If you’re struggling to understand today’s economy, you’re not alone. Many so-called experts have completely discounted their predictions, while positive economic data – the Dow Jones Industrial Average at 50,000 points – seemingly contradicts negative survey responses. But understanding five key elements shows we’re about to be off to the races.
First, 2025 was a transition year for the economy. Under Democrat President Joe Biden, especially during his last two years in office, job growth has been disproportionately driven by government hiring. Similarly, government purchases played an outsized role in the growth of overall economic activity as measured by gross domestic product (GDP).
President Donald Trump turned off those taps, clamped down on government spending growth and fired a record number of bureaucrats at the federal level. Shrinking the unproductive public sector and growing the private sector is a welcome change, but by many economic measures it initially shows us as a negative.
Shrinking the federal workforce and cutting wasteful government spending reduce total jobs and GDP, respectively. Just as Biden was able to inflate these numbers with public money at taxpayer expense, reducing the bloat is now driving down headlines. Still, it is a positive change.
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President Donald Trump gestures as he arrives to deliver remarks on the American economy and affordability at the Mount Airy Casino Resort in Mount Pocono, Pennsylvania, on December 9, 2025. (Jonathan Ernst/Reuters)
The second element is the distinction between inflation and prices. You can think of inflation as how fast you drive down the highway, and prices as mileage markers on the side of the road. Your speed (the inflation rate) can remain constant at 60 miles per hour, and the mile markers (prices) will continue to increase, 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 continue to go up, but now it’s only once every two minutes. This is the same as prices rising more slowly when inflation falls. When you come to a complete stop, your speedometer will read zero and the mile markers will not go up at all. That’s zero inflation.
But note that the mile markers do not go down even if there is no inflation. That’s almost where we are today, with real-time inflation numbers 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 inflation rate, but how bad inflation was during the four years under Biden, causing prices to skyrocket. People are not angry about inflation right now, but that prices have stopped falling. To make that happen, we need Congress to make serious cuts in both spending and red tape.
Even if Congress does nothing, the good news is that income growth is helping to solve the problem, albeit more slowly, and that is the third element that has changed significantly in the economy.
Under Biden, wages rose substantially, but prices rose much faster. The average American’s weekly salary, adjusted for inflation, shrank 4% over those four years. But with inflation so much lower during the Trump administration, the average American is earning about 2% more in their weekly paycheck 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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Characteristic of these two facts is the fourth element that we must understand, namely the federal finances. With the economy growing faster, tax revenues for the Treasury are up 11.8% this fiscal year, compared to the same months in the previous fiscal year – the final four months of the Biden administration.
Shrinking the unproductive public sector and growing the private sector is a welcome change, but by many economic measures it initially shows us as a negative.
On the spending side of the ledger, spending rose just 1.9%, reducing the federal deficit by 17.0% – huge progress in just one year! Again, this doesn’t mean the public finances are sunshine and rainbows, but it’s not doom and gloom either. We are not yet where we want to be, but we are definitely making progress.
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That brings us to the last element: investments. Between tax and regulatory cuts and Trump’s trade talks, trillions of dollars of investment are pouring into the country. That means more factories, higher productivity and wages, more products and services, higher tax revenues for 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 bend and will soon be entering the straight and narrow. After years of being in the doldrums, the finish line of prosperity is fully in sight.
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