I’m not sure why, but whenever I read about the U.S. economy, images of the Titanic flash in my brain. On the surface, things look pretty good. The stock market is near record highs, the growth of GDP has been solid, and inflation is only a percentage point or so above the target rate. So why do I sense that danger is lurking just below the surface?
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| RMS Titanic |
Perhaps my anxiety stems from Captain Edward Smith who dismissed warnings about sea ice from other ships and maintained his course at full speed. The “captain” of our economy seems equally determined to ignore warning signs and blast ahead as if our economy were unsinkable. As history has repeatedly taught us, however, there is no such thing as an unsinkable ship or an economy immune from recession.
As it turns out, there are a variety of economic icebergs that could sink the economy if they are left unaddressed. I’m going to touch on a couple of the more ominous ones, but then focus on the one factor that I think is particularly relevant to the development and prosperity of cities. The national economy is so complex, of course, that charting a successful economic path is as much an art as a science. Consequently, predicting economic collapse is a popular pastime among economists and financial pundits. Those predictions are occasionally right but mostly wrong because the U.S. economy has proven to be remarkably resilient.
So while I am personally pessimistic about our country’s near-term economic outlook, I’m not going to make this article a prediction of the future. Instead, I’m going to structure what I have to say on the economic trends that I find troubling as more of an exercise in scenario planning – if these trends continue, what would the impact be and how should cities respond. Scenario planning is a tool that can prepare cities for bad events that might happen even if the exact timing and nature of those events can’t be accurately predicted.
The Labor Market
By several measures, the U.S. economy is booming. The gross domestic product (GDP) for example, has more than doubled since 2010, and most of that growth has taken place in just the past 5 years. In fact, GDP has grown consistently for a very long time. Current GDP is more than 100 times larger than it was in 1950. During that time, total employment has grown consistently as well, although not at the same rate since worker productivity increased at the same time.
The odd thing is that recent employment has under-performed compared with economic growth. This is particularly true in the past two years. Nonfarm employment fluctuates to some degree, but total U.S. employment has averaged nearly 150,000 additional jobs each month since 2010. That drops to just over 70,000 since the beginning of 2024 and roughly 23,000 since Trump took office in January of 2025. In fact, total employment growth would have been negative in 2025 had it not been for robust expansion in the medical and social assistance sectors.
The current economy is now being called a “jobless boom” in contrast to the situation immediately following the pandemic when companies seemingly couldn’t hire people fast enough. The current quit rate is nearing 10-year lows and the rate of layoffs is trending upward. If 2021 and 2022 were characterized by “job hopping” because job openings were everywhere, 2025 and 2026 are being defined by “job hugging” – a term coined by Korn Ferry consultants. [1] Job hugging is when people cling to their jobs due to economic uncertainty rather than due to fondness for their work or loyalty to their companies.
The current lack of hiring may largely be a reaction to what is now perceived as the over-hiring in 2021 and 2022, but it increasingly reflects the impact of Artificial Intelligence which is making many white collar jobs unnecessary. Dario Amodei, the CEO of AI giant Anthropic, has warned that the technology could replace 50 percent of entry-level jobs before 2030. He has stated that AI’s “cognitive breadth” will replace not just a single type of worker, but will eliminate jobs across a broad swath of white-collar industries, thus preventing laid-off workers from finding employment in related fields. [2] The unemployment rate has remained fairly stable because of deportation efforts, immigration policy changes, and retiring baby boomers, but I expect the rate to increase significantly over the next year or two.
Debt
The total amount of U.S. national debt continues to surge to new record levels, now more than $37 trillion dollars. Of course our country has always had debt starting from its very inception after the revolutionary war. But the scale of debt is relatively new – it is now well in excess of GDP – and it has the potential to drastically alter our economic future. Just 20 years ago total national debt was roughly 60 percent of GDP. Recent presidents of both parties – from Bush to Obama to Trump to Biden and back to Trump – have piled on debt like there is no tomorrow. It has become the cocaine of the federal government, highly addictive and ultimately destructive.
