In our age of overwhelming technological progress, I still cling to the simpler practices of my youth. I read books rather than tablets, write with an ink pen in cursive rather than text with my thumbs, and attempt to use mental arithmetic, rather than a calculator, in solving math problems. I also greatly prefer an analog watch to a digital one.
However, I realize that all of this is fading, as we outsource human intelligence and skills to a seductive and ever-more intrusive cloud. I entitled this piece, “Why a 1:13 expansion feels like a 1:20 recession” but I’m not even sure that an analog clock analogy works in 2025 so I’d better be explicit. The reality of today’s economy is like thirteen minutes past one on an analog clock. The little hand, representing the fortunes of the top 10%, points sharply upwards and to the right. The big hand, representing the progress of everyone else, is also pointing up, but only mildly so.
However, it feels like a twenty past one recession, with the little hand still pointing up but the big hand pointing down. In the September University of Michigan Sentiment Survey, 45% said that they and their families were worse off financially than a year ago while only 21% cited an improvement. More Americans feel that they are going backwards in economic terms than believe they are moving forward.
This distinction between reality and perception is crucial in supporting our belief that the current economic expansion can be sustained, barring some shock, over the next year. However, the growing gap in the fortunes of different groups is also important in determining the pace of economic growth, winners and losers among market sectors, prospects for further fiscal stimulus and the potential for political change – all of which could have material impacts on investment returns going forward.
The 1:13 Reality
Despite a lack of recent government data, it appears that the post-pandemic economic expansion is continuing. We believe real GDP grew at roughly a 3.0% annual pace in the third quarter and, while growth may slow to close to 0% in the fourth quarter, it should pick up nicely early next year, with the arrival of a bumper crop of income tax refunds, before slowing down in the second half of 2026. All told, real GDP could grow by 1.6% in 2025 and 2.0% in 2026.
Job growth will likely be very slow over the next year, partly due to a lack of labor supply. However, this lack of labor supply should also keep the unemployment rate within a range of 4.0%-4.5% and inflation, after rising some more in late 2025 and the first half of 2026, should gradually recede to 2.0% year-over-year by the end of next year.
All of this being said, there are clearly groups that are experiencing significant economic stress in the current environment.
- Federal workers, thankfully, are receiving paychecks again but still face uncertainty from the tide of downsizing since the start of the year.
- Younger Americans continue to struggle with high housing costs and, in many cases, significant student debt. Mortgage payments relative to personal income have edged down over the past year but are still far higher than they were at any time between 2008 and 2022. 43 million Americans currently have federal student loan debt with an average balance of $39,000, while the median age of first-time home-buyers is now an astonishing 40. Not coincidently, the median age of first marriage has increased from 22.1 years in 1974 to 29.4 years 50 years later.
- And, health insurance has, once again, become a significant concern for many, with the roughly 24 million Americans participating in ACA Marketplace insurance currently facing a doubling of insurance premiums in 2026.
All of this being said, on average, real wages are continuing to increase. August 2025 marked the 28th consecutive month in which the year-over-year growth in average hourly earnings exceeded CPI inflation. We expect wage data in this Thursday’s delayed September jobs report to extend that streak to 29 months. This, in turn, appears to be funding a further slow increase in real consumer spending, even in more basic areas, as is evident in, for example, the Adobe on-line shopping index, which showed 8.2% year-over-year growth in October, compared to 6.7% in September.
The 1:20 Perception
So, overall, the economy is continuing to grow and consumer spending is continuing to rise. However, this unremarkable reality stands in sharp contrast to very negative perceptions.
The flash reading from the University of Michigan index of consumer sentiment for early November came in at 50.3 – lower than all but one monthly reading since 1978.
We estimate, (admittedly with even less precision than usual, given the recent lack of government data), that the November unemployment rate will come in at 4.4% with CPI inflation reaching 3.5% year-over-year, summing to a so-called “Misery Index” of 7.9% - up from 6.9% a year ago but still better than it has been, on average, 66% of the time since 1978.
So why do people feel extra gloomy?
