Behind the curtain, the US economy looks shakier than many realize

• Key insight: Looking past the headline numbers, there are reasons to be concerned about the condition of the U.S. economy. Particularly troubling is the fact that large numbers of Americans live financially precarious lives.
• Supporting data: Research from the Ludwig Institute for Shared Economic Prosperity suggests that the bottom 60% of Americans, as a group, do not command enough of the nation's income to achieve a minimal quality of life.
• Forward look: We couldface a downturn reminiscent of the 1989-1992 period, most remembered as the "S&L" crisis.

The resilience of the American people and the American economy is admirable. A strong work ethic, fundamentally good values and optimism about the future have gotten America through a very great deal. Warren Buffett has famously cautioned investors to "never bet against America" over the long term, and I agree with him. The American economy has repeatedly shown an extraordinary ability to weather difficult periods, adapt and continue to grow. That same resilience is reflected in our ability to accomplish real business outcomes and develop new products and services that even 50 years ago would have been almost unfathomable.

Right now, the U.S. economy is seeing unprecedented levels of investment from several powerful forces. The boom in technology, led currently by artificial intelligence, is driving enormous investment in data centers and companies such as SpaceX, with the potential for significant gains in productivity and economic growth. Government deficit spending is providing another source of economic activity. A large military budget, propelled forward by ongoing conflicts and the desire to replenish offensive and defensive capabilities, may be acting as a temporary buoy of investment and production. And a tax code that only recently lowered taxes has provided additional stimulus, albeit mostly for upper-income brackets.

Not surprisingly, given these pluses, most banks report that their lending metrics remain good, though some report a deteriorating trend.

But economies and markets, particularly free markets, are, as everyone in finance knows, cyclical. And the current economic expansion has its own clay feet: huge bets on AI and other emerging technologies whose ultimate returns remain uncertain; federal deficits that are putting pressure on borrowing costs and are hard to believe can go on forever; and, perhaps most importantly, a growing economic imbalance between upper-income Americans and middle- and lower-income Americans.

Much of my personal angst centers around the last of these. Why? The numbers from the Ludwig Institute for Shared Economic Prosperity, or LISEP, which I founded, tell us that the economic situation for low- and middle-income Americans is more precarious than headline statistics would suggest — situations some have characterized as "hanging on by their fingertips."

LISEP's research has found that low- and middle-income Americans have experienced long-term economic stagnation over the past two decades. For many Americans, that stagnation amounts to a real economic decline. LISEP research also suggests that the bottom 60% of Americans, as a group, do not command enough of the nation's income to achieve a minimal quality of life. And this at a time when GDP has been on the rise, and upper-income Americans have generally seen stronger and stronger economic gains.

LISEP's True Rate of Unemployment, or TRU, a measure of "functional" unemployment which counts not only people without work but also those who cannot secure full-time employment or are earning poverty-level wages, is worrisome. In July, LISEP's TRU stood at 24.9%, compared with the official unemployment rate of 4.1%.

These "hanging-on-by-their-fingertips" households are particularly vulnerable to a variety of personal and broader economic shocks, e.g. higher oil prices, an unexpected health expense, the loss of a job, or a further bump up in interest rates. For households already spending most of what they earn on housing, transportation, food, healthcare and childcare, there is very little cushion when one of those costs rises.

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Just how vulnerable these income groups are is hard to determine with certainty. A number of the financing schemes they increasingly rely on are private, with limited publicly available data — buy now/pay later lending and private credit generally, for example. These forms of financing can help households make ends meet when their income is not keeping pace with expenses, but they can also make it harder to know just how much financial pressure these households are under.

Sadly, one way consumers express their displeasure with their economic circumstances is by voting for political figures on both the left and right who advance schemes which, to my more traditionally trained economic mind, are not certain to produce a genuine lift to this group's economic circumstances. Certainly not for very long.

As if this were not enough to make one nervous, we are vulnerable to military, political, and social swings that can be highly destabilizing and cause the dam to break on an increasingly large reservoir of debt.

To mix metaphors, from a theoretical perspective, it is not hard to let some air out of the balloon before it pops. Some tax relief for lower-income Americans — I have favored adjusting the payroll tax to land less heavily on the shoulders of working families — or lower prices on the few key expenses that make life sustainable can make a difference. Assuming employment holds up, finding sustainable ways to lower some of these costs could strengthen the economic foundation beneath the headline numbers. Having the courage and humility to evaluate honestly whether our trajectory in domestic and foreign policy will best support working households in meeting their basic needs would also make a difference.

However, a serious shift from a virtuous to a vicious circle is more likely. While I don't expect another financial crisis on the scale of 2007, we could well face a downturn more reminiscent of the 1989-1992 period, most remembered as the "S&L" crisis.

Some will face the current odds and "keep dancing." As a former regulator, my bias is to expand in a more cautious way. Or, if dance you must, stick to the foxtrot and avoid the boogie-woogie.