile, as we all know, a lot of business growth has been concentrated in AI infrastructure. The Fed estimates that investment likely connected to AI contributed 1.36 percentage points to first quarter GDP growth alone, the second largest contribution in its data since 2022. That figure describes one quarter's growth rate, not AI's share of the whole economy. And even the Fed's July Monetary Policy Report says investment outside AI-related categories was fairly weak, particularly in office and manufacturing structures. That does not mean the rest of the economy is in recession. It just shows a strong national GDP number can be driven by investment that does not immediately improve every household's financial position.

The Fed already knows and has acknowledged this. Their July meeting minutes say stock market gains supported spending particularly among higher income households. The same minutes note increasing strain among low and moderate income households as inflation eroded their real disposable income.

So the question is not whether the Fed can see these parallel experiences in our economy. Its own research and meeting record show that it can. The question for Jackson Hole is how much attention, and how much weight, that gap receives. Does the bottom third, and the middle third sitting right beside it below that 2008 floor, continue to get ignored? The record so far is not encouraging. The bottom third has been at crisis-era readings for more than a year without a response aimed at it. If it did not matter for policy then, it is fair to ask what would make it matter now?

Resilient GDP growth, strong AI investment, and a stable labor market describe one part of the economy. Weak sentiment, declining financial well-being among lower income households, and sharp differences in the ability to pay ordinary bills describe another. Both are supported by the data, and both are happening at the same time.

No predictions and no investment advice, just the question I will be listening for at Jackson Hole: what is the likely outcome, the top lifting us all, or the bottom pulling it all down? Continued growth may eventually improve conditions across more households. It could also stay concentrated long enough that the national average as a whole keeps looking healthier while those living at the bottom experience something very different. Not all booms are booms for all. And it is worth asking the hard question: if the status quo simply continues, can two experiences this far apart keep sharing one national average without more friction than we already see in communities? How long can people barely covering basic needs keep being told the economy is doing great, while the divide keeps growing? It does not have to be that way.

The live VA and conventional mortgage averages are on Rate Watch, updated daily.