4 Charts That Explain Why The Economy Is Growing But Doesn’t Feel Like It

Economists are generally optimistic about the economy, but the public hasn’t hated it this much in more than a decade.

If you’re downbeat about the economy and your personal finances, you’re far from alone: consumer sentiment fell to its lowest level since 2014 in January, according to a survey by The Conference Board.

Yet the word “recession” has dropped from most economic forecasts as the economy has shrugged off disruptions from tariffs, the government shutdown, and a slowdown in the job market. In fact, the economy is on track to grow at a blistering 5.4% annualized rate in the fourth quarter, the fastest since the rebound from the pandemic recession, according to the Federal Reserve Bank of Atlanta’s GDP Now tracker.

“Consumer sentiment has become unusually divorced from the macroeconomy since the pandemic,” Bernard Yaros, Lead US Economist at Oxford Economics, wrote in a commentary. “Understanding this disconnect is important because forecasters have historically looked to consumer surveys for additional useful information on consumption trends.”

Why Economists Are Optimistic

The main reason economists believe the economy is solid is that the main engine of economic growth—consumer spending—has stayed solid. Consumers as a whole have simply continued to spend as if there’s no tomorrow, despite all the economic upheaval.

Why It Doesn’t Feel Like The Economy Is So Great

Take a look under the hood of that consumer spending, though, and a possible reason for the consumer pessimism stands out: people with high incomes are doing most of the buying, while lower- and middle-income households struggle to make ends meet.

As this chart from the Federal Reserve Bank of Dallas shows, top earners account for a larger share of wealth, household income, and spending than they did a few decades ago.

Since the pandemic hit, inflation has eroded the buying power of paychecks for those whose wages haven’t kept up, hitting lower earners the hardest.

GDP may tell people one thing about the health of the economy, but their bank statement at the end of each month tells a different story when the necessities of life keep getting more expensive. Before the pandemic, annual inflation was typically 2% or under, meeting the Federal Reserve’s target for price stability. That hasn’t been the case in more than four years.

Yaros flagged this sticker shock and the “long shadow” cast by post-pandemic price increases as a major reason for the disconnect between hard data and consumer sentiment in the University of Michigan’s widely watched poll on how people feel about the economy and their finances.

Other factors, he said, are that reporting on economic news has become increasingly negative, and that more of those surveyed are Democrats, which reflects partisan judgments in the poll.

The Letter Of the Day Is K

All this adds up to what economists call a “K-shaped” economy after the shape of the graph depicting the trajectory of high earners versus those with typical incomes.

Wealthier households own most of the stocks and have benefited most from the recent AI-driven stock market boom, while average households, more dependent on wages, see the financial situation deteriorating.

Here’s what it looks like, as charted by economist Adam Tooze, a historian at Columbia University: