Read the Balance Sheet, Not the Headlines

C onsumer sentiment just printed a preliminary 46.3, a reading below the 1st percentile of the University of Michigan survey’s history and lower than where it stood when any of the six recessions on record began. Yet the economy grew at a 2.2 percent annual rate in the second quarter, and final sales to private domestic purchasers, the cleanest gauge of underlying demand, rose at a 4.6 percent pace. The public sentiment suggests a movie flop, but the data show a sequel that beats expectations.

Headlines tell you what a gallon of gas costs this morning. Fundamentals tell you what companies earn and whether they’re keeping their people. By the second measure, the economy is stronger than the national mood. The administration’s strategy, in Treasury Secretary Scott Bessent’s framing, is to grow our way out of debt. This month, he told a Pennsylvania business audience, “Underneath, the economy is very strong.” But that’s not the message being received by the public, according to opinion polls. 

The pain is real, so start there. The survey’s director ties the gloom to high prices and borrowing costs, and sentiment fell sharply among lower-income households and people with small stock portfolios. September prices rose 3.7 percent from a year earlier, with core inflation at 2.6 percent, up from 2.4 percent in August. The gap between them is energy cost, up 20.4 percent over twelve months, with gasoline up 34.2 percent. AAA says pump prices are the highest ever for this time of year since 2022. The IMF projects global headline inflation at 4.7 percent in 2026, so the fuel shock isn’t ours alone. In June 2022, U.S. inflation hit 9.1 percent during the Biden administration, the largest annual jump since 1981.

Layoffs typically tell the other half of the story, yet there weren’t many. Initial jobless claims were 197,000 in the week ended October 3, the four-week average was 198,000, and the insured unemployment rate was 1.1 percent. The jobless rate sits at 4.2 percent. Employers who expect a downturn cut staff early, and that doesn’t appear to be happening here. 

Follow the cash next. FactSet projects S&P 500 earnings up 29.6 percent in the third quarter from a year ago and 32.7 percent for calendar 2026, on a 15 percent net profit margin. Only 19 companies had reported as of October 9, so treat those as estimates. The Federal Reserve’s September statement describes activity growing at a solid pace, with strong productivity and healthy capital spending. Gordon Gekko made a poor role model but a fine analyst in the movie Wall Street: “The most valuable commodity I know of is information.” Here, the information says companies are earning and investing.

Skeptics have a point, and I’ll concede it. Payrolls grew by only 29,000 in September, and wages rose 3 percent against 3.7 percent inflation, so paychecks are losing ground. That’s the grievance behind the sentiment number, and it’s legitimate. The ten-year Treasury yield topped 5 percent in September, the Fed raised its target range to 3.75 percent to 4 percent, and the fiscal 2026 deficit came in near $2 trillion, with net interest running about $1.1 trillion. Bessent said in June that growth could return to 3 percent before year-end, and 2.2 percent in the second quarter leaves work to do. The IMF’s October outlook projects world growth of 3.1 percent this year, but warns that fiscal vulnerabilities and a reassessment of AI expectations could weaken it..

Then, there’s November. Polymarket traders put the odds of Democrats winning the House at 93 percent and the Senate at 69 percent as of Thursday. BNY’s midterm outlook expects at least one government shutdown, possibly paired with a debt-ceiling standoff, and sees little chance of fiscal consolidation after the midterms. The current stopgap spending law expires December 11, which BNY calls the outgoing Republican Congress’s last opportunity to raise the debt ceiling. If that slips into 2027, Democrats could press for ACA subsidy extensions or clean-energy incentives. BNY also expects a new House select committee on AI and frequent Trump vetoes of tariff-limiting bills.

Gridlock has defenders, and BNY itself notes that a constrained legislature can limit market-moving change. Freezing the current setup makes sense if you like what it’s producing, and projected profit growth near 30 percent suggests plenty of people should. The danger is the brinkmanship that comes with it. Research by the Federal Reserve Bank of St. Louis found that firms and households delay expenditure when uncertainty spikes, and BNY warns that fiscal standoffs can add pressure and volatility to long-end yields, which topped 5 percent in September. A chief financial officer watching a shutdown fight and a debt-ceiling standoff will postpone building a factory and hiring employees.

I’d start with the debt ceiling. Congress should raise it before December 11, while the (possibly outgoing) Republican Congress still holds the gavels, and attach spending limits with teeth. Treasury should then publish a multi-year path that keeps lowering the deficit-to-GDP ratio, as Bessent says it will, in a form bond buyers can underwrite. Lawmakers should also go after the fuel bill. Gasoline drives the gap between headlines and the actual core inflation; expanding refining and pipeline capacity is a step Congress can take. It won’t affect prices soon, but it would send a valuable signal. 

I ran the high hurdles in high school and college. The rule is to clear the barrier in front of you and keep your eyes on the finish line, because staring at a hurdle is how you hit it. Seneca told Lucilius that “we suffer more often in imagination than in reality.” The reality today is a profitable economy with few layoffs, a fuel problem, and a deficit problem. Fixing the last two takes growth, and growth takes a Congress that doesn’t spend the winter on a theatrical shutdown. In November, the hurdle is the ballot box.