The Disconnect in Our Economic Reality

Exploring why there's a disconnect between economic data and public sentiment, and how personal experiences shape our views on the economy.

May 27, 2024

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More than 2,000 Americans were surveyed for a recent Harris poll conducted for The Guardian, and guess what? Despite some pretty solid economic indicators, a large chunk of people think the U.S. is currently in a recession. Surprising, right? Take the stock market, for example. It’s not a traditional economic indicator, but many people see it as a kind of thermometer for the economy’s health. It’s up more than 12% so far this year! But get this—almost half of the people polled believe the S&P 500 is actually on the decline.

There’s a stark contrast between what economic data shows and how people are feeling. But it’s an interesting paradox worth looking into: why do so many Americans feel like the economy is heading south when the numbers tell a different story? Kyla Scanlon has dubbed it the “vibecession” in her newsletter,

Kyla’s Newsletter

. While the technical measures—things like GDP growth, inflation, and unemployment rates—have been showing improvement, a lot of people’s day-to-day experiences are telling them something completely different. It’s important, then, not just to correct misconceptions but to understand and validate the emotions driving them.

Understanding Economic Indicators

Before we dive into the specifics, let’s take a moment to understand what we mean by “economic indicators” and why they matter. They measure very specific things, but these terms are used constantly on social media and in the news, which makes them fairly easy to misinterpret. We’ll look at three big ones below, but keep in mind that their specific nature gives us a consistent way to measure and compare economic performance over time and between different places.

Our personal experiences and perceptions, however, may be measured by different indicators that may not be measured in the same way that the government measures their indicators. Understanding the difference between these economic indicators and our personal experiences can help us make sense of why there might be a disconnect between what the data shows and how people feel. So, let’s take a closer look.

Indicator #1: Gross Domestic Product

Let’s start with the Gross Domestic Product (GDP). It’s often seen as the primary indicator of a country’s economic health and the most common measure associated with recessions. Essentially, GDP measures the total value of all goods and services produced over a specific period. When the news reports on the growth rate of GDP, they’re indicating whether the economy is expanding or contracting.

Historically, economists have used a shorthand measure of a recession as two consecutive quarters of declining GDP. That rule of thumb isn’t always perfect. For example, the pandemic recession was dated at 3 months and the U.S. saw two consecutive quarters of decline in 2022, but the NBER didn’t classify that as a recession. That was the past, but what about now? According to the Harris Poll Survey, 56% of respondents think the US is currently experiencing a recession, and 55% believe the economy is shrinking.

But here’s the interesting part: GDP has been growing for seven consecutive quarters, nearly two straight years. A recession will eventually happen in the U.S., but there’s no indication we’re in one right now based on economic data. So why the disconnect? Why do so many people feel like we’re in a recession when the GDP numbers suggest otherwise?

One important thing to remember is that GDP alone doesn’t account for the distribution of income or the disparities in economic growth experienced by different demographics. Just because the overall economy is doing well doesn’t mean that everyone in the economy is benefiting equally. There are other measures of well-being, but most people focus on GDP.

Wealth inequality is a major factor in the discount. The United States has one of the highest levels of wealth inequality among developed countries, and this inequality has been increasing for much of the past 60 years. When wealth and income are concentrated among a small segment of the population, the majority might not feel the positive effects of economic growth.

Indicator #2: Inflation

Perhaps the most discussed economic indicator over the past year has been the inflation rate. Inflation measures the change in prices from the previous year. The pandemic had a large impact on people’s lives beyond health. The economy was slow to get back to normal, with supply chain disruptions making it difficult for people to get what they needed. Just as people were adjusting to the “new normal,” they were hit with the highest rate of inflation that the U.S. has seen in 40 years.

According to the Harris Poll, 72% of respondents believe inflation is still going up. The problem? The inflation rate is half of what it was two years ago when it peaked at 9.1%. The disconnect? Just because the inflation rate is lower, that doesn’t mean that prices are decreasing. Instead, it simply means that prices are increasing slower than they were before. Historically, Americans are used to a 2% inflation rate, but the inflation rate has been stuck between 3% and 4% over the past year.

