Why Everyone Disagrees About the Economy

By Morgan HouselMarketsFool.com

People are skeptical of politicians. Skeptical of institutions. Skeptical of things we used to admire, like money managers and journalists.

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And we're really skeptical of economic data. Tell a group of people that the unemployment rate is 5% and a significant portion will react like you referenced the tooth fairy. Fifty-seven percent of Americans thought the economy was in recession in 2014, according to an NBC/WSJ poll. Inflation was less than 2% in 2013, but 39%thought it was at least5%, and 22% said it was double digits.

An important question iswhypeople are so skeptical of economic data. Why is there a gulf between what's reported and what people believe?

One answer is that conspiracy theories never go out of style. But another force is becoming more important by the day, and helps explain everything from data skepticism to the rise of presidential candidates who wouldn't stand a chance a few years ago.

Most economic data references "the economy," in the aggregate or average. But no one lives intheeconomy. They live intheireconomy. And the difference between "the" and "their" is now enormous, and growing.

Take thisstatby Jim Tankersley of theWashington Post:

For perspective, 81.2% of counties have fewer than 100,000 residents, and are home to about a third of all Americans. During a period when "the" economy grew 19%, unemployment was cut in half, the stock market doubled, and household net worth grew 39%, a third of Americans saw "their" economy do nothing of the sort.

So of course they're skeptical of the data. It's not that the data is manipulated or fraudulent. But the aggregate and average doesn't reflect what many people see in their own world.

You can slice this dozens of ways.

  • Theunemployment ratefor Asian women age 34-44 is 2.9%. For African American men age 16-17, it's 45.1%.
  • For those with a doctoral degree, unemployment is 1.7%. For those without a high school diploma, it's 8%.
  • During the peak of the recession in 2009, the unemployment rate for those with a bachelor's degreenever topped5.3%. For those without a high school diploma, unemploymenthasn't beenbelow5.3% in more than 30 years.
  • Inflation-adjusted wages for men with advance degreeshave nearly doubledsince the 1960s. They've declined for those without a high school diploma and barely budged for everyone else.
  • The laborforce participation rate for menhas declinedin 48 of the last 67 years. For women, it'sincreasedin 51 of the last 67 years.
  • The richest 1% of Americans have a life expectancy 14.6 yearslonger than the poorest 1% of Americans, andthat gap has increasedover time.
  • The unemployment rate for men age 25 and up is 4.1%. For married men, it's 2.7%.

We've always had an unequal economy. But the cultural and econoimc wedges today are larger than they were for much of the last 60 years. In a fascinating essay, Paul Grahamwrote:

Fifty years ago, those with a college degree earned about 30% more than those without a degree; today they earn about 75% more. In his bookComing Apart, Charles Murray gives an example of how different groups have skewed over the last half-century:

Another powerful trend adds to this. The surge in U.S. manufacturing that came from a new world order after World War II benefited one group more than any other: White men without a college education. They were the, in many ways, the most emboldened economic group for two generations, benefiting from relatively high pay and job security of labor-intensive manufacturing.

But those jobs -- and that demographic -- have been some of the hardest hit in relative terms over the last 40 years. Manufacturing employmentpeakedin 1979 at 19.5 million. Today it's 12.3 million.

Any time an entire group sees their lot decline, the result will be skepticism of any reporting that "the" economy is growing, because their struggle appears widespread rather than anecdotal and individual. Derek Thompson ofThe Atlanticrecentlywrote:

They're skeptical not because of a character flaw or predisposition to conspiracy, but because the economy they see is so vastly different from the average or aggregate, which are skewed higher by the 20 counties that have boomed over the last six years.

Investors and economists like to argue over who's right. Keynesians vs. Austrians, bulls vs. bears. The more I dig into these debates, the more I see that people aren't actually debating the same topic; they're just trying to get the other side to see their own version of reality, and become frustrated and insulted when the other side can't or doesn't.

We all do this to some extent. It drives home that a vital skill of anyone trying to make sense of the economyis realizing that everyonehas a point of view, and none of them are complete.

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The article Why Everyone Disagrees About the Economy originally appeared on Fool.com.

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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