Everyday we are bombarded by economic statistics. Some say the economy is getting better. Others are more cautious.
How can we sum up our economic wellbeing? There’s no perfect answer – but you could take a look at the ‘misery index’.
US economist Arthur Okun devised the misery index. It is simply calculated by adding the unemployment rate to the rate of inflation. The higher the number, the more miserable the country.
So in the UK right now, with an unemployment rate of 8.3% and inflation rate of 3.6%, we have a misery index score of 11.9%.
But what does this really mean? Here’s the misery index for the UK going back to 1971.
UK misery index
As the chart shows, the UK misery index is quite high at the moment. Certainly, we’re nowhere near as miserable as in the 1970s when high rates of unemployment and inflation ravaged the UK economy.
But at 11.9% it’s still at its highest level for 17 years, back to when the UK was coming out of a deep recession. We are still a long way off from the relatively prosperous days of the late 1990s and mid 2000s.
So, which way is the index heading? Yesterday’s small drop in the unemployment rate was welcome. But it is hard to see where lots of new jobs are going to come from to replace those being lost in the public sector and financial services.
Then we turn to inflation. The Bank of England has been too optimistic on the outlook for inflation. In fact, despite being given the job of keeping a lid on prices in the country, a lot of us are waking up to the fact that it is currently trying to do the exact opposite. (See my colleague John Stepek’s comments: Is the Bank of England waking up to inflation? Don’t bet on it.)
The Bank knows that consumers and the government are loaded up with debt. It also knows that this poses a big deflationary threat to the UK economy. It hopes that by printing money and keeping interest rates at 0.5% it can create that ‘little bit’ of inflation to get rid of the debts.
Trouble is, this is a dangerous game to play. Inflation tends to work in phases. It starts off gently, then suddenly spikes. So while we don’t know where inflation is going, the risks of it increasing are very real.
You could also argue that neither the headline employment measure, nor the consumer price index measure of inflation give a complete view of just how tough things are out there for many people.
So the misery index might even understate how bad the underlying economy is. Unfortunately, it seems that we are going to be miserable for some time to come.
What the US misery index tells us about the US elections
Similar comments can be made about the US misery index. But it may have another use, beyond depressing us. Peaks in the US misery index have been surprisingly good at predicting the outcome of US elections.
US misery index
A peak in the mid 1970s coincided with Jimmy Carter beating Gerald Ford in 1976. A further peak around mid-1980 saw Ronald Reagan defeat Jimmy Carter a few months later. A relatively high misery index in the early 1990s was later followed by Bill Clinton taking the White House from George Bush.
With the US misery index hovering at relatively high levels, could this signal an end to Barack Obama’s presidency later this year? Or is it pure coincidence?
Time will tell.