Why the U.S. Economy is Much Weaker Than You Think

By Victor Sperandeo with the Curmudgeon

Introduction:

Victor has argued that the U.S. economy has been slowing since the beginning of the year, with GDP serving as the primary measure of that deceleration. That view is broadly consistent with the downward revision in the Atlanta Fed’s GDPNow estimate, which fell from 5.4% on January 7, 2026, to 1.5% on July 28, 2026, in line with the BEA’s first estimate of 2Q26 real GDP growth at 1.5%. By comparison, official 1Q26 GDP growth was 2.1%, indicating a clear moderation in U.S. economic momentum. That's depicted in this chart:

At the same time, equity valuations remain at historically elevated levels, creating what some investors would characterize as an increasingly asymmetrical risk/reward profile or "disconnect." In that context, the combination of slowing growth and rich market multiples warrants heightened caution.

Let's examine a few economic metrics to confirm our thesis that the U.S. economy is slowing and headed for recession.

Deceptive Labor Market:

The labor market appears resilient on the surface, but several underlying indicators suggest a softer trend than the headline unemployment rate implies.

In its July 29, 2026, statement, the Federal Reserve said job gains have kept pace with the workforce and that the unemployment rate has changed very little, with unemployment at 4.2%. However, the labor force participation rate has eased to 61.5% as of June 2026 - the lowest reading since March 1974 (not counting the April 2020 pandemic lockdown. That statistic exemplifies broader labor-force engagement weakens.

A more complete read on labor conditions should also account for movements in the labor force, not just the unemployment rate. If participation declines, the headline unemployment figure can understate underlying slack. Here's why:

The workforce is currently 169.4 million people (with every tenth equal to 169,000 workers). Therefore, the

unemployment rate of 4.2%. If the BLS lowers the workforce, naturally the employment rate “will keep pace.”

Victor's Opinion: The formula for the current jobs created SHOULD BE: the non-seasonally adjusted jobs counted or + 472,000 MINUS THE BIRTH DEATH MODEL (BDM) JOBS IMPUTED or +539,390 not counted. That equals -67,000 jobs lost vs. the 856,000 jobs gained (as per the BLS's current formula) in the first half of 2026.

Last year, 4 million workers left the labor market due to retirement (that's ~11,000 per day). That's not including workers who die while employed. In Jackson Heights Queens, where I grew up, they call that "a Statistical Con!"

-->As Mark Twain put it: "There are three kinds of lies: lies, damned lies, and statistics."

Weak Housing Market:

The housing market is in a deep decline and remains under severe pressure. It's primarily because affordability constraints are limiting demand. Even where inventory is available, elevated mortgage rates and stretched valuations are reducing transaction volume and making it harder for home sellers to close sales. In that setting, housing weakness may be understated if one focuses only on prices rather than turnover and affordability.

Importantly, 30-year U.S. mortgage rates have climbed to nearly 7%, extending the affordability squeeze that has already cooled housing demand and slowed price momentum. At these levels, financing costs are likely to keep sidelining marginal buyers, reduce transaction volumes, and lengthen time on market, even if limited inventory prevents a broad-based price correction. In short, higher mortgage rates should continue to act as a headwind for the housing market, with the greatest pressure showing up in sales activity rather than a sharp nationwide decline in home values.

Here's a video by a real estate developer and a real estate agent, who will give you a deep dive into the housing market. It's titled, “Home Sellers PANIC | Can't Sell HOMES.”

-->The comments from some real estate experts say it's worse than the 2008-2009 mortgage meltdown.

Crumbling Consumer Confidence:

Significant downturns in consumer confidence typically lead to large declines in consumer spending, which accounts for ~70% of GDP. The current persistent downward trends continue to warn that an economic contraction could lie ahead.

Consumer Confidence from The Conference Board, released this week, continues to show increasing signs of weakness. The Present Situation Index fell to its lowest level in more than five years as consumers continue to be weighed down by high prices, concerns about further inflation, and maintaining their jobs in the "AI era."

The sustained decline in confidence can also be attributed to increasingly pessimistic views of business and employment conditions. The percentage of respondents who said jobs were plentiful fell to 24.6% – its lowest level since early 2021. That's shown in this chart:

Higher Long-Term Interest Rates:

Friday's 19-year high in the 30-year U.S. Treasury yield of 5.28% lifts the economy’s benchmark long-term borrowing rate. That means higher costs for the federal government (debt financing) and higher interest rates for companies, homeowners and car buyers. It is also signaling investors very serious concern about inflation, debt, and fiscal risk.

Energy vs. Economic Growth:

Energy demand is closely tied to the broader economy, and abrupt sharp changes in oil markets can have important macroeconomic consequences. Recent reporting has noted that "demand destruction" has been a key factor in stabilizing oil prices despite supply disruptions, with global demand expected to decline this year in some forecasts. Gasoline and diesel prices also do not move one-for-one with crude oil, since refining margins and product spreads matter as well.

If geopolitical tensions were to push crude significantly higher, the more immediate transmission to consumers would likely come through refined products such as gasoline and diesel. A sustained move in fuel prices could erode real household purchasing power and pressure economic growth through heightened demand destruction rather than simply higher prices.

Victor's Conclusions:

Energy use is 95% correlated to GDP. As the price rises the economy must decline.

The U.S. war with Iran is not winnable without mass casualties. Boots on the ground would cause an economic crash like 1929-32. Meanwhile, it is unlikely President Donald Trump will take a “loss” for the WAR he started. Thereby, it is a matter of time when the oil reserves run out, and the price spikes due to a shortage that will cause severe “demand destruction,” which will lead to a recession/depression —not inflation!

Trump and the GOP must walk away from this war with Iran to save the global economy, boost regional security, and lead to peace in the Middle East.

End Quote (an old joke):

A consumer walks into a grocery store and asks if they have strawberries?

· The grocer says yes.

· The guy asks how much they are?

· The grocer says $5 a pound.

· The guy says, "the store across the street sells them for $4 a pound!"

· So, the grocer says, "Why don't you buy them across the street?"

· He answers, "Because they're all out of strawberries!"

· And the grocer then says, "When we're out of them, we’re $3 a pound."

Explanation: This strawberries tale is analogous to the current state of the Crude Oil Futures market vs. fuel!

You do not fill up your car or truck with September Futures on Crude oil, you must use the refined product, e.g. gasoline or diesel fuel, which are much higher in price.

At $200 a barrel oil with inventories exhausted, gasoline would be ~ $10 per gallon and diesel $18 (estimated). That would produce severe “demand destruction.”

Like the strawberries story, it is where we're headed, unless Trump ends the war with Iran.

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Stay healthy. Wishing you success and good luck. Till next time…

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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