
US growth of 2.2% looks solid on paper, yet prices, pay, hiring and mortgage rates are squeezing households as the Iran war and federal debt push costs up.
Donald Trump won the White House in 2024 largely on voters’ frustration with the economy. Of the 45% of voters who told exit pollsters that their families were worse off than four years earlier, 80% chose him, and AP VoteCast found that nearly two-thirds of the voters who said inflation mattered most to their decision did the same.
Fast forward to 2026, and less than three weeks before the midterm elections, that frustration is working against his party. Emerson College Polling finds that voters who rank the economy first now favor the Democratic candidate by 55% to 41%, and gasoline averages $4.36 a gallon, $1.24 more than a year ago, according to AAA.
The economy is also the issue voters rank highest this year. In a Pew Research Center survey, 29% of registered voters named it as the topic they most want candidates to address, ahead of every other issue, and 41% of likely voters in Emerson’s poll said it concerns them most. A July Washington Post/Ipsos poll found that the economy and high prices were the factors registered voters cited most often in their congressional choices.
Trump’s ratings explain the shift. An AP-NORC poll released October 1 found that 26% of Americans approve of how he is handling the economy and 17% approve of his handling of the cost of living, and 65% say his policies, more than outside factors, are responsible for high prices.
Trump’s explanation, given at a White House event on September 30, was that he had done “a very bad job of explaining how good the country is doing,” alongside his claim that the country is doing better than it ever has.
Three things explain why the economy officials describe and the one voters live in look so different. A war that raised the price of fuel for every household, borrowing that has helped push long-term interest rates to their highest level in 24 years, and a growth engine that runs on a small group of high-income households, AI companies, and government deficits.
An economy growing, on paper
By the standard measures, the economy is expanding. Real GDP grew at a 2.2% annual rate in the second quarter after 2.5% in the first, according to the Bureau of Economic Analysis; unemployment was 4.2% in September against 4.4% a year earlier, and the Census Bureau reported that real median household income reached a record $87,460 in 2025, although income at the 10th percentile showed no significant change.
Officials describe a stronger economy than these figures show. US Commerce Secretary Howard Lutnick predicted in January that first-quarter growth would top 5%, and the quarter finished at 2.5%.
National Economic Council Director Kevin Hassett said in May that growth could reach “north of four, north of five” percent, particularly if the war on Iran ended soon. US Treasury Secretary Scott Bessent told Axios this month that the numbers are strong “apart” from headline inflation.
The figures that arrived after those statements do not match them. Growth came in at 2.5% and 2.2% in the first two quarters, about half of what Lutnick predicted for the first, and Bessent’s exception covers the two measures households check first.
Inflation stood at 2.4% earlier this year, when Trump described it as defeated, and reached 3.7% in September, while real hourly earnings ended the same month 0.7% below their level a year earlier.
Higher prices, thinner pay and costlier loans
Consumer prices rose 3.7% in the 12 months to September, up from 3.4% in August and from 2.4% in February, before the war, with gasoline up 9.1% in September alone and 34.2% over the year, according to the Bureau of Labor Statistics. The $1.24 rise in the average pump price adds about $19 to filling a 15-gallon tank, and AAA says this is the first October in which the national average has topped $4.
But pay has not kept up. Average hourly earnings rose about 3% over the year, which left real hourly earnings 0.7% lower in September than a year earlier, whereas BLS data show them growing about 1.2% in January and February before energy prices rose.
Hiring has slowed as well, with employers adding 29,000 jobs in September against about 90,000 expected and revisions removing 60,000 jobs from July and August, so a 4.2% unemployment rate protects people who have jobs while people looking for work or a better job face fewer openings.
Loans have become costlier too. Freddie Mac’s survey put the average 30-year mortgage at 7.40% on October 8 against 6.30% a year earlier, which adds about $290 a month in principal and interest to a $400,000 loan.
The University of Michigan’s preliminary October sentiment index of 46.3 included a record-low reading on current conditions, with confidence down 20% among Republicans and 13% among Democrats since January.
Bessent attributes the current price pressure mainly to the war on Iran, so the war is the next place to look.
What the US war on Iran has cost
Before the war, the Strait of Hormuz carried about a fifth of the world’s oil and liquefied natural gas shipments, so its disruption raised fuel prices everywhere, and crude was still above $90 a barrel in early October according to AAA.
The cost reaches households first through gasoline and diesel and then through the goods that diesel moves. Brown University’s Iran War Energy Cost tracker estimates about $100 billion in extra gasoline and diesel spending by early September, more than $760 per household, and Moody’s Analytics chief economist Mark Zandi estimated in July that higher energy and borrowing costs had cost the typical household about $1,100.
Officials said the shock would pass. Bessent told the Senate Finance Committee in June that the inflation was a short-term blip, yet headline inflation held at 3.4% in July and August and rose to 3.7% in September when gasoline climbed again.
The Federal Reserve responded to inflation that its chair, Kevin Warsh, described as too high for too long, raising its policy rate unanimously on September 16 to a range of 3.75% to 4%, its first increase since 2023, and 16 of 18 officials projected at least one more by year-end.
That tightening arrives on top of a federal deficit and a bond market that were already under strain.
Read more: Ghalibaf to US: Enjoy 1970s rates, gas prices and bell-bottoms
Debt, rising yields extend the bill
The federal government borrowed about $2.0 trillion in the fiscal year that ended September 30, $218 billion more than the year before, according to the Congressional Budget Office, with $7.4 trillion of spending set against $5.4 trillion of revenue.
