Understanding the Gap Between “Hard” and “Soft” Economic Indicators
You’re driving to an important destination using your trusty GPS when construction forces an unexpected detour. You begin to wonder, “Are we still on the right track? This doesn’t look familiar!” Meanwhile, the GPS calmly announces “Recalculating route” and continues providing reliable guidance. You now have two sources of information to consider: the emotional reaction to unfamiliar terrain, and the data-driven navigation system that sees the broader picture.
This illustration seems to capture how people are often feeling with regard to the American economy today. Consumer sentiment has been reacting to unfamiliar policy terrain, while economic fundamentals continue providing steady navigation signals. Understanding this divergence is crucial for making sound financial decisions.
The Data Divide: What Hard Numbers Actually Show
The disconnect between how Americans feel about the economy and what the economy is actually doing has reached historically significant levels. Consumer sentiment surged 16% in June after six months of decline, but remains 18% below post-2024 Presidential election levels. This improvement suggests adaptation rather than deterioration, yet anxiety persists despite strengthening fundamentals.
The hard economic data tells a story of resilience and gradual adjustment. GDP stands at 2.6% growth in the second quarter 2025, a solid recovery from the first quarter’s temporary contraction of 0.3%. That earlier decline wasn’t necessarily economic weakness—it was actually strategic inventory building as companies prepared for policy changes, especially around potential tariffs. Employment remained steady with 147,000 jobs added in June and unemployment improving to 4.1%, while wage growth continues supporting consumer purchasing power.
Inflation data reveals the most interesting story. June’s Consumer Price Index rose 0.3% monthly, pushing the annual rate to 2.7%—the highest since February but still well within manageable ranges. More importantly, the composition of this inflation is what economists predicted: tariff-driven price increases in specific categories rather than broad-based economic overheating.
Where We’re Feeling It Now: Tariff Conversations
The global tariff environment that is generating anxiety is producing measurable, but contained, effects. In June 2025…
- Household furnishings prices rose 1% (the biggest increase since January 2022)
- Video and audio products climbed 1.1%
- Toy prices increased 1.8%
- Groceries are experiencing moderate inflation of around 3%
While these are definite category-specific impacts, it appears that they might represent targeted price adjustments, not economy-wide inflation spirals.
What makes this data particularly instructive is that unlike supply-chain driven inflation that caught economists off-guard in 2021-2022, tariff-induced price changes follow mathematical formulas. Ernst & Young economists expect CPI inflation to reach approximately 3.1% by year-end 2025 as businesses continue spreading tariff costs across product lines. This doesn’t seem to be runaway inflation but rather the calculable cost of policy choices.
Consumer Psychology: The Adaptation Process in Real Time
Perhaps the most fascinating aspect of current economic conditions is watching consumer psychology adapt to new realities. University of Michigan data shows consumer sentiment fell 18.2% between December 2024 and June 2025, but the recovery pattern suggests resilience rather than capitulation. Americans initially reacted with alarm to unfamiliar policy territory but are now demonstrating their characteristic adaptability.
This psychological adjustment process explains much of the sentiment-data divergence. Year-ahead inflation expectations rose from 3.3% in January to 5.1% in June, yet actual inflation has remained far more modest. The gap between expected and realized price increases suggests that anxiety, not experience, has been driving consumer concern.
The chart below shows the measures of actual inflation against consumer sentiment for the last 20 years. What you will see is that the current level of divergence between what consumers are feeling and the inflation reality, while significant, is not unprecedented. Similar divergences occurred during the 2008 financial crisis and 2021-2022 inflation surge. In 2022, consumer expectations peaked at 5.4% when actual inflation hit 8.0%, showing expectations can lag reality in both directions. The 2025 pattern suggests consumer fears may be overestimating tariff impacts, creating potential for positive sentiment surprises as adaptation occurs.
Data Sources: University of Michigan Consumer Sentiment Survey of 1-year inflation expectations (annual averages); U.S. Bureau of Labor Statistics Consumer Price Index annual inflation rates
The improvement in June sentiment coincided with policy clarity rather than economic improvement. The passage of the “One Big Beautiful Bill Act” provided fiscal certainty that markets and consumers had been seeking. This suggests that predictability matters more than specific policy outcomes…a crucial insight for planning.
The Fed’s Role?
The Federal Reserve faces the complex task of interpreting both hard data and soft indicators while maintaining credibility in their dual mandate. In June and July, the Fed held rates steady at 4.25%-4.50%, with markets pricing 60% probability of September rate cuts. This patient approach reflects sophisticated risk management: responding to underlying economic strength while acknowledging that tariff-driven inflation may prove temporary.
Chair Powell’s strategy appears calibrated to avoid both premature stimulus and unnecessary economic restriction. The Fed recognizes that tariff effects will likely peak in the fourth quarter of 2025, creating a natural inflection point for policy adjustment. This timeline-sensitive approach demonstrates why central bank independence matters during periods of rapid policy change.
Are There Implications for Personal Financial Planning?
Understanding the divergence between economic feeling and fact provides crucial context for personal financial decisions. The emotional response of many investors to unfamiliar economic terrain creates opportunities for disciplined investors who can separate noise from signal. Market volatility driven by sentiment swings often disconnects asset prices from underlying business fundamentals, creating opportunities for patient long-term investors to either accumulate more shares of good companies “on sale” and/or harvest some losses for future tax savings. Most importantly, recognizing that consumer adaptation is already underway via continued spending suggests that current anxieties are temporary rather than permanent.
The View from the Destination
Just as GPS navigation systems work best when drivers trust the underlying data rather than emotional reactions to unfamiliar routes, successful financial planning requires distinguishing between temporary and permanent economic changes. The current divergence between consumer anxiety and economic fundamentals represents an example of markets and individuals adapting to new information.
The construction zones in front of us today are real. Tariff effects are measurable and will continue influencing specific sectors and categories. But like any navigation system, the economy is successfully recalculating routes around these obstacles. Consumer sentiment is improving because Americans are recognizing that adaptation, not catastrophe, defines our current moment in time.
Your financial plan should reflect this reality: acknowledge new terrain while maintaining confidence in the underlying navigation system. The route may look unfamiliar, but the destination remains achievable through disciplined execution.
The GPS is still working. Trust the process.
Sources & Disclosures
University of Michigan Survey, Consumer Sentiment Index (monthly) (https://www.sca.isr.umich.edu); U.S. Bureau of Labor Statistics (employment – https://www.bls.gov/news.release/empsit.htm, CPI data – https://www.bls.gov/cpi/); Federal Reserve Bank of Atlanta GDP tracking; Ernst & Young, https://www.ey.com/en_us/insights/strategy/macroeconomics/us-economic-outlook; Deloitte, https://www.deloitte.com/us/en/insights/topics/economy/us-economic-forecast/
Data points are accurate as of publication date but subject to revisions. Economic forecasts represent professional opinions of the specific entities and economists and are not guarantees of future performance.
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