Why Consumers Underestimate Health of the US Economy

If you’ve been paying attention to the news over the past year, you might have noticed that views on the economy have diverged widely.

By almost every traditional measure, the U.S. economy is robust. Growth is strong, the Fed has succeeded in bringing down inflation, unemployment is low, and the stock market achieved multiple record highs over the course of 2024.

But if you ask the proverbial person on the street about the economy, they’re likely to say it’s terrible. There are many reasons for this, including personal circumstances, limited exposure to of broader economic data, and media coverage. 

It’s not uncommon for there to be a gap between how economists judge the health of the economy versus the average person, but this gap can be more profound than most. The risk is that retail investors, who make investment decisions in part based on their own experience, may pull back from the market. 

Let’s talk about why this perception gap exists, and what retail investors need to know. 

The bigger picture 

On a macro level, as of January 2025, the U.S. economy isn't  just strong—it’s outperforming almost every other advanced economy across the globe. Since 2020, real growth in the U.S. has surged by 10%—three times the average growth rate of other G7 nations, which include Canada, France, Germany, Italy, Japan, and the United Kingdom.¹ According to the International Monetary Fund (IMF), the U.S. is the only G20 economy whose GDP level exceeds its pre-pandemic level.² 

The COVID-19 pandemic was a profound shock to the global economy. However, according to a U.S. Department of Treasury report released in January 2025, "the policy response [to the pandemic] was key in driving a rapid recovery, leading to an economy that is now booming. Comparisons to other advanced countries, to past recessions, and to prior forecasts all suggest that the United States has done remarkably well in this recovery."³

One significant driver of this growth has been job creation. Since January 2021, the U.S. has created an unprecedented 16.6 million jobs, making then President Biden the only president in history to oversee job creation every single month during his term. Employment figures for working-aged women are at record levels, and the employment gap between Black Americans and white Americans is the smallest it’s ever been. Unemployment, which stood above 6% in January 2021, has fallen to 4.1%.⁴

Job growth, wage increases, and easing inflation can combine to fuel consumer spending, which in turn can drive earnings for publicly-listed companies. Given these dynamics, it’s not surprising that the market turned in a spectacular performance in 2024. The S&P 500 was up more than 23%, the Nasdaq rose by nearly 29%, and the Nasdaq 100 appreciated by almost 25%.⁵ In fact, 2024 was one of S&P 500’s best years ever, with the index hitting new record highs more than 55 times over the course of the year.⁶

For retail investors and consumers, we believe such robust economic indicators should support a positive outlook on the state of the economy. 

"It’s the inflation, obviously."

The problem is that, regardless of whether the economy is booming by many measures, households and businesses are not necessarily doing better than they were before the pandemic. High levels of inflation since 2020 have strained budgets for consumers, peaking at 9.1% in June 2022, the highest rate in 40 years.⁷ While the Federal Reserve has done a remarkable job in taming that inflation, the current inflation rate, 2.9% in December 2024, still remains above the Fed target rate of 2%.⁸  

Even with the historic inflation highs, wage growth has actually outpaced inflation since January 2023. For instance, in November 2024, inflation was at 2.7%, while wages grew by an impressive 4.3%.⁹ However, during the pandemic, wage growth failed to keep up with inflation. A recent article in the New York Times noted that "most Americans are probably making more money today, adjusted for inflation, than they were in 2019. But not all have seen their pay keep up with their own cost of living, and many—perhaps most—are lagging behind where they would be if pre-pandemic trends had continued unabated."¹⁰ 

Prices are 22.5% higher today than they were before the pandemic recession began in 2020.¹¹ Once prices rise, historically they don’t tend to go back down—and a 22.5% cumulative increase in prices over five years is indisputably painful. It makes sense to us that the fact that the Fed tamed inflation without triggering higher unemployment, lower wages, or a less-vibrant economy is underappreciated.

It’s not just inflation 

There are reasons beyond a higher cost of living that can affect how consumers and investors believe the economy is performing.

1. Media influence

Sensational headlines about economic challenges—such as surging inflation or layoffs in specific sectors—tend to dominate news cycles, even as indicators of economic recovery (like consistent job creation) receive less attention. The recent brouhaha over the price of eggs, which in fact rose largely due to the impact of bird flu, is a shining example of how sensationalized stories can have a strong impact on public opinion.

2. Uneven recovery

While many households have benefited from wage growth and low unemployment, disparities in economic recovery persist. Low-income groups and retirees, who often feel the effects of inflation more acutely, contribute to a narrative of tepid economic progress. 

3. Complex indicators

Many consumers lack access to—or do not actively follow—critical economic indicators such as GDP growth, wage-to-inflation ratios, or real income data. Instead, individual experience is the barometer which many consumers use to judge the economy. 

Implications for retail investors 

Understanding the true health of the U.S. economy can have important implications for retail investors attempting to make informed decisions. A healthy economy may often correlate with strong corporate earnings, making equities an attractive investment vehicle. Additionally, positive economic data, such as job growth and wage increases, may suggest increased consumer spending—another key driver of company revenues.

Retail investors should also keep in mind: The stock market often prices in optimism well before the broader consumer sentiment reflects an improvement in economic conditions. Staying up-to-date on macroeconomic trends and maintaining a long-term perspective are important for judging when those sentiments are already priced in.

The challenge for any investor is to look past daily headlines and emotional responses to focus on the bigger picture. To us, the U.S. economy continues to demonstrate resilience and strength, creating abundant opportunities for the savvy investor.