Reality Check: The Disconnect Between The Economy and Your Personal Finances
- Davina Jackson
- Apr 15, 2024
- 11 min read
Welcome to The Woman CFO – a space crafted just for you, where we embark on a journey of financial empowerment.
Have you ever wondered why, despite hearing about a booming stock market, GDP growth and record-low unemployment rates, many people still feel financially squeezed?
It's a puzzling contradiction, isn’t it? We have economic indicators suggesting that the economy is thriving on one hand, and on the other hand, we have individuals and families struggling to make ends meet.
In today’s post, we're going to take a look at this phenomenon and discuss reasons why the economy might be great on paper - doesn't feel that way in reality.
Prepare yourself for a deep conversation as we unravel the mysteries of our modern economy - from understanding the biases that shape our perceptions of the economy to exploring the societal implications of economic dissatisfaction - and how it applies to your personal finances.
We'll also highlight actionable steps you can take to help manage your well-being.
Are you ready? Let’s go.
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Defining the Disconnect Between Economy, Public Perception and Your Personal Finances
Let’s start by setting the scene...
The disconnect between economic indicators (the economy), public perception, and personal finances refers to a situation where economic data - GDP growth, stock markets, and unemployment data - suggests positive economic conditions while public sentiment or perception of the economy remains negative.
This can happen due to various factors, such as how economic data is interpreted, the presence of hidden economic challenges not reflected in official statistics, and the influence of media reporting or politics on public perceptions of the economy.
Also, individuals may base their perception of the economy on personal experiences, such as job insecurity, wages, and spending that may or not align with broader economic trends.
In other words, economic indicators can paint a rosy picture of economic prosperity on the surface, but if you look a little deeper, you'll find a more nuanced reality that shows individuals and families facing significant financial challenges.
Let’s take a closer look at economic indicators.
The Macro View: Indicators of Economic Prosperity
There are two branches of economics that analyze different levels of economic activity: the macroeconomic (macro) and the microeconomic (micro).
Macroeconomic activity looks at GDP growth, unemployment, and stock market performance - aka the indicators that suggest a thriving economy.
Let's gain a better understanding of them:
Macro Factor #1: GDP Growth - Understanding the Numbers
Gross Domestic Product (GDP) growth is often touted as a key measure of economic health. It represents the total value of goods and services produced within a country's borders over a specific period.
A higher GDP growth rate typically indicates increased economic activity and prosperity.
But, while strong GDP growth is undoubtedly a positive sign, it's essential to recognize that it doesn't always translate into tangible benefits for all segments of society.
That’s because economic growth can be unevenly distributed, with some sectors and regions benefiting more than others.
Additionally, GDP fails to account for factors like income inequality, environmental degradation, and overall well-being - which are equally important indicators of societal progress.
Macro Factor #2: Unemployment - More Jobs, More Opportunities. Right?
Low unemployment rates are another hallmark of a healthy economy. When more people are employed, it typically signals increased consumer spending, higher household incomes, and greater economic stability.
So with more job opportunities available, one would expect that people feel more financially secure and optimistic about their prospects. Right? Well, not really.
Headline unemployment rates may paint a positive picture, but they don't capture the full extent of labor market dynamics.
That’s because the official unemployment rate only includes individuals actively seeking work. It doesn't account for discouraged workers who have given up looking for jobs or those working part-time for economic reasons.
It's essential to consider alternative measures of labor market health, such as labor force participation rates and underemployment levels, to gain a more comprehensive understanding of employment trends.
Macro Factor #3: Stock Market Performance - Record Highs and Bullish Trends
For many investors, the stock market serves as a barometer of economic confidence and prosperity.
Bullish trends and record-high stock prices are often interpreted as signs of robust economic growth and corporate profitability.
However, it's important to recognize that stock market performance doesn't necessarily reflect the economic realities faced by ordinary individuals and families.
Stock ownership is heavily skewed towards the wealthiest segments of society, with the top 10% of households owning approximately 88% of all stocks.
As a result, stock market gains may benefit a relatively small portion of the population, while many others remain excluded from the wealth-building opportunities afforded by equity investments.
Macro Factor #4: Consumer Confidence - The Psychological Aspect of Economic Well-Being
The Consumer Confidence Index, often measured through surveys and indices, reflects people's perceptions of the economy's health and their own financial prospects.
High levels of consumer confidence typically correlate with increased spending, investment, and economic growth, while low confidence can lead to cautious behavior and reduced economic activity.
In recent years, consumer confidence has been on a rollercoaster ride, fluctuating in response to various economic and geopolitical developments.
As of March 2024, the Consumer Confidence Index showed unfavorable views of current conditions and increased pessimism about the future - including assessment of personal financial situations, changes in family situations over next few months (such as a potential layoff or change in employment situation), and perceived likelihood of a recession.
