The Real Story Behind America's Affordability Crisis

A MyTSV.com Research Report — Chicago & Illinois Small Business Insights

You keep hearing it on the news: the U.S. economy is growing. GDP is up. The stock market is hitting records. And yet your grocery bill is higher, your favorite neighborhood restaurant just closed, and nobody you know is brave enough to start a business right now. If that gap between the headlines and your kitchen table feels confusing, you are not imagining it — and you are not alone. This is one of the most well-documented paradoxes in the American economy today, and understanding it is the first step to protecting your finances and your business.

The Numbers Are Real — But They're Not Telling the Whole Story

Start with what's actually true. The U.S. economy grew at roughly a 2% annualized rate in early 2026, and forecasters expect growth near 2% for the year, supported by strong business investment — especially in AI and data centers, which jumped over 20% in early 2026 alone. Corporate profit margins are sitting at an all-time high, around 14% of GDP. On paper, this looks like a healthy, expanding economy.

But GDP measures the size of economic activity — it does not measure who benefits from it, or whether an average family's income actually covers their bills. And that's exactly where things fall apart for most households.

The K-Shaped Economy: Two Americas, One Economy

Economists now have a name for what you're sensing: the "K-shaped economy." Picture the letter K. One arm goes up — that's higher-income households, investors, and homeowners who benefit from rising stock portfolios and real estate values. The other arm goes down — that's everyone whose income depends mainly on a paycheck rather than an investment account.

The data backs this up clearly. Wage growth for lower-income workers has slowed to roughly 1% a year, while the cost of living continues climbing around 3% — a gap that steadily erodes purchasing power for the very people who have the least cushion to absorb it. Meanwhile, wealthier households continue spending comfortably, propped up by gains in the stock market, keeping overall GDP numbers looking strong even as a large share of the population struggles. Some economists now describe an emerging "E-shaped" economy — three tiers instead of two, with a shrinking, anxious middle class caught between the two extremes and "spending in a nervous way."

This is why GDP can rise while you feel poorer: the growth is concentrated. A relatively small number of high earners and asset holders can move the national average even while median households are treading water or falling behind.

The Paycheck-to-Paycheck Reality

The numbers on household finances are sobering:

Nearly 1 in 4 U.S. households were living paycheck to paycheck in 2025, meaning essentials like housing, groceries, gas, utilities, and child care consumed more than 95% of their income.

Among lower-income households specifically, nearly 3 in 10 are in this position, a share that has climbed steadily since 2023.

A separate ADP survey found that 64% of American workers report living paycheck to paycheck — up sharply from 46% just a few years earlier.

76% of Americans report having little to no financial safety net, with roughly 1 in 5 saying they have zero money left over after a payday.

At the same time, inflation-adjusted (real) wage growth for the typical worker has been essentially flat to barely positive, even as nominal paychecks look bigger on paper. When your raise is 3.5% and your actual cost of living rose just as much or more — especially in categories like beef, insurance, health care, and housing — you don't feel richer. You feel like you're running in place.

Why Prices Keep Climbing Even as Inflation "Cools"

A crucial and often misunderstood point: when officials say inflation is "coming down," they mean prices are rising more slowly — not that prices are falling back to where they were. Add to that a few specific pressures still working through the economy in 2026:

Tariffs. Higher import tariffs implemented over the past two years continue to filter into retail prices, particularly for goods, electronics, and food. Even as their overall drag on inflation gradually fades, the price increases they already caused remain baked into the shelf price.

Energy and oil price volatility, including disruption tied to Middle East conflict, which pushes up transportation and production costs across nearly everything you buy.

Sticky services inflation — health care, insurance, and housing costs have proven especially resistant to cooling, and these are exactly the categories that consume the biggest share of a working family's budget.

A federal deficit now exceeding 100% of GDP and still rising, which contributes to longer-term upward pressure on interest rates and borrowing costs for everyday consumers, small businesses, and mortgages alike.

Why Small Businesses Are Closing — and Why Fewer People Are Starting New Ones

This is the part of the story that hits closest to home for many MyTSV readers, especially Chicago-area business owners. The data shows a genuine structural problem, not just anecdote:

Closures are outpacing transitions. Roughly 7–8% of all U.S. firms close every year, and recent research finds that the overwhelming majority of small business exits — about 92% — happen through outright closure rather than a sale or ownership transfer to a new operator. That means when a longtime owner retires or gives up, the business usually disappears entirely rather than passing to someone new, taking local jobs and services with it.