One answer could be social media and politics. As Jonathan Haidt argues in his important book, The Anxious Generation, the advent of ubiquitous smartphones in the past decade has coincided with an increase in anxiety, particularly among teenagers and younger adults. Indeed, it is quite possible that the depressive effect of a constant scroll of stories curated to make the viewer scared and angry, is having a negative impact on consumer confidence across the board.
It could also be politics. One puzzling aspect of recent confidence polls is that, while college graduates are clearly faring better in this economy compared to high school graduates, the college graduates in recent months have reported even lower confidence than their less educated brethren. This may have something to do with the political leanings of both groups, as college graduates now appear more likely to vote for Democratic candidates and those classifying themselves as Democrats have a much more negative view of the economy than those calling themselves Republicans. More generally, the very sharp political divide in the US today is likely undermining confidence.
However, another aspect of the story is simply one of numbers of people. Consumer confidence surveys are among the most egalitarian of economic indicators – everyone, rich or poor, gets one vote. If the economy is benefitting the top 10% of households but leaving the other 90% behind, at least in relative terms, then typical economic data will show a boring picture while consumer sentiment will be much more negative.
As an example, based on current trends, we expect that, by December of this year, total wage and salary income will be up 17.0% from three years earlier while consumer prices will be up by 9.8%. However, this 7.2% increase in real wage and salary income will be spread over approximately 3.5% more payroll jobs, resulting in a real wage gain per job of just over 1% per year – hardly enough to notice.
By contrast, over the same period we expect total household net worth to rise by 27% - assuming no change in equity prices between now and the end of the year. This has far outpaced inflation, making the last three years spectacular ones for wealth accumulation.
But here’s the rub. In 1992, according to the Federal Reserve’s survey of Consumer Finances, the highest-income 10% of families earned 38% of all pre-tax income and accounted for 52% of the net worth of all families. Thirty years later, in 2022, these numbers had grown to 51% and 61% respectively. By 2025, it is likely that they have grown again.
Because of this, while mediocre real wage gains in a politically troubled environment could leave sentiment at very low levels, they may be enough to fuel a small increase in consumer spending on the basics. Meanwhile, spectacular gains in wealth among the richest households could boost spending on luxury goods and services while supporting a steady increase in consumer spending overall.
Investment Implications
So where does this gap between reality and perception leave us?
First, for consumer spending, we expect to see continued modest growth overall. However, spending gains are highly dependent on the fortunes of the rich so a bear market in stocks could put a serious dent in the economy. In addition, the perception of economic weakness, to the degree that it extends to lenders and employers, could rein in credit and diminish hiring.
Second, from a political perspective, the perception of the economy is more important than objective measures of economic reality. If, even after strong income tax refunds in early 2026, consumer sentiment remains deeply depressed, the Administration and Congress could enact further stimulus – perhaps in the form of the $2,000 per person “dividend rebate” checks that the President mentioned last week. This would, if enacted, increase economic growth, inflation and government debt in the second half of 2026 – boosting long-term interest rates and, presumably, putting an end to the Fed’s current slow easing policy.
Finally, and despite the possibility of rebate checks, the perception of an economy that is just not working, could lead to a significant swing against the Republicans in the 2026 mid-term elections. This might not just result in a change in control, particularly in the House of Representatives, but a change in political direction, with leaders advocating far more radical change as a solution to the nation’s problems.
For investors, this has three broad implications:
First, the divergence in fortunes between the wealthy and everyone else adds further potential volatility to the outlook. If this volatility leads to a major market correction or even a bear market, investors should recognize that the most frothy assets are the most vulnerable. This suggests a need to rebalance away from areas such as mega-cap growth stocks and cryptocurrencies and towards value and non-mega-cap stocks within the United States.
Second, if an attempt to improve the public mood leads to fiscal stimulus, in turn leading to stronger growth, higher inflation and worsening deficits, then bonds may not be effective at diversifying portfolios, underscoring the need for broader diversification to include income-producing alternatives such as real estate and infrastructure.
Finally, the growing perception that the economy is not working for average Americans led to a swing to the right in the 2024 elections. However, it could as easily lead to a swing to the left in elections in 2026 and beyond. If this occurs and it leads to a less friendly environment for domestic financial assets, it suggests that U.S. investors would benefit from bulking up today on their still very slim holdings of overseas, non-US-dollar denominated assets.