The Micro View: Challenges Facing Individuals and Families
Now let’s shift our focus to the microeconomic view - aka the real life, day-to-day challenges that individuals and families face - and talk about those factors contributing to the disconnect between economic indicators and public perception.
Micro Factor #1: Wages - The Disconnect Between Growth and Paychecks
Despite robust economic growth and productivity gains, wage growth has remained relatively stagnant for many workers.
Median wages have barely budged in recent decades, failing to keep pace with the rising cost of living.
And for millions of Americans, stagnant wages mean struggling to afford basic necessities like housing, healthcare, and education.
In other words, despite working full-time jobs, many families find themselves living paycheck to paycheck, unable to build savings or plan for the future.
Meanwhile, corporate profits have soared and executive compensation has reached new heights (the average CEO makes 344 times the average employee salary). - Further contributing to growing income inequality and leaving many workers feeling financially squeezed.
Micro Factor #2: Rising Costs of Living - Housing, Healthcare, Education, and Childcare
In addition to stagnant wages, rising costs of living pose significant challenges for individuals and families across the country.
From housing and healthcare to education and childcare, essential expenses continue to outpace income growth, putting pressure on household budgets and exacerbating financial strain:
Housing
Housing affordability, in particular, has become a pressing issue in many parts of the country.
Skyrocketing home prices and rents have made it increasingly difficult for middle- and low-income families to find affordable housing options.
According to the National Low Income Housing Coalition, a worker earning the federal minimum wage would need to work 100 hours per week, or at least $28.58 per hour, to afford a modest two-bedroom rental home at fair market rent.
Healthcare
Healthcare costs continue to rise, outpacing both inflation and wage growth.
Average annual premiums for employer-sponsored health insurance plans have more than doubled since 2000, placing a significant burden on households' budgets with average annual health insurance premiums increasing 7% in 2023 - resulting in single coverage averages of $8,435 per year and family coverage averages of $23,968 per year.
Education
The cost of higher education has also reached unprecedented levels, with tuition and fees at public universities increasing by 212% over the past 30 years.
In the US (alone), a total of 45.3 million borrowers have student loan debt and 92% of them have federal loan debt. And 20 years after entering school, half of the student borrowers still owe $20,000 each on outstanding loan balances.
As a result, many young adults graduate with staggering student loan debt burdens, hampering their ability to save for the future and achieve financial stability.
And if that’s not enough, student loan debt balloons in size as Americans pursue advanced degrees. Here are the most recent stats by degree level according to the Education Data Initiative:
Undergraduate Degree:
The average undergraduate student borrows over $30,000 to pursue a bachelor’s degree
Average public undergraduate student loan debt is $37,338 per borrower
Average private undergrad student loan debt is $54,921 per borrower
Graduate and Beyond:
The average graduate student loan debt is $76,620 per borrower
Average master's degree student loan debt is $83,651
Average PhD student loan debt is $125,276
Average law school student loan debt is approximately $130,000
Average medical school student loan debt is $250,995
Childcare
Whether it is after-school care or full-day care for infants, child care consumes a large share of family income among those who pay for childcare services.
The average cost of childcare in the US is $14,760 annually.
These higher childcare prices are especially detrimental to women as their employment tends to drop overall but more so in areas with more expensive child care - even in places where women’s wages are higher.
Micro Factor #3: Economic Inequality - The Growing Gap Between the Rich and the Rest
Economic inequality has reached historic levels with wealth and income concentrated at the top of the distribution.
While the wealthiest individuals enjoy unprecedented prosperity, millions of working-class Americans struggle to make ends meet and access opportunities for upward mobility.
According to data from the Federal Reserve, the top 1% of households hold more wealth than the bottom 90% combined, reflecting the staggering disparities in wealth accumulation.
This concentration of wealth not only undermines social cohesion but also perpetuates cycles of poverty and inequality across generations.
In other words, economic inequality has far-reaching consequences, impacting everything from health outcomes and educational attainment to political participation and social mobility.
Micro Factor #4: Financial Insecurity - The Impact of Debt and Savings Shortfalls
Last and definitely not least, we must address financial insecurity as it remains a pervasive issue for many Americans, with millions of households facing high levels of debt and inadequate savings.
High levels of debt can constrain individuals' and families' ability to build wealth, invest in their futures, and weather financial emergencies.
Also, inadequate savings leave many Americans vulnerable to unexpected expenses, job loss, or medical emergencies, further exacerbating financial instability.
As it stands today, total household debt is a record $17.5 trillion, driven by increases in credit card, mortgage, auto, and student loan debt - with delinquencies on the rise for all categories except student loans (mostly due to student loan pause/repayments).