President Trump has promised to substantially reduce the Federal debt by relying on revenue from rapid economic growth, his “gold card” immigration program, and DOGE spending cuts. So far none of those programs have had any significant impact on debt levels. Debt in Trump’s first year actually increased by more than $2 trillion dollars. His track record from his first term doesn’t inspire confidence either – debt rose more than $7 trillion during those four years. I am not trying to pin the problem solely on Trump because this is a problem that neither party has been able to solve. I just want to make it clear that there is currently no solution in sight.
The national debt qualifies as an economic iceberg for a variety of reasons:
High interest payments. In 2026, the estimated interest payments on Federal debt will top $1 trillion dollars. This level is three times higher than in 2020 and represents more than 18 percent of federal revenue. Money spent on interest is money that could have been spent more productively elsewhere.
Slower economic growth. Increased government debt hinders growth by reducing the capital available for private sector investments. In effect, debt hamstrings the very strategy that offers the best chance to reduce debt levels (i.e. economic growth).
Higher interest rates. As government borrowing increases, global financial markets are likely to increase interest rates which raises borrowing costs not only for the federal government, but for local governments, businesses and individuals as well. Higher interest rates, of course, lead to higher interest payments which spark the need for more borrowing and starts a downward spiral that no one wants.
Less fiscal flexibility. Increasing debt is like painting yourself into a corner. There is simply less room to maneuver financially the next time there is an economic crisis, a pandemic or a global war.
The K-Shaped Economy
There have been quite a few articles in the press in recent months about a phenomenon known as a k-shaped economy, although the definition of exactly what that term means is a little fuzzy and some debate is taking place as to whether we are really experiencing this phenomenon or not. The term is generally used to describe an economy where the rich are getting richer and the rest of society is struggling to make ends meet. Unfortunately, different writers describe “the rich” in different ways and the degree to which the rest of society is struggling might be more of a perception than actual reality. Consequently, a deeper dive into the data seems warranted.
Mark Zandi, chief economist at Moody’s Analytics, recently posted about trends in personal outlays by income group. [3] He found an interesting difference between U.S. households in the top 20 percent of all households, and those in the bottom 80 percent. Thirty years ago, the two groups had roughly equal amounts of personal outlays but the relative shares have been diverging ever since. Currently, the top 20 percent account for nearly 60 percent of personal outlays and the rest of society is down to just over 40 percent. He sees this trend as a bad sign because it means the economy is increasingly dependent on a relatively small group of wealthy households. This point is further backed up by a Federal Reserve research paper which found that since 2018 retail sales to households earning over $100,000 have increased by 16.7%, compared with 13.3% for households earning between $60,000 and $100,000, and just 7.9% for households earning less than $60,000 (all figures adjusted for inflation). [4] Thus, while all groups are spending more, the rich are spending considerably more.
A recent Gallup poll found that only 59 percent of Americans gave high ratings when asked to evaluate how good their life will be in 5 years. This is the lowest rating since Gallup started asking this question 20 years ago. Current life satisfaction is also declining but future scores are falling nearly twice as fast. [5] Jordan McGillis in a Wall Street Journal Editorial said that middle class families don’t feel as secure as they once did because of what he calls the Great Decompression – where incomes are rising across the board, but are rising much faster for families at the high end of the spectrum.
Families with income at the 80 percentile and above are pulling away in lifestyle and social status, opening a chasm that separates them significantly from families with median incomes.
