Americans say the economy is lousy, but their spending habits say the economy is pretty good. What's going on?

By Jeffry Bartash

Tariffs, rising inflation and fewer new jobs cast a pall over the economy in 2025. Next year might be different.

Why are Americans so gloomy when the economy seems so strong?

In the third quarter of 2025, the economy grew at the fastest pace in two years, but year-end polls of Americans show they are worried and unhappy. Why the disconnect?

Blame tariffs, inflation and politics, if you listen to what Americans are saying.

In December, a survey of consumer confidence fell to an eight-month low and hung near the lowest level since the pandemic. Another closely followed poll of consumer sentiment finished 2025 near a historic low.

At the same time, a new report showed the economy grew in the third quarter at the fastest rate in two years. Second-quarter growth was also quite snappy.

Read: U.S. economy grew 4.3% before government shutdown, GDP shows. Biggest gain in two years.

Even more puzzling, strong U.S. growth was driven by consumer spending - by the very same people who tell pollsters they are gloomy.

The disconnect between what Americans say and how much they spend may stem in part from what they are spending most of their money on: needs instead of wants.

Take the third-quarter report on gross domestic product, the official scorecard of the economy. Consumer spending increased at a snappy 3.5% pace following a healthy 2.5% increase in the second quarter.

The bulk of the spending in the third quarter was on necessities such as healthcare, insurance, clothing, car repairs, gas, housing and utilities. The prices of most of these goods and services have surged since the pandemic.

Other spending, especially in the second quarter, simply resulted from Americans speeding up purchases of new cars and other big-ticket items before higher prices tied to U.S. tariffs kicked in.

The effects of tariffs didn't stop there. They also added upward pressure to inflation over the summer, just as it had been slowing toward low prepandemic levels.

Already burdened by the biggest spike in inflation 40 years, the rebound in inflation this year further aggravated Americans.

"Inflation fatigue was fading in 2024 before tariffs revived those concerns," said Thomas Simons, chief U.S. economist at Jefferies.

Not only that, but tariffs raised business costs and added enough uncertainty into the economy to discourage companies from hiring.

The number of new jobs created this year has taken a nosedive, and the unemployment rate has crept up to a four-year high of 4.6%. A weak job market in particular has Americans down.

Throw in a tumultuous first year of President Donald Trump's second term in office, along with a record 43-day government shutdown, and there are plenty of reasons for Americans to be anxious.

In the survey of consumer confidence, Americans blamed their unease on "prices and inflation, tariffs and trade, and politics," said Dana Peterson, chief economist at the Conference Board, the publisher of the report.

The anxiety was particularly acute among lower-income families, which tend to suffer the most from persistent inflation and a lack of jobs.

How long can the economy keep growing if consumers feel unhappy and financially stretched?

The good news is, the mood of consumers has less influence on the future path of the economy than it used to. The historic relationship appears to have been severed.

Consider this: A survey asking consumers what they expect the economy to look like six months from now has been below the threshold that signals an oncoming recession for the 11th month in a row.

And yet there's been no recession - and Wall Street DJIA SPX economists don't expect one in 2026. In fact, most economists predict U.S. growth might speed up.

How come?

The effects of the tariffs are expected to fade, for one thing, and inflation is likely to slow again. That will give businesses more certainty to hire and invest, making jobs somewhat easier to find.

The Federal Reserve, for its part, has been cutting interest rates and is likely to reduce borrowing costs again in 2026. Cheaper money is always a salve for the economy.

Business profits, meanwhile, are extremely high and are likely to stay that way. Companies are expected to invest more in artificial intelligence, and that will also drive the economy forward.

The government might be of help to the economy in 2026, too. Some new tax breaks are taking effect, the Trump administration aims to reduce regulations, and every White House tries to goose the economy with more spending in an election year.

Whether all this leads to an improvement in the attitude of consumers remains to be seen, but one thing is clear: The actions of consumers speak a lot louder than their words.

-Jeffry Bartash

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12-23-25 1227ET