This means approximately 39% of adults would struggle to cover a $400 emergency expense without borrowing money or selling assets. That statistic increases to 56% for emergency expenses of $1,000 or more.
Psychological Factors: Perception vs. Reality
As we continue our exploration of the economic paradox, we must talk about the role that psychological factors play in shaping people's perceptions of the economy.
While macroeconomic indicators may suggest prosperity, individuals' subjective experiences and perceptions can often diverge from these objective measures.
Let's look at psychological factors that influence how people perceive the economy and how these perceptions shape their behavior and attitudes:
Psychological Factor #1: Human Nature - The Tendency to Focus on Negatives
Human beings are wired to pay more attention to negative information than positive information—a phenomenon known as negativity bias.
In the context of the economy, negativity bias can manifest in various ways. For example, people may be more likely to remember and dwell on negative economic news, such as job losses or stock market downturns, than positive developments like GDP growth or rising wages.
As a result, individuals may still feel pessimistic about their financial prospects even when objective indicators suggest economic prosperity, .
Psychological Factor #3: Media Influence - Sensationalism and Negative News Bias
The media plays a significant role in shaping public perceptions of the economy.
Sensationalist headlines and negative news bias can amplify economic anxieties and contribute to feelings of uncertainty and insecurity among the public.
For example, during periods of economic uncertainty or market volatility, media coverage often focuses on doom-and-gloom narratives, emphasizing risks and uncertainties while downplaying positive developments.
This barrage of negative information can contribute to a cycle of fear and pessimism, influencing people's perceptions and behavior in ways that may not align with objective reality.
Psychological Factor #4: Personal Experience - How Individual Circumstances Shape Perception
People's personal experiences and circumstances also play a significant role in shaping their perceptions of the economy.
While macroeconomic indicators provide a broad overview of economic trends, they may not accurately reflect individuals' lived experiences or the realities of their day-to-day lives.
For example, someone who has recently lost their job or experienced a pay cut may perceive the economy as being in worse shape than someone who has received a promotion or a raise.
Similarly, individuals living in regions or industries that have been harder hit by economic downturns may have a more negative outlook on the economy compared to those in more prosperous areas.
Psychological Factor #5: Economic Anxiety - The Lingering Effects of Past Recessions and Financial Crises
Economic anxiety stemming from past recessions and financial crises can shape people's perceptions of the economy long after the initial shock has passed.
Memories of job losses, foreclosures, and financial hardships can linger, leading individuals to approach economic uncertainty with caution and skepticism.
For example, the scars of the 2008 financial crisis and the Great Recession are still fresh in the minds of many Americans, influencing their attitudes and behaviors towards financial risk-taking and investment.
Similarly, the economic upheaval caused by the COVID-19 pandemic has left lasting effects on people's confidence in the economy and their ability to weather future storms.
Embracing Collective Action for Economic Well-Being
In unraveling the economic paradox and exploring its impact on your everyday life, we discussed the discrepancies between economic realities and perceptions - shining a light on the systemic barriers and inequalities that shape women's economic lives.
It's clear that addressing the economic paradox requires collective action and a commitment to promoting gender equity and inclusivity.
Women, particularly those from marginalized communities, face unique challenges and vulnerabilities in the economy, from wage disparities and rising costs of living to financial insecurity and economic anxiety.
Yet, amidst these challenges lie opportunities for positive change.
By advocating for gender-inclusive policies, investing in financial education and literacy, fostering community support networks, and cultivating confidence and resilience, we can create a future where women have the resources, opportunities, and support they need to thrive.
So, what can you do to contribute to this vision of economic empowerment and equity for all women? Here are a few actionable steps you can take:
Educate Yourself: Take the time to learn about the economic challenges facing women in your community and beyond. Stay informed about policy issues, economic trends, and opportunities for advocacy.
Advocate for Change: Use your voice to advocate for gender-inclusive policies and initiatives that promote women's economic rights and opportunities. Write to your elected officials, participate in community forums, and support organizations working towards economic equity.
Support Women-Owned Businesses: Make a conscious effort to support women-owned businesses and enterprises. By shopping locally and patronizing women-led ventures, you can help empower women entrepreneurs and strengthen the economic fabric of your community.
Mentor and Support Others: Offer mentorship and support to women in your network who may be navigating economic challenges or pursuing their financial goals. Share your knowledge, resources, and experiences to help others succeed.
Foster Solidarity: Build connections and networks of solidarity with other women in your community. By coming together, sharing resources, and advocating for one another, we can create a more supportive and empowering environment for all women.
By taking concrete actions and standing in solidarity with women everywhere, we can build a world where economic prosperity is truly inclusive and equitable, and every woman has the opportunity to thrive.
Together, we can turn the tide of the economic paradox and create a brighter future for generations to come.
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