For families with children, the household income of the 80th percentile in 1975 was 51 percent more than the median family. By 2000, that difference had risen to 68 percent more, and last year the difference was 85 percent more. McGillis references sociologist Richard Reeves as identifying this trend as allowing the upper classes to “hoard the American Dream.” [6]
Even more striking is the change in wealth as illustrated by the chart below which shows the trend in total household wealth over the past 25 years. The first thing to point out is that the bottom half of all households have only a trivial amount of total wealth – currently just 2.5 percent of the total, down from 3.5 percent in 1990. The second thing to notice is that the only group to move up substantially is the top 1 percent of households. That small group increased their share of total wealth from 22.5 percent to 31.7 percent. This increase came primarily at the expense of households that have historically been the heart of the American economy – the 50th percentile through the 90th percentile. Even though their actual wealth increased
(even in inflation adjusted dollars), their share of wealth dropped by almost 20 percent.
An Economic Conundrum
What all of this boils down to is a situation in which many people, while objectively better off than they were 10 or 20 years ago, feel subjectively worse off. In my opinion, part of the problem is that expectations – fueled by popular culture and social media – have grown faster than average incomes or wealth. We feel poorer than we actually are.
This may seem like a moment when I should write something like “don’t worry, everything is fine” but I’m not going to for two primary reasons. The first is that perception is reality. It doesn’t matter if average household income has risen in inflation-adjusted dollars, our behavior is determined by how wealthy we feel and right now many people are feeling like they are losing ground relative to where they think they should be in society. In a recent poll by ABC News, 74 percent of respondents said that a new car was unaffordable given their current budget. Taking a weeklong vacation (60%) and healthcare costs (56%) were also seen as unaffordable by a majority of people. The new reality is that a large chunk of our society feel they can no longer afford purchases that used to be taken for granted by many middle class households just a few decades ago. [7]
The second reason is that both income and wealth inequality is growing. Our economic success isn’t being shared as evenly as it once was. Increasing inequality is real, not just perceived, and it seems counter to what our country has historically stood for. The growing gap between the rich and the middle class may lead people to believe that the economy is rigged against them and that they can’t succeed no matter how hard they work. If that happens, our society is in real trouble.
Part of the issue is that the parts of the economy that are doing especially well are not evenly distributed across wealth classes. The stock market is near historic highs, for example, but the ownership of stocks and mutual funds is heavily skewed toward the top ten percent of households by wealth. A booming stock market simply doesn’t matter to most families.
A second issue is that companies are figuring out that star employees – the entrepreneurs, the innovators, the strategists, the specialists and the big producers – are the real source of profits. Middle managers, bean counters, and other worker bees are either necessary in far smaller quantities or can be replaced with AI agents. Salary and employment decisions are being made accordingly. Big bucks for some, minimal raises or layoffs for many. The fintech company Block, for example, recently laid off 4,000 of its 10,000 employees. That is probably an anomaly, but the fact that a company that recently reported a Q4 profit increase of more than 20 percent can find a way to operate with 40 percent fewer employees is scary.
What is potentially more worrisome is that the societal split embodied in the K-shaped economy may get worse before it gets better. The job destruction potential of artificial intelligence may just be ramping up. As with many disruptive technologies throughout history, the jump in productivity and the availability of excess labor will likely cause new types of jobs to be created that were not previously foreseen. Eventually, the overall impact of AI on society may well be positive. The problem is that job destruction happens first which means that there is a period of time when lots of people who thought they had dependable careers are suddenly unemployed and very angry.
A big economic shock like a jump in unemployment typically elicits a strong economic stimulus from the federal government. Witness, for example, the actions that followed the 2008 housing crisis or the 2020 COVID pandemic. That response, however, might be muted in the future because borrowing may be constrained by a heavy debt load (due to a middle east war, perhaps?) or by rising interest rates (due to tariff induced trade disputes?). I’m not predicting that these things will happen, but it is a scenario with odds well above zero.
The Impact on Cities
It may be a bit of a longshot, but what if the k-shaped economy continues to the point where there is a clear break between the top 10 or 20 percent and everyone else? What if legions of mid-level accountants, paralegals, sales managers, researchers, and software coders with years of experience are suddenly out of a job and unable to find work? What if the middle class decide that capitalism is not a meritocracy, but rather a system that is rigged so that the rich get richer and everyone else has to fight over the scraps?
