When the economy tanked about 10 years ago, I filled this space by writing about the misery index. With today’s economy seemingly getting stronger, I thought I’d revisit the index to see if our misery has lessened.
At the end of 2008, the index stood at 7.4 percent. One year later, as unemployment soared as the economy crashed, it was 12.6 percent.
At the end of 2017, it was 6.2 percent and as of the end of June this year, it is 6.8 percent. Higher numbers indicate that average citizens are feeling more economic pain than when the number is lower.
The misery index, created by economist Arthur Okun during the Lyndon Johnson administration in the 1960s, helps determine how the average citizen is doing economically, and it is calculated by simply adding the annual inflation rate to the seasonally adjusted unemployment rate.
Since both high unemployment and high inflation are major factors to the average wage earner, it’s a quick metric to gauge the health of the economy because as inflation rises the cost of living increases and as unemployment rises more people cross the economic line into poverty.
The misery index exceeded 20 percent during the Great Depression because the unemployment rate was so high, topping out at 24.9 percent in 1933.
In 1946, the misery index exceeded 20 percent because inflation was 18.1 percent.
It almost reached 20 percent in 1979 and 1980 as inflation topped 12 percent each year and unemployment was in the 6- and 7-percent range.
The unemployment rate measures the misery of people being laid off and having difficulty finding jobs. High unemployment prevents people from making a living wage.
Inflation is the rising price of goods and services over time. Inflation impacts your life by reducing your purchasing power. It's a measurement of misery because it increases the cost of living. Over time, it reduces your standard of living.
President Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.”
According to the phases of the business cycle, unemployment signals a contraction. Inflation signals that the expansion phase is creating a bubble.
The misery index should reveal when the economy is either running too slow or too fast. Kimberly Amadeo, a U.S. economy analyst and president of WorldMoneyWatch.com says that a healthy economy will produce a misery index of between 6-7 percent. The ideal rate of growth is 2-3 percent. To achieve that, employers need to find good workers. They need to see a natural rate of unemployment from 4-5 percent.
When the rate is lower than that, companies can't find enough good workers to maximize production.With the unemployment rate hovering around 4 percent most of the year, we are seeing the problem of finding workers come into play.
As a result, Amadeo says, growth is likely to slow. A healthy economy also requires some inflation. The Federal Reserve aims for a target inflation rate of 2 percent year-over-year.
According to Amadeo, a misery index between 6-7 percent signals a Goldilockseconomy (as in Goldilocks and the Three Bears), with healthy levels of inflation and unemployment.
A Goldilocks economy, she says, is when growth isn't too hot, causing inflation, nor too cold, creating a recession. It has an ideal growth rate of between 2-3 percent, as measured by GDP growth. It also has moderately rising prices, as measured by the core inflation rate.
The Federal Reserve has set this target inflation at 2 percent. At the end of 2017, we had an inflation rate of 2.1 percent and unemployment stood at 4.1 percent for a misery index of 6.2 percent, which put the economy solidly in the Goldilocks range.
At the end of June, unemployment was at 4 percent and inflation had risen to 2.87 percent, still putting the economy in Goldilocks territory, but nearing it’s outer edge.
So, what all that means, I’m not sure. Based on my decades-old perspective from when gas cost less than $1 a gallon and ground chuck cost less than $1 a pound, the cost of living has risen considerably and the economic pain from the high cost of everything surely has been felt by everyone. Paychecks, of course, are larger today than they were then, but I’m not sure it all evens out.
The good news, though, is that the misery index is much better than the last time I looked, which means we must all be happier today than we were 10 years ago.