It’s important to understand that while people may want lower prices, deflation—which is a decrease in the general price level of goods and services—can be detrimental to an economy. Deflation can lead to reduced consumer spending, as people wait for prices to fall further, which can slow economic growth and lead to higher unemployment.

Why does this matter? When inflation is high, people feel the pinch in their wallets. Groceries, gas, and other everyday items cost more, and wages are often slower to keep up with these price increases. This can lead to a sense of financial insecurity, even if the overall economy is growing.

Indicator #3: Unemployment

Lastly, let’s talk about the unemployment rate, perhaps the most misunderstood economic indicator among the big three. The official unemployment rate, known as the U-3 rate, measures the share of people actively looking for a job compared to the country’s labor force. This rate doesn’t include every person in the country—babies can’t work, and your retired grandparents don’t want a job. Instead, it focuses on a subset of the population that is willing and able to work.

According to the Harris Poll, 49% of respondents believe that the current unemployment rate is at a 50-year high. But here’s the kicker: the United States is actually experiencing a historically low unemployment rate that it hasn’t seen in nearly 50 years. So why the disconnect here?

What many people think of when they think of unemployment isn’t captured in the official unemployment rate that’s reported each month. The U-3 rate doesn’t factor in people who have stopped searching for a job because they’ve become discouraged or those who want to work more hours but can’t. These groups are counted in a broader measure of unemployment known as the U-5 rate, providing a more comprehensive picture.

So, while the official unemployment rate might initially seem to paint a misleading picture of job market health, it’s just one measure. It’s important to consider the broader context and additional indicators to get a full understanding of the employment situation. Both have been fairly stable the past year at near-record-low levels. That’s not the normal place you would expect the unemployment rate (U-3 or U-5) if your economy is in a recession.

What’s Behind the Disconnect?

The economy is complex, and these indicators, while important, don’t capture every nuance of our lived experiences. That’s why it’s important to look beyond the headlines and understand the broader context. Let’s look at three key reasons for this broad gap.

Firstly, there will always be a lag between when economic data is reported and public sentiment. Economic data is inherently retrospective, often released months after the fact. This delay can lead to a significant lag in public perception, especially during periods of rapid change. For example, if the economy begins to recover from a downturn, it might take a while before this recovery is reflected in the data and even longer for the public to feel the effects. This lag can lead to skepticism about positive economic reports, as they might not align with the immediate realities many are facing, such as ongoing job insecurity or high living costs.

Secondly, the skepticism around economic indicators can be magnified when people suffer from relative deprivation. This is where individuals perceive themselves to be worse off compared to others around them, regardless of their actual economic situation. Social media plays a huge role here, constantly showing us glimpses of other people’s lives which can make us feel like we’re not doing as well as we should be. This perception can influence public sentiment about the economy, making it feel like things are worse than they are.

Lastly, we have to consider the impact of economic scarring, particularly from events like the Great Recession. Older Americans experienced significant financial and psychological distress during and after the 2008 crisis. The economic conditions around the pandemic created new scars for many of us, especially for people who were struggling to survive, both medically and financially. This type of scarring can lead to a prolonged sense of distrust and pessimism about economic recovery. For many, the memories of lost jobs, homes, and savings have a lingering effect, coloring their perceptions of current economic conditions. People with deep scars may be more likely to believe that a recession is ongoing, as their personal recovery might not mirror the broader economic indicators.

Final Thoughts

To bridge the gap between economic data and public sentiment, we need an ongoing effort to communicate economic realities in an empathetic manner. Economists, policymakers, and journalists must work hard not only to present data but also to contextualize it in ways that resonate with the public’s lived experiences. Telling people they’re fine when they don’t feel fine isn’t productive. We must acknowledge the limitations of economic indicators and the uneven nature of economic recoveries.

Understanding the economy is about more than just numbers—it’s about people and their experiences. The personal stories we see shared on social media shouldn’t be downplayed simply for clashing with economic data. Macroeconomic trends affect individuals differently. Recognizing this difference should improve public discourse and recognize the very real feelings of those who are still waiting to see these positive trends reflected in their own lives.