Sorry, I’m getting too dystopian. Society isn’t likely to flip-flop into a new reality overnight. But what if society shifts in that direction? Would people elect politicians who promise to return things to a nostalgic past (make America great again)? Would people blame immigrants for job market woes? Would people reject science for internet conspiracy theories? What if the fringe become a potent political force? It might not take much of a shift for things to get weird. Particularly at the local level, our democracy depends upon a large block of society being level headed and relatively united in working toward a shared future vision. It is worth thinking about how cities should respond if disillusionment spreads and the ‘silent majority’ shatter into a dozen splinter groups.
Take care of the basics. This may sound overly simplistic, but when people are economically stressed, cities need to fill the potholes, keep people safe, fix the playground equipment, and keep utility systems running smoothly. Households that are worrying about making the next mortgage payment shouldn’t have the added stress of worrying whether their kids are safe walking to school or whether the water system is going to shut down because neglected pipes are breaking. When times are good, cities often expand into programs that are nice but not essential. If times turn bad, cities need to pare back or pull the plug despite the constituencies that have built up around them.
Don’t swing for economic home runs. If the local economy is struggling, every politician wants to be at the ribbon-cutting for the new factory (or office campus, or medical center) that is going to create a thousand new jobs. The problem is that economic development staffers can spend years trying to land the splashy new employer only to have the whole project go up in smoke or have it shift to some other city. Even the successes can have such an enormous cost in terms of economic incentives and tax breaks that the new jobs are an overall drain on the community. Community boosters like to claim that lavish incentives are needed to “prime the pump” for more growth in the future, but that approach can turn into a ponzi scheme if cities aren’t careful.
Cities would be better off nurturing home-grown economic expansion that might take the form of a thousand small entrepreneurs. How many people have started a “side hustle” that became a significant contributor to household wealth? The so-called gig economy will be a particularly useful safety valve if layoffs become commonplace. Twenty years ago, who would have thought that people could make a good living as a podcaster or social media influencer? Cities should reexamine their home occupation ordinances to make sure they are as flexible as possible and should think about sponsoring training resources for people wanting to start their own business.
Enable economic returns on existing assets. I am amazed that someone with a cellphone and a car – two of the most widely owned assets – can make a living as an Uber driver. No college degree, office building or special equipment needed. I don’t even really need the car. In many cities, an e-bike and a phone are all I need to do deliveries for Doordash, et al. These are examples of a secondary economy that is unexpectedly blooming because of technologies invented over just the past decade or two. Will a software developer laid off because AI made him redundant be happy with a career delivering pizza on an e-bike? Probably not, but my point is that economic growth can take place in surprising ways. A couple of cobbled together side hustles might make a second career or at least serve as a stop-gap until a more traditional job appears.
Real estate is an example of a local asset where significant economic returns are often locked away by unnecessary city regulations. Most cities have neglected neighborhoods filled with houses that are literally falling apart and in recent years developers have made decent money rehabbing and “flipping” those houses to buyers desperate for a reasonably priced place to live. That activity has unlocked value, boosted the local tax base, and reinvigorated neighborhoods that were headed toward blight.
The problem is that cities have unintentionally put a cap on how much can be accomplished by enacting a myriad of regulations and fees connected with almost any form of construction work. These regulations and fees may make perfect sense in the context of large scale projects or new subdivisions on the edge of the city, but for a small developer rehabbing just one or two properties a year they can be the difference between success and failure. Instead of spending a hundred million on expanding the convention center for conventions that may never appear, perhaps cities should spend money streamlining construction processes for small projects, and even subsidize infrastructure costs for builders willing to produce affordable housing.
