‘Misery index’ approaches lowest level since pre-Covid, but are Americans happy?
Americans should be in a better financial position heading into the holidays, according to a famous formula developed in the 1960s under President Lyndon Johnson.
The sum of U.S. unemployment and inflation—known as the “misery index”—fell to 6.8% in November from 7.5% the previous month. That’s the lowest since the summer and fast approaching pre-Covid levels.
The misery index is calculated by adding up the current unemployment rate (3.7%) and the inflation rate (3.1%). The formula provides a simple way to gauge whether the well-being of Americans is improving or not.
Misery peaked in April 2020 when the index spiked to 15%, the highest since 1982. Conditions have improved since the early onset of Covid, but it hasn’t been smooth sailing.
After falling back to 7.7% in January 2021, the index re-accelerated over the next two years as inflation surged. The misery index was 12.5% in June 2022—the same month that annual inflation hit 9.1%.
The unemployment component of the index has been faring well since Covid emergency measures were lifted back in 2021. The unemployment rate has remained below 4% for nearly two years—even as the economy begins to slow.
But economists warn that the misery index doesn't offer a complete picture of how the average American is doing. You can tell just by asking them how they feel about the economy and personal finances.
How do Americans really feel?
Economist Greg Ip, who heads economic commentary at The Wall Street Journal, compared the misery index to the University of Michigan’s consumer sentiment index—one of the most closely-watched consumer surveys.
“Based on historic correlations, sentiment has been more depressed this year than you would expect given the level of economic misery,” Ip wrote, arguing that consumers are more pessimistic than the misery index would suggest.
A deeper dive into the sentiment data reveals that Americans are still frustrated about inflation and the impact of high interest rates on their finances. And while the consumer sentiment index rose in December—breaking a four-month skid—some economists attributed it to a temporary holiday boost ahead of Christmas.
“Consumer spirits are perking up for the holiday season which is a sign Christmas is still coming this year,” said Christopher Rupkey, chief economist at FWDBONDS, a New York-based financial research company.
A separate sentiment survey from LSEG/Ipsos paints an even less enthusiastic picture of the average consumer.
The December primary consumer sentiment index—which measures Americans’ attitudes toward jobs, investments, the economy, and personal finances—declined from November and was only up slightly compared to 12 months earlier.
According to the survey, attitudes toward the current situation, investments, and jobs “showed significant declines this month.”
The impact of cumulative inflation
While inflation has fallen to 3.1%, consumer prices have increased by a cumulative 19% since the start of 2020. Food prices are up a whopping 25% over that period.
Americans spent the better part of two years—April 2021 to January 2023—seeing inflation grow faster than their paychecks. That trend reversed in February of this year.
But even with stronger purchasing power this year, the vast majority of Americans (92%) said they reduced their spending in the six months through September, according to a Morning Consult survey for CNBC.
A majority of respondents across all wage brackets said current economic conditions negatively impacted their finances.