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If you’re struggling to make sense of the economy today, you’re not alone. Many so-called experts completely whiffed their forecasts, while positive economic data — the Dow Jones Industrial Average at 50,000 points — seemingly contradicts negative survey responses. But understanding five key elements reveals we’re about to be off to the races.
First, 2025 was a year of transition for the economy. Under Democrat President Joe Biden, particularly his last two years in office, job growth was disproportionately due to government hiring. Similarly, government purchases played an outsized role in growing overall economic activity, as measured by gross domestic product (GDP).
President Donald Trump turned off those spigots, slamming the brakes on government spending growth and firing a record number of bureaucrats at the federal level. Shrinking the unproductive public sector while growing the private sector is a welcomed change, but it initially shows us as a negative in many economic metrics.
Shrinking the federal workforce and cutting wasteful government spending subtracts from the overall job numbers and GDP, respectively. Just as Biden was able to boost these figures with government largesse at taxpayer expense, now cutting the bloat drags down the headline numbers. Nevertheless, it’s a positive change.
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The second element is the distinction between inflation and prices. You can think of inflation as how fast you’re driving down the highway, and prices as the mile markers on the side of the road. Your speed (the inflation rate) can stay constant at 60 miles per hour, and the mile markers (prices) will keep going up, at a rate of one per minute.
But now let’s say your speed drops by half, to 30 miles per hour. The mile markers keep going up, but now it’s only once every two minutes. This is like prices going up more slowly when the inflation rate drops. If you come to a complete stop, your speedometer hits zero and the mile markers don’t go up at all. That’s zero inflation.
But notice that the mile markers aren’t going down even when there’s no inflation. That’s nearly where we’re at today, with real-time inflation metrics like Truflation showing an inflation rate well below 1%, about as good as it gets outside of a recession.
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The problem today is not the rate of inflation but how bad inflation was for the four years under Biden, which caused prices to skyrocket. People are not mad about inflation right now, but that prices aren’t coming back down. To make that happen, we need Congress to make serious cuts in both spending and to bureaucratic red tape.
Even if Congress doesn’t act, the good news is that income growth is helping solve the problem, albeit more slowly, and that’s the third element which has changed significantly in the economy.
Under Biden, wages grew substantially, but prices rose much faster. The average American’s weekly paycheck, adjusted for inflation, shrunk 4% during those four years. But with inflation so much lower now during the Trump administration, the average American’s weekly paycheck buys about 2% more than when he was inaugurated.
That tells us two very important facts: things are getting better, but we also haven’t regained all the lost ground from the Biden years.
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Emblematic of these two facts is the fourth element to understand, which is federal finance. Because the economy is growing faster, tax receipts to the Treasury are up 11.8% this fiscal year, compared to the same months in the prior fiscal year — which were the last four months of the Biden administration.
Shrinking the unproductive public sector while growing the private sector is a welcomed change, but it initially shows us as a negative in many economic metrics.
On the spending side of the ledger, outlays rose just 1.9%, causing the federal deficit to fall 17.0% — tremendous progress in just a year! Again, this doesn’t mean the government’s finances are sunshine and rainbows, but they’re not doom and gloom either. We’re not where we want to be yet, but we are absolutely improving.
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That brings us to the final element: investment. Between tax and regulatory cuts along with Trump’s trade negotiations, trillions of dollars in investment are pouring into the country. That will mean more factories, higher productivity and wages, more products and services, higher tax receipts to the Treasury, and even lower inflation, if not lower prices.
That’s all incredibly bullish and paints a picture of an economy that has just rounded the turn and will soon blast down the straight. After years in the doldrums, the finish line of prosperity is fully in sight.
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