In previous posts, I have written about the falling size of the average household and yet many cities have thousands of 4-bedroom, single-family homes on large lots. The houses were built for families of four, five or six people but are increasingly occupied by an elderly person or couple wanting to age in place in a familiar home in a familiar neighborhood. They are not only “over housed,” they are often overwhelmed by maintenance tasks they can no longer perform and expensive maintenance projects they can no longer afford. Cities should modify their zoning regulations to allow homes to have an accessory apartment or a freestanding accessory dwelling unit in the back yard. The existing owner is able to tap into a new source of revenue, the tax base grows, and new forms of affordable housing are created.
Keep debt levels low. Earlier I wrote about the iceberg of federal debt, but local governments frequently have their own debt problems. At least in theory, the federal government can print their way, inflate their way, or grow their way out of debt, but cities have far fewer options. A city mired in debt can significantly raise taxes, drastically cut budgets or declare bankruptcy – none of which are good options if the economy is depressed and the citizenry feels underwater. Spending on glitzy projects that promise a big return on investment can seem like progress, but the people doing the cost-benefit analysis are prone to exaggeration because they have a vested interest in getting the project built.
Even projects financed with federal grants should be examined with a jaundiced eye if the operational and maintenance costs are going to fall to the city. In particular, projects designed to support future growth may backfire during an economic slowdown because the “growth” turns out to be either nonexistent or simply a reshuffling of existing economic activity. The spigot of federal money seems like manna from heaven but it can lure cities into reckless spending and it can be unexpectedly shut down leaving cities holding the bag.
The Bottom Line
The point of this article, and scenario planning in general, is to highlight actions that can be taken in the near term which expand the range of future events that can be handled without disastrous results. A little planning during unsettled times can be a form of insurance against future risks. Unfortunately, cities often have a type of inertia that makes even minor adjustments in direction difficult until disaster is imminent – which brings me back to my analogy with the Titanic. In hindsight, it seems obvious that the disaster could have been avoided. As it turns out, the sinking of the Titanic did result in changes to the way ocean liners were built and operated, but at a terrific cost. My fingers are crossed that municipal captains will be able to steer clear of the financial icebergs that are looming ahead.
Notes:
Matt Bohn, et al.; “Job Hugging for Dear Life”; August 2025; Korn Ferry; https://www.kornferry.com/insights/this-week-in-leadership/job-hugging-for-dear-life
Sawdah Bhaimiya; “Anthropic CEO Dario Amodei warns AI may cause ‘unusually painful’ disruption to jobs”; January 2026; CNBC; https://www.cnbc.com/2026/01/27/dario-amodei-warns-ai-cause-unusually-painful-disruption-jobs.html#:~:text=Anthropic's%20CEO%20Dario%20Amodei%20warned,humans%2C'%22%20Amodei%20wrote.
Mark Zandi; Moody’s Analytics; February 2026; https://www.linkedin.com/posts/mark-zandi-667086350_the-k-shaped-economy-is-becoming-steadily-activity-7418691133180112896-Wz7h/
Sinem Hacioglu Hoke, et al; “A Better Way of Understanding the U.S. Consumer: Decomposing Retail Spending by Household Income”; October 2024; Federal Reserve System; https://www.federalreserve.gov/econres/notes/feds-notes/a-better-way-of-understanding-the-u-s-consumer-decomposing-retail-spending-by-household-income-20241011.html
Linley Sanders; “What a new Gallup poll shows about the depth of Americans’ gloom”; February 2026; AP; https://apnews.com/article/poll-gallup-optimism-future-republicans-democrats-4dc287cdbbaefb077895746613fea4e4
Jordan McGillis; “Why the Middle Class Feels Poor”; February 2026; Wall Street Journal; https://www.wsj.com/opinion/why-the-middle-class-feels-poor-cdb17587?mod=hp_opin_pos_4
Emily Guskin; “Over half of Americans say health care, a weeklong vacation and a new car are unaffordable”; February 2026; ABC News; https://abcnews.com/Politics/half-americans-health-care-weeklong-vacation-new-car/story?id=130538412
