Is The Economy Good Or Bad?

Just what’s going on with the economy?

Look at it from one angle, and everything appears hunky-dory. The unemployment rate is low, gross domestic product (GDP) growth is chugging along and the stock market is at all-time highs.

However, inflation is still well above the Fed’s target, consumer sentiment is in the dumps and it’s becoming increasingly difficult to find a job.

Given these various cross pressures, it’s helpful to determine which parts of the economy are doing well, who’s struggling and what the future holds in store.

The Economy Is Good

It’s hard to complain about the economy if you’re looking at it from 30,000 feet.

“I am an optimist,” says Tom Stringfellow, chief investment strategist at Argent Trust Company. “We’re looking at phenomenal employment levels, and I don’t get too excited about inflation since the numbers were much worse a few years ago.”

The unemployment rate is currently at 4.0%, which, while a touch higher than the recent past, is still low by historical standards. For instance, the unemployment rate was never this good between January 2001 and January 2018.

Initial jobless claims, which occur when someone files for unemployment insurance after getting let go from a position, are at pre-recession levels and are much lower than they were during the economy of the roaring 1990s.

Meanwhile, 83.5% of workers between the ages of 25 and 54 are in the labor force, slightly more than before the pandemic.

More than one-third of small businesses are unable to find someone to fill an open position, according to the National Federation of Independent Business, and many are upping pay to attract workers.

Inflation, meanwhile, has come down meaningfully over the past few years. Core PCE—the Fed’s preferred inflation gauge—showed prices rose 2.8% over the past 12 months in December 2024, compared to 5.6% in September 2022.

The Federal Reserve had a lot to do with that. The nation’s central bank raised the federal funds rate by 5.25 percentage points between March 2022 and July 2023 in an effort to get prices under control.

Many economists worried that such a strong slam on the brakes would cause the economy to veer into a recession.

Fortunately, the Fed has been able to avoid such a fate.

The economy grew at a solid clip of 2.8% in 2024, after expanding by 2.9% the year prior.

The Economy Is Bad

Given all that good news, why aren’t more people in a better mood?

Consumer sentiment, per a University of Michigan survey, sits at 74. While that’s a considerable improvement from 50 in June 2022, it’s still well below the 101 pre-pandemic reading in February 2020.

According to a Gallup poll, 40% of Americans in January 2025 said the economy is poor, compared to 12% at the end of 2019.

“The economy in aggregate is still doing well, but it’s a bifurcated economy,” says Lawrence Gillum, chief fixed income strategist at LPL Financial. “People aren’t necessarily losing jobs, but it’s getting harder to find a job.”

While initial jobless claims are healthy (as mentioned above), continued jobless claims (out-of-work folks who file additional unemployment claims) are up by 73,000 to 1.8 million over the past year. That has led to an increase in the ranks of the long-term unemployed.

The quits rate, which is typically higher when workers feel confident they can find a better job, is not only significantly down from early 2022 but is also lower than before the pandemic.

Workers have seen their pay grow, but the rate of increases has slowed dramatically. Real (inflation-adjusted) disposable income grew 2.4% in December 2024 compared to the year prior, which is down from 4.7% in December 2023 and 6.5% in June 2023.

While that decline was part of the Fed’s plan to bring overall inflation down, workers can be forgiven for feeling blue about 18 months of declining raises.

Folks are also having trouble keeping up with their bills.

Credit card delinquency rates jumped from 1.57% at the end of 2021 to 3.23% three years later. That’s the highest percentage of borrowers falling behind on their plastic payments since the fourth quarter of 2011.

The same story is going on with auto loans.

The Future of the Economy

The state of the economy, then, is highly dependent on your particular situation.

If you bought a home at the end of 2019 (median sales price about $327,000) with an average mortgage rate (3.70%) and have stable employment with rewarding work, you’re sitting pretty.

Life’s harder if you’re trying to buy a home now (median price of $419,200 with a 6.9% mortgage rate), recently got laid off or are trying to take the next step in your career.

Just a year or two ago, it was easy to find another job. Now, firms are much slower to add to payroll.

While the Fed may have needed to slow the economy to bring down inflation, the concern is that prices are still growing too quickly.

Core Personal Consumption Expenditure (PCE), for instance, is well above the Fed’s 2% target. Economists hope that price growth will slow a bit further in the months to come, but if it doesn’t, then the Fed will have to keep interest rates at their current levels or even potentially raise them.

The Fed was initially expected to cut rates perhaps four times throughout 2025, but those expectations have dropped to one or two. Higher interest rates for longer will continue to put a cap on how quickly the economy can grow.

The situation can get even more complicated should an unforeseen disaster occur.

“I think we are vulnerable to a big shock event,” says Gillum.

If energy prices start to soar, for instance, or another international conflict arises, the economy could soften.

The Fed could cut rates, but that could also stoke inflation.

Given the overall uncertainty and vulnerability of the current economy, you should take this opportunity to shore up your emergency fund (shoot for two months’ income in a high-yield savings account) and make sure you’re staying on budget (take advantage of a budgeting app if you need some help).

While you can’t control the global economy, you can effectively manage your own finances.