Americans Significantly Misunderstand Basics Like Inflation and the Stock Market

Eco­nom­ic indi­ca­tors sug­gest a thriv­ing post-pan­dem­ic recov­ery, yet a sig­nif­i­cant por­tion of Amer­i­cans remain pes­simistic about the nation’s finan­cial health. 

Less than a quar­ter of Amer­i­cans (23%) con­sid­er the coun­try’s eco­nom­ic con­di­tions to be excel­lent or good, while 36% describe them as poor, and about four-in-ten (41%) view them as ‘only fair’. Inter­est­ing­ly, though, per­sis­tent mis­un­der­stand­ings about the fun­da­men­tals con­tribute to this dis­so­nance, as report­ed in a CBS News poll ear­li­er this year.

Recession Misconceptions

A reces­sion is typ­i­cal­ly iden­ti­fied when there is a sig­nif­i­cant decline in eco­nom­ic activ­i­ty across the econ­o­my, last­ing more than a few months. While the com­mon rule of thumb is two con­sec­u­tive quar­ters (or six months) of neg­a­tive GDP growth, econ­o­mists often look at a range of indi­ca­tors such as employ­ment, indus­tri­al pro­duc­tion, real income, and whole­sale-retail sales to deter­mine the start and end of a reces­sion. The Nation­al Bureau of Eco­nom­ic Research (NBER) in the Unit­ed States, which offi­cial­ly declares reces­sions, does­n’t rely sole­ly on the two-quar­ter rule and instead con­sid­ers the depth, dif­fu­sion, and dura­tion of the downturn.

More than half of the sur­veyed Amer­i­cans (56%) erro­neous­ly believe that the U.S. is cur­rent­ly ensnared in a reces­sion, accord­ing to Har­ris Poll con­duct­ed by Guardian. How­ev­er, the real­i­ty is quite dif­fer­ent. Dri­ven by strong con­sumer spend­ing, GDP growth rates are exceed­ing econ­o­mists’ expectations.

The gap between pub­lic per­cep­tion and eco­nom­ic real­i­ty is shaped by sev­er­al fac­tors. These include reliance on pol­i­cy-dri­ven sce­nar­ios, anec­do­tal evi­dence, per­son­al finan­cial strug­gles over­shad­ow­ing broad­er eco­nom­ic indi­ca­tors, and media nar­ra­tives that empha­size eco­nom­ic vulnerabilities.

Fed’s ‘Taming-Inflation’ Policy

A wide­spread mis­un­der­stand­ing is about how the Fed­er­al Reserve impacts the econ­o­my, espe­cial­ly its link to reces­sion. Some wrong­ly think that the Fed always slows down the econ­o­my, pos­si­bly push­ing it into reces­sion. This mis­con­cep­tion comes from the idea that the Fed delib­er­ate­ly tight­ens access to cred­it in cer­tain sec­tors to con­trol infla­tion. Over two years, the cen­tral bank raised inter­est rates 17 times, reach­ing 5.33%, the high­est in more than 20 years.

This increase coin­cid­ed with a sig­nif­i­cant rise in the Con­sumer Price Index for All Urban Con­sumers (CPI‑U), reach­ing a record high of 313.55 points, show­ing a 3.4 per­cent increase over the past year. How­ev­er, the cen­tral bank’s main aim is undoubt­ed­ly to care­ful­ly man­age con­straints to tack­le infla­tion with­out caus­ing a reces­sion, employ­ing sophis­ti­cat­ed mon­e­tary poli­cies. When the Fed­er­al Reserve increas­es inter­est rates, it rais­es the cost of bor­row­ing, affect­ing both cred­it and invest­ment by mak­ing them more expensive.

Media Influence

Stud­ies show there is cur­rent­ly a wide­spread dis­as­ter of mis­in­for­ma­tion.

