Thanks man. I seriously tried for over an hour to figure this out. I hate to ask as I like to try to learn, but this one tricked me. The IDE knew exactly where it was, so I thought the path was good.
This is a confusing one because there are multiple stdlib.h files. The one in the GCC toolchain gets preference over the one in the Raspberry Pi Pico SDK when you only specify the file name in the #include directive. So you get a valid #include directive, but not the expected declarations to use in your sketch.
Using the unique relative path to the file in the #include directive forces the compiler to pick the intended file.