Access to capital has tightened. Startups citing lack of financing or investors as their reason for shutting down has spiked dramatically compared to just a few years ago. Higher interest rates make loans more expensive at exactly the moment rising costs make working capital more necessary.

Fear of failure is rational — and rising. More than 4 in 10 Americans aged 25–34 say fear of failure is the main reason they haven't started a business. That's not irrational caution; it reflects real conditions: thinner consumer spending among the very customer base a new business would need, higher costs for rent, insurance, and labor, and less room for error when a bank loan carries a heavier interest burden than it did five years ago.

New business applications are a mixed signal. Business applications have actually ticked up in some recent months, which sounds encouraging — but an application is not a surviving business. Many of these are gig-economy or single-person filings, and the follow-through rate into a stable, multi-year, job-creating company remains historically weak compared to prior decades. New business creation overall has fallen by nearly half over the last 30 years.

Put simply: the economy is investing heavily in a narrow set of winners — AI infrastructure, data centers, and large-cap companies with record profit margins — while the small, local businesses that most communities depend on for jobs and everyday services are being squeezed from both directions: costlier to run, and serving customers with less money to spend.

What This Means for You: Practical Ways to Navigate a K-Shaped Economy

None of this is meant to be alarmist — it's meant to help you plan clearly. A few practical takeaways:

For households:

Track your actual "necessity spending ratio" (housing + food + utilities + transportation + child care as a share of income). If it's creeping above 70–80%, treat it as an early warning sign, not a temporary blip.

Prioritize building even a small emergency cushion before optional spending — with roughly three-quarters of Americans reporting little to no safety net, this single step puts you ahead of most of the country.

Be cautious about relying on credit cards to bridge monthly gaps; rising reliance on debt is one of the clearest signals economists point to when describing households that are quietly falling behind despite "low unemployment" headlines.

Compare essential costs regularly — insurance, phone plans, subscriptions, and grocery staples — since services inflation has been the stickiest category and shopping around still yields real savings.

For small business owners and entrepreneurs:

Recognize that today's environment rewards lean, service-based, high-retention businesses over capital-heavy ones. Financing is tighter, so cash flow discipline matters more than growth-at-all-costs.

Local visibility and trust matter more than ever, because consumers — especially the squeezed middle and lower tiers — are being far more deliberate about where they spend. Businesses that clearly demonstrate credibility (reviews, video presence, real interviews with the owner, transparent pricing) convert better with cautious spenders than businesses relying on generic advertising.

If you're considering succession or an exit, know that closure is currently the default outcome for most small businesses rather than a sale — meaning planning an ownership transition early, rather than waiting, meaningfully improves your odds of preserving what you built.

Diversify revenue rather than betting everything on one service line or one customer segment; the same divergence hitting consumers (some sectors booming, others starved) is showing up business-to-business as well.

The Bottom Line

The U.S. economy is not lying to you when it says it's growing — but growth and shared prosperity are not the same thing. Record corporate profits, a booming AI investment cycle, and a resilient stock market are real and are lifting GDP. At the same time, a widening gap between how top earners and everyday working households experience the economy is just as real, and it's the reason "the economy is fine" and "I can't keep up" can both be true statements at once. Recognizing which economy you're actually operating in — the K-shaped top or the squeezed middle and bottom — is the key to making smart decisions with your money and your business in 2026.

MyTSV.com is Chicago's video-based local business directory, connecting Illinois residents with trusted local businesses through video profiles, studio interviews, and in-depth reporting. Have a business story or local economic trend you'd like us to investigate? Contact MyTSV Studio in Wheeling, IL.

Sources: U.S. Bureau of Economic Analysis; Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036; U.S. Department of the Treasury; Stanford Institute for Economic Policy Research; Bank of America Institute (2025–2026 Paycheck-to-Paycheck research); Federal Reserve Bank of Atlanta; ADP; CivicScience; U.S. Census Bureau, Business Formation Statistics; McKinsey small business ownership-transfer research; EY US Economic Outlook, June 2026.

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Why the U.S. Economy Keeps "Growing" While Your Paycheck Doesn't Stretch

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