Friday, February 6, 2009

Misery Index says things aren't miserable

Remember this chart? The Misery Index was invented in the late 1970s, when unemployment and inflation were both high. It was an ugly combination, to be sure. With politicians and the press and President Obama all wringing their hands about how the situation is so abysmally bad that we need to pass a monstrous, pork-laden, government-expanding, faux-stimulus bill urgently today, not next week—the more time given to the critics to look inside the bill, the more critics there are—I thought it would be a public service to post this chart. The unemployment rate is indeed high, but thanks to sharply lower energy prices, inflation is very low. Things are really not as bad as the hysteria would lead you to believe.


Eldon Mast said...


Thanks again for level-headed data...


Mark A. Sadowski said...

As you probably figured out by now I love to play the contrarian.

In November, consumer prices fell at a compund annual rate of 18.6%, the fastest rate of deflation since January 1932. The unemployment rate was 6.8% in November so that means the Misery Index was -11.8.

I know that's supposed to cheer us up, but consider the following. Consumer prices fell at a compound annual rate of 22.1% in January 1932. We don't have monthly unemployment rates for that far back but Christina Romer estimated the annual unemployment rate to be 15.3% in 1931 and 22.5% in 1932. Based on that I would guesstimate the January 1932 unemployment rate was about 19.2%. Thus the Misery Index for January 1932 was probably about -2.9.

Now, I don't think anyone who's sane thinks that, in economic terms, January 1932 was a wonderful month. (And personally, I don't think that what is happening right now is all that wonderful either.) This just underscores that rapid deflation, just like rapid inflation, has some pretty unpleasant side effects (or correlations if you prefer), and the Misery Index may have been an appropriate reference in 1981 but it wouldn't have captured the misery of the Great Depression, and I don't think it's capturing the misery that's beginning to be experienced right now.

Scott Grannis said...

Mark: You've exaggerated your case, even though you are correct in trying to put things in greater perspective. The year over year change in the CPI in Jan. '32 was -10%, and yoy is the measure that goes into the Misery Index. So using your estimate for unemployment, which seems reasonable, the Misery Index would have been 9.2%, not -2.9.

Even so, things were obviously an order of magnitude worse back in the '30s, because we had a massive contraction in GDP in addition to a modestly high Misery Index.

brodero said...

Miserable depends....81-82 job loss 3.1% of
payroll employment...we already are at 2.6 %....

Mark A. Sadowski said...

Thanks for correcting me. I should have noticed from the lack of volatility on the graph that it was yoy CPI and not monthly CPI. Of course, this also means that since yoy CPI was 1.0% in November that the Misery Index was actually 7.8% that month or only a little better than in January 1932.

As for GDP, it just fell at a annual rate of 3.8% last quarter, and based on the inventory adjustment, I suspect we're in for a repeat performance in the first quarter. No Great Depression of course, but bad enough. After that things could get better, but we'll just have to wait and see.