There is grow­ing media cov­er­age of eco­nom­ic events, sig­nif­i­cant­ly shap­ing pub­lic per­cep­tion. How­ev­er, this often leads to mis­un­der­stand­ings about reces­sions due to sen­sa­tion­al­ism and selec­tive report­ing. By pri­or­i­tiz­ing atten­tion-grab­bing head­lines over detailed analy­sis, the media can ampli­fy per­cep­tions of reces­sion sever­i­ty, espe­cial­ly dur­ing uncer­tain times.

Alarmist lan­guage and a focus on neg­a­tive indi­ca­tors with­out con­text can dis­tort assess­ments of eco­nom­ic health. This can fuel pub­lic anx­i­ety. For exam­ple, report­ing a mod­est decline in con­sumer spend­ing with­out men­tion­ing pos­i­tive trends like job growth can cre­ate a false impres­sion of an impend­ing reces­sion. This mis­rep­re­sen­ta­tion can influ­ence pub­lic sen­ti­ment and con­sumer behav­ior, which is cur­rent­ly occurring.

Confirmation Bias

Con­fir­ma­tion bias is essen­tial­ly a form of self-decep­tion, with poten­tial­ly mas­sive con­se­quences that vary when con­sid­ered from either an indi­vid­ual or soci­etal lev­el. It can sig­nif­i­cant­ly con­tribute to mis­con­cep­tions about reces­sions. This cog­ni­tive bias caus­es indi­vid­u­als to inter­pret new infor­ma­tion in ways that affirm their exist­ing beliefs, which can dis­tort their under­stand­ing of eco­nom­ic conditions.

If some­one firm­ly believes a reces­sion is immi­nent, they may inter­pret ambigu­ous or mixed eco­nom­ic data as con­fir­ma­tion of their belief. They might focus on a rise in gov­ern­ment bor­row­ing as a sure sign of impend­ing eco­nom­ic trou­ble, while dis­re­gard­ing oth­er pos­i­tive indi­ca­tors like low unem­ploy­ment rates or strong con­sumer spending. 

This kind of selec­tive inter­pre­ta­tion rein­forces one’s belief in an impend­ing reces­sion, even if the over­all eco­nom­ic data sug­gests sta­bil­i­ty or growth.

In addi­tion, this bias can also influ­ence pub­lic opin­ion and pol­i­cy deci­sions. When con­fir­ma­tion bias is wide­spread, it can lead to a col­lec­tive mis­read­ing of eco­nom­ic con­di­tions, poten­tial­ly result­ing in pre­ma­ture or inap­pro­pri­ate eco­nom­ic measures.

Stock Market Performance

The per­for­mance of the stock mar­ket, par­tic­u­lar­ly the S&P 500 index, is anoth­er area rife with pub­lic mis­un­der­stand­ing. The S&P 500 has ascend­ed by approx­i­mate­ly 11% in 2024, indi­cat­ing good mar­ket health. Nev­er­the­less, about half of the respon­dents in the Harris/The Guardian poll incor­rect­ly opine that the stock mar­ket has depre­ci­at­ed over the year.

This mis­align­ment between pub­lic per­cep­tion and mar­ket real­i­ty can be attrib­uted to cog­ni­tive bias­es, which are sys­tem­at­ic pat­terns of devi­a­tion from ratio­nal­i­ty in judg­ment, lead­ing indi­vid­u­als to inter­pret and process infor­ma­tion in a sub­jec­tive manner.

As of now, around 60% of Amer­i­cans own stocks. Investors often miss oppor­tu­ni­ties and make impul­sive deci­sions dur­ing mar­ket down­turns due to the recen­cy effect, where­in they pri­or­i­tize short-term fluc­tu­a­tions over long-term trends and his­tor­i­cal evi­dence of mar­ket resilience.

This cog­ni­tive bias leads indi­vid­u­als to focus exces­sive­ly on imme­di­ate neg­a­tive impacts, poten­tial­ly cloud­ing their judgment.

