America finds itself in an unprecedented era of wealth. As 2024 drew to a close, U.S. household net worth soared to new heights. Unemployment has hovered near historic lows for nearly three years, and the proportion of debt households carry relative to their assets is at an impressively low point.
However, even in this land of abundance, there are challenges that affect both perception and reality for many Americans. Despite a flourishing economy, striking inequalities persist, with wealth and financial security gaps looming large even as inflation stabilizes and incomes rise. The metrics we typically use to gauge the economy may not fully capture the hurdles faced by a substantial segment of the population, particularly those on the lower end of the wealth and income scale.
In recent years, wealth has increased for those in the lower half of the income distribution, yet much of this surge is tied up in “illiquid assets” like increased home values and stock portfolios. These assets don’t easily convert to cash, complicating the task of covering day-to-day expenses, which have ballooned compared to a few years ago. Although the bottom 50% hold merely 1% of the total financial market wealth, many Americans still invest in the stock market, bringing a sense of frustration as these investments don’t always translate into immediate liquidity, as Daniel Sullivan of the JPMorganChase Institute points out.
“Massive home equity gains, and my 401(k)’s through the roof, but I can’t touch any of that!” Sullivan captures the exasperation many feel. Despite growing wealth, confidence in the economy hasn’t bounced back to pre-pandemic levels. This trend started even before concerns about Trump’s tariffs unsettled both consumer sentiment and the stock market. A stark divide exists in how different income groups perceive the economy.
The University of Michigan’s survey of consumer sentiment over the past four years paints a picture of deep economic skepticism among those in the bottom two-thirds of the income spectrum, with sentiments echoing those of the 2008 financial crisis. Conversely, higher earners have recently seen a rebound in optimism, buoyed by their stronger spending.
Part of the disconnect arises from economists’ tendency to track income growth in percentage increases rather than in absolute dollar terms. Even when inflation reached about 9%, diminishing income growth, a 10% rise in middle and higher incomes feels substantial, with tangible benefits. For a middle-income salary, that’s a noticeable bump, translating to real spending power. Yet, for those earning lower wages, a comparable percentage increase does little to ease a paycheck-to-paycheck existence.
In a recent evaluation, Matt Bruenig of the People’s Policy Project examined the elusive question of how many Americans live paycheck to paycheck, defining it as lacking three months’ emergency savings or unable to cover a $2,000 emergency. Under this definition, 59% of adults fall into this category.
Chris Wheat from the JPMorganChase Institute suggests that the lingering economic gloom could be more psychological — a hangover from the economic swings during the pandemic years, when federal aid temporarily lifted many households to a higher standard of living. That aid has long ended, and many households now grapple with reduced purchasing power as inflation-adjusted income levels decline.
Meanwhile, checking account balances overall remain relatively healthy, yet cash reserves have dwindled since 2021. With costs rising, many lower- and middle-income families found themselves returning to a reliance on labor income, reigniting a sense of “loss aversion” — where losses are felt more acutely than gains.
Despite economists agreeing that pandemic-era financial aid was a necessary yet short-lived measure, the transition back to tighter budgets has been frustrating for many. This frustration is compounded by the fact that a significant portion of the wealth held by the lower half of the wealth spectrum is tied up in real estate, as property prices have surged since 2020. Yet, this wealth doesn’t seamlessly translate into cash for everyday expenses. With high-interest rates and limited housing availability, the dream of homeownership remains out of reach for many young adults.
Interestingly, while high-interest rates put a damper on the housing market, they benefited households capable of saving. Higher interest rates have enticed many savers to deposit more money into high-yield savings accounts, leading personal interest income to reach a record of $2.1 trillion as of January.
Yet, for those at the lower income levels, the scenario is less rosy, as Sullivan notes. Historically, economic sentiment improves after inflation or a recession, given time. However, President Trump’s erratic tariff policies continue to stoke inflation fears and economic instability, with potential downsides to the economy being a topic of serious concern for major financial institutions.
UBS’s David Lefkowitz links the recent declines in consumer sentiment and stock market performance to the volatility caused by uncertainty surrounding trade policies. Despite promises to lower living costs, public approval of Trump’s economic leadership is lukewarm, and Wall Street is cautious about looming recession risks.
Economists, including Owen Davis of the Siegel Family Endowment, emphasize the need for separate dialogues on the economy’s size and health. Acknowledging that while the ship isn’t sinking, its accommodations may not meet everyone’s needs, allows for a deeper understanding and pursuit of solutions that enhance economic wellbeing for all.