The Committee for a Responsible Federal Budget estimates that the deficit equals 6.2% of GDP and that interest costs reached a record $1.1 trillion, and its president, Maya MacGuineas, says the government now spends more on yearly interest than on national defense.
That borrowing meets a more expensive bond market. The 10-year Treasury yield, which is the return investors demand for lending to the government for ten years and the benchmark for mortgages and corporate loans, reached 5.34% on October 1, its highest since 2002. It stood near 4% in February and has risen about 60 basis points, or 0.6 percentage points, since the end of July, and mortgage rates rose with it from just under 6% at their low to 7.40%.
No single cause explains the rise. The Fed’s September minutes, released October 7, record that yields from two to ten years climbed about 35 basis points between meetings, with market commentary citing geopolitical developments, uncertainty over a Treasury buyback program and competition for capital from heavy corporate borrowing to finance artificial intelligence infrastructure.
The New York Fed’s estimate of the term premium, the extra return investors require for holding a long-term bond, reached its highest level since 2014, which Reuters said reflects concern about rising debt and government financing. Bessent has called the bond moves global, and yields have also risen in Britain, France and Germany, though the term premium suggests US debt is part of the explanation.
The Dallas Fed cited Wall Street estimates of about $300 billion in AI-related investment-grade bond issuance this year, roughly an eighth of the long-term bond supply from Treasury issuance, which puts AI companies and the Treasury in competition for the same lenders.
The medium-term effects fall first on housing, where mortgage rates above 7% discourage buying and building, and on business projects outside the AI sector, which must promise higher returns to justify borrowing. The long-term effect runs through the federal budget, because the Treasury refinances maturing debt at prevailing rates and each new issue at a higher yield locks in a larger interest bill until it matures.
CBO projects that publicly held debt, now about 100% of GDP, will reach 120% by 2036. CBO Director Phillip Swagel said at a Minneapolis Fed conference on October 8 that growth alone is unlikely to stabilize that path, and Fortune reported that he put the necessary growth at 5% to 6% a year, a figure CBO has not separately confirmed, against its baseline of 1.8% from 2027 and the roughly 3% growth Bessent has argued could help.
What is holding growth up?
Three supports account for much of the growth that continues despite the squeeze on households.
Consumer spending is the largest, rising at a 3.8% annual rate in the second quarter, and a January analysis by Moody’s Analytics of Federal Reserve data found that households in the top 20% by income account for 59% of it, which helps explain why spending stays firm while sentiment sits near record lows. That spending is also outrunning income, since personal outlays rose $190.7 billion in August against a $66.6 billion rise in personal income, and the saving rate was 4.1%, according to BEA.
Share prices support the same households through what economists call the wealth effect, in which owners of rising assets spend more. The Kobeissi Letter, a market research newsletter, calculated that 42 AI-linked companies produced two-thirds of the S&P 500’s price gains since the start of 2024, while the Fed minutes record that this year’s rise in equity prices came entirely from higher earnings as price-to-earnings multiples fell.
AI investment adds to growth directly through spending on data centers, software and equipment. No official statistic isolates it, and imported chips subtract from GDP when counted as imports, so estimates vary, with ING putting the contribution near a third of year-over-year growth.
Government borrowing is the third support, because a $2.0 trillion deficit equal to 6.2% of GDP, nearly three times the economy’s 2.2% growth rate, sustains demand through tax cuts, transfers and government purchases, although no official figure divides growth by cause.
The three supports depend on one another. Rising share prices lift spending by wealthy households, technology companies borrow to build data centers, their bond sales add to the long-term debt that Treasury borrowing already supplies, and higher yields then raise mortgage costs for everyone else. If AI earnings disappoint, share prices, wealth-driven spending, investment, and the debt financing it would all come under pressure together.
What to watch for in October
Three releases will show whether the pressures are easing before the election.
The University of Michigan publishes its final October sentiment reading on October 23, the Federal Reserve announces its next rate decision on October 28 after a two-day meeting, and the Commerce Department publishes September personal income and outlays on October 29.
Oil shipments through Hormuz matter as much as any of them, because gasoline accounted for more than half of September’s monthly price increase.
The evidence before November 3 shows an economy that is growing on a narrow base, that took a price shock from a war the United States launched, and that will carry the borrowing costs after the shock fades.
What this means for the midterms
When asked how they judge the economy, a CBS News survey found that almost all Americans use prices to gauge the well-being of the economy. And if conditions continue as is, costs are likely to compound.
Gas prices tend to fall more slowly than they rise, according to CNN’s reporting, so relief at the pump would trail any end to the fighting. Sixteen of 18 Fed officials expect another rate increase this year, which would keep mortgage and business loan rates high at a time when employers added only 29,000 jobs in September, and the government’s interest bill would grow with them, narrowing its room to offer relief.
The effect on the election shows up in the polling. The CBS News Battleground Tracker estimates that Democrats hold a narrow House majority, with the advantage coming mostly from frustration over prices and a Republican base that looks less likely to vote. Reuters/Ipsos found that 64% of Republicans give the White House at least some blame for rising costs.
Trump told supporters on September 30 that his failure was in explaining how well the country is doing, and the voters he is addressing have spent the year comparing that description with their own receipts.
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