We’re not in a recession. So why does it feel like we are?

It may not feel like it, but the U.S. economy is currently doing alright. We are not in a recession or a depression. Economic indicators are neither too hot nor too cold—a Goldilocks dynamic that The Federal Reserve strives for. 

In September, the Fed lowered interest rates by a-more-than-expected 50-basis point, causing stocks to rally. And last week, the Dow closed at a record-high upon news that inflation was improving, as well as hopes that the Fed would continue to lower rates, and in effect, make it cheaper for businesses and consumers to borrow money. Even though interest rates have been high for most of 2024, the Dow has still broken records numerous times this year—32 times to be specific.

For the average worker, the economy may not feel quite so rosy, but it certainly isn’t entirely thorny. While high-profile layoffs at some of the world’s most profitable companies have made headlines, the unemployment rate ticked down slightly from 4.3% to 4.2% in August. Plus, the most recent Consumer Price Index indicates that inflation cooled to an annual rate of 2.5% in August—the lowest reading since February 2021.

However, despite these undeniably strong indicators, most people aren’t feeling great about their economic situation. Consumer confidence, a catch-all measure of the opinions and attitudes of consumers about the current and future strength of the economy, fell from 105.6 to 98.7 in August. The slide was the biggest one-month decline since August 2021 when surging COVID-19 cases rattled markets. One survey found that 59% of Americans incorrectly believe that the U.S. is currently in a recession.

Dr. Giacomo Santangelo, an economics professor and economist for Monster likens the disconnect between how the economy is doing and how people feel about the economy, a frustrating doctor’s visit. You feel sick, go to the doctor, pay a $25 copay, and then are told by the doctor that nothing is wrong. 

“It’s a reasonable question to say, ‘If everything’s fine, if I’m healthy, why do I feel like this?’” says Santangelo. “We’re being told everything’s great, but the people are saying, ‘but we don’t feel well.’” 

The expectation economy

Santangelo explains that when it comes to the economy, most metrics are impacted by human predictions and individual points of view. 

“Everything that a person does is based on their perception. One hundred percent of how a consumer acts on a microeconomic level is based on what they perceive is happening to them now and what’s going to happen to them in the future,” he says. “And when you take one consumer and put them together with lots and lots of other consumers, on a macroeconomic level, it’s still all about perception.”

In general, the stock market moves as investors make predictions about various economic figures and firms’ earning reports. If investors think a company is going to make more money than expected, or lose less than expected, the stock price typically rises. But even if a company performs well, but not as well as investors hope, the stock price takes a hit. 

For instance, imagine a company forecasts that their revenue will grow 5%, and then later reports that revenue did indeed grow 5%. If investors were hoping that revenue would rise 7%—even if the company never said it would—the share price could fall. It’s not about how well the company did, it’s about how well it did compared to expectations. This dynamic can drive many leaders to try to manage investor expectations, and make more conservative predictions. 

Or, imagine the case of a bank run in which customers fear, for one reason or another, that their money is not stable at a given bank. Then, a critical mass of people may attempt to withdraw their funds at the same time and cause a real crisis. Collective panic, in this way, can cause negative ramifications for a wide range of actors. 

Indeed, while modern economics is an empirical science, what many may not realize is that economics was born out of moral philosophy. How individuals and firms feel, can have very serious impacts on an economy and a society at large. 

The cost of living

One metric that is likely impacting how workers feel about the economy is the cost of living. Santangelo and his team at Monster surveyed workers and found that 95% say their current wages have not kept up with the rising cost of living, an increase of 14% from 2023 when 81% of workers said the same. Just 11% workers say they have received any form of raise or salary adjustment to account for inflation. 

As a result of these pressures, 62% of workers say they are looking for a higher paying job, and 39% are even considering taking on an additional job to stay afloat.

Financially, 82% of those surveyed say they had to draw from their savings to stay afloat, 69% say they have cut back on non-essential expenses, 43% say they have had to rely more heavily on credit or loans, and 41% have had to cut back on retirement savings. 

The rising reliance on credit cards concerns many economists, including Santangelo. Though, he suggests that this behavior is also impacted by individuals’ perceptions of their lives. 

“Coming out of COVID-19, the lockdown, affected people on a soul level, being stuck at home,” says Santangelo. So he says it’s only natural that consumers are willing to go into debt to reestablish a sense of normalcy. “The problem is, normality is a moving target, and we have a new normal. That new normal is: It doesn’t matter that I can’t afford it.”

Small-business sentiment

Ufuk Akcigit, an economics professor at the University of Chicago suggests that small businesses, the biggest collective employer of U.S. workers, have also been impacted by the challenges of the pandemic. And this impact is coloring how many workers feel about the economy. 

Small businesses, he suggests, are hit the hardest when the Fed raises interest rates because “financial institutions see small businesses as the riskiest group to lend to.”

“What we have seen is that during these turbulent times, small businesses depleted their savings in their bank accounts, and they relied more and more heavily on their credit cards to finance their business, which is the worst way of financing their business, because it’s the most expensive form,” Akcigit explains. “Since COVID-19, credit card use has increased by 20% among this group of businesses. And it’s not just that they are using [credit cards] more frequently, they are also carrying more balance on their credit cards.’

Now that the Fed has lowered rates, he expects for many small businesses to be able to grow and rehire some of the workers they let go of during the height of the pandemic. 

“I’m, in general, quite optimistic,” says Akcigit, pointing to research he conducted with Intuit QuickBooks’ for the company’s new Small Business Revenue Index  which found that the average real monthly revenue for small businesses increased slightly in August, signaling a positive trajectory for the broader economy. 

But even though economic conditions may soon improve for small businesses, he says that many small business owners are still scared about what might happen. 

“Recovery on the revenue side is not surprising, but I have the feeling that small businesses might be acting a bit cautiously because they’ve gone through quite a rough episode and now that things are getting better, probably they are growing their revenue without growing their employment yet,” says Akcigit. “Only when they feel more confident, will they start hiring more.”

Generational comparison

A final dynamic that may be impacting how people feel about the economy is generational comparison. 

In 2022, Gallup found that Americans had the lowest levels of optimism about future generation’s prospects. “In America, each generation has tried to have a better life than their parents, with a better living standard, better homes, a better education and so on,” asked Gallup. “How likely do you think it is that today’s youth will have a better life than their parents?”

Just 13% of respondents said that this kind of generational improvement was “very likely.” A lack of optimism about the future of young people may be because of legitimate concerns about climate change, housing insecurity, or even the future of social security. And people’s perceptions of these issues may be impacting how they perceive the economy.

“The issue I feel we have is that it’s about how people feel. It’s about the fact that people are dipping into their savings. It’s the fact that a larger portion of people surveyed by the Conference Board think we’re already in a recession,” says Santangelo. “I don’t think that, but people are saying that.”