Final answer:
The US economy showed several warning signs of distress, such as over-speculation, a reliance on credit, an overheated housing market, and over-leveraged financial institutions.
Step-by-step explanation:
Warning signs suggesting that the US economy was not as prosperous as it appeared included signs of over-speculation, an over-reliance on credit, and an overheated housing market leading to 'bubbles' in states like California and Florida.
High levels of debt among consumers and financial institutions, as well as an overstimulated economy, were overlooked, framed by figures like Alan Greenspan and Ben Bernanke as unlikely to affect the United States due to an assumed 'economic American exceptionalism'.
However, this façade began to crumble as large financial firms showed instability beneath their record profits. When some of the largest banks faced collapse and firms like Bear Stearns went bankrupt, it became evident that government deregulation had allowed systemic risks to accumulate unchecked.
When the housing market crashed, it sparked a deep financial crisis—known as the Great Recession of 2008. This cascade of economic disasters caused consumer spending to decline sharply, leading to a decrease in international trade and a significant loss of jobs, with millions of Americans being laid off.
The distribution of wealth was so skewed that when average consumers could no longer spend, the entire economy suffered. The stock market crashed, erasing trillions of dollars in wealth, and despite government bailout efforts and economic stimulus packages, recovery was slow and painful, causing prolonged high rates of unemployment and a stark drop in the S&P 500 Index.