Everyone experiences it in a different way
If you’ve listened to political pundits lately, you’ve probably heard their takes on the state of U.S. economy.
While economists widely view the economy as strong — unemployment is low, productivity is up and the markets keep breaking record highs — that doesn’t mean Americans feel the same way.
Individuals typically don’t use traditional indicators like the gross domestic product or unemployment rates to shape their opinions on the economy. Instead, their outlook usually depends on how they feel about their own financial situation, coupled with inflation levels and interest rates.
The economy cycle
As the last four years have shown us, the U.S. economy is cyclical.
In 2020, the pandemic crippled the economy and caused many disruptions in the supply chain. Historically, the government has attempted to soften the blows of such negative economic crises by lowering interest rates to encourage business and consumer spending and buy time until things stabilize.
The challenge? This extra demand on goods and services and new money flowing into the economy ultimately results in increasing inflation rates.
This dynamic has played out over the past few years. Those initial disruptions to the supply chain prompted the government to lower interest rates, and soon afterward interest rates climbed higher and higher. These underlying conditions created the perfect storm for higher inflation.
Which brings us to 2022 and 2023, when inflation and the economy were growing at full speed due to these necessary actions by the government. So, what happened next? The government raised interest rates to choke the economy and tame inflation.
Now that inflation has mostly been tamed, the risk becomes a slowing economy. The Federal Reserve has recently started to decrease interest rates with the goal of creating enough stimulus for the economy to avoid a recession.
This is the vicious circle of supply and demand needed to manage the U.S. economy.
The ideal outcome is to create what is called a “soft landing” for the economy — one where the unemployment rate increases at a manageable level without causing an economic downturn.
What it means to you
Are you employed? Retired? Looking for a job?
Have your monthly expenses become unmanageable? Do you have less discretionary income? Have health care costs become a significant burden?
The answers to these questions shape a person’s view on how the economy is performing — everyone experiences the economy in a different way.
The primary pain points for most Americans have been inflation and interest rates, despite cooling on both fronts. Inflation is now at 2.5 percent, down from the 9.1 percent peak in June 2022 and close to the Fed’s long-term 2 percent target. Interest rates are dropping, with the Federal Reserve delivering a 50 basis-points cut last month, its first cut in four years.
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But fewer than a quarter of Americans (23 percent) rate the country’s economic conditions as excellent or good, according to a Pew Research Center survey in May.
At the end of the day, each person wants reasonable expenses that allow them to pursue their interests and activities with friends and family and maintain their health.
Inflation is a major hindrance to accomplishing that goal for many Americans.
One of the biggest fears of the government is out-of-control inflation, since it hits every person and business in a negative manner. Hopefully, the fact the Fed has recently switched its monetary policy to “easing” from “tightening” signals inflation has been sufficiently put in check.
Pete Alepra is managing director-financial adviser with RBC Wealth Management. Comments: (319) 368-7023; peter.alepra@rbc.com.