A Misguided View of Unemployment Rates

Unem­ploy­ment rates, a crit­i­cal barom­e­ter of labor mar­ket health, are cur­rent­ly near a 50-year low, with the job­less rate stand­ing at 3.9% in April. The rate has remained in a nar­row range of 3.7 per­cent to 3.9 per­cent since August 2023. 

This fig­ure aligns close­ly with pre-pan­dem­ic lev­els, indi­cat­ing a sub­stan­tial recov­ery in the labor mar­ket. Yet, para­dox­i­cal­ly, about half of the sur­vey par­tic­i­pants believe that unem­ploy­ment is near a 50-year high.

This notable dis­par­i­ty may come from a mis­un­der­stand­ing between absolute unem­ploy­ment fig­ures and the broad­er con­text of employ­ment con­di­tions. The lin­ger­ing impacts of the pan­dem­ic, such as sec­tor-spe­cif­ic job loss­es and the emer­gence of gig econ­o­my roles, might con­tribute to a per­cep­tion of height­ened job inse­cu­ri­ty despite the over­all low unem­ploy­ment rate.

Fur­ther­more, the medi­a’s empha­sis on high-pro­file lay­offs and cor­po­rate down­siz­ing inten­si­fies con­cerns about wide­spread unem­ploy­ment, rein­forc­ing this misconception.

Inflation: Rising or Falling?

Infla­tion, defined as the rate of change in prices, has been on a declin­ing tra­jec­to­ry since peak­ing at 9.1% in June 2022. As of the lat­est Con­sumer Price Index (CPI) read­ing, infla­tion stands at 3.4% in April, reflect­ing a sig­nif­i­cant moderation.

How­ev­er, approx­i­mate­ly 70% of the respon­dents in the Harris/The Guardian poll con­tend that infla­tion is rising.

This mis­in­ter­pre­ta­tion might orig­i­nate from mis­un­der­stand­ing the dif­fer­ence between infla­tion rates and the cost of liv­ing. While the rate of infla­tion has decel­er­at­ed, lead­ing to slow­er price increas­es, the absolute price lev­els con­tin­ue to rise, albeit at a dimin­ished pace.

Many peo­ple don’t grasp this detail, so they mis­tak­en­ly think infla­tion keeps going up. Also, past high infla­tion still affects house­hold bud­gets, mak­ing it seem like infla­tion is still a big problem.

To Sum Up

The gap between what peo­ple believe about the econ­o­my and what eco­nom­ic data actu­al­ly shows high­lights how tra­di­tion­al mea­sure­ments can miss the com­plex finan­cial real­i­ties peo­ple experience.

Com­mon indi­ca­tors like GDP growth, stock mar­ket num­bers, and unem­ploy­ment rates pro­vide use­ful infor­ma­tion, but they don’t always reflect the eco­nom­ic chal­lenges faced by dif­fer­ent groups of peo­ple. Things like income inequal­i­ty, dif­fer­ences in region­al economies, and down­turns in spe­cif­ic indus­tries often get over­looked in these big-pic­ture sta­tis­tics. This can leave many feel­ing dis­sat­is­fied with the economy.

As dis­cussed ear­li­er, peo­ple’s per­cep­tions of the econ­o­my can also be influ­enced by men­tal short­cuts and the ten­den­cy to believe infor­ma­tion that con­firms their views. For exam­ple, per­son­al finan­cial strug­gles and neg­a­tive news might feel more sig­nif­i­cant than broad­er eco­nom­ic trends, shap­ing how indi­vid­u­als see the econ­o­my around them.

On top of every­thing, media nar­ra­tives, often sen­sa­tion­al­ized, exac­er­bate these bias­es. This rein­forces pub­lic mis­con­cep­tions about eco­nom­ic health. Respon­si­ble jour­nal­ism, pri­or­i­tiz­ing data-dri­ven report­ing and con­tex­tu­al analy­sis, has the poten­tial to align pub­lic sen­ti­ment with eco­nom­ic real­i­ty by demys­ti­fy­ing com­plex eco­nom­ic phe­nom­e­na and pro­vid­ing bal­anced perspectives.