Misery Index

Misery Index at recession-like level despite high growth

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This month, the S&P 500 has reached record highs, wage growth is accelerating, and jobless claims have fallen to the lowest level since 1969. So it comes as somewhat of a surprise that the nation’s economic misery, as measured by one index, is at levels typically seen during recessions, according to a new report from Oxford Economics.

Chief among the findings of the report, written by Senior Economist Bob Schwartz, is that the U.S. misery index was 11.2 in November, a level similar to the indices during economic recessions.

“The misery index after dropping for several months never fell to levels consistent with past expansions,” Schwartz wrote in the report. “Worse, since its brief downward journey, the index has resumed climbing and erased almost half of the decline.”

Developed in the 1970s by American economist Arthur Okun, the misery index is an economic indicator used to measure the average person’s economic well-being. The index is calculated using inflation and unemployment figures and is used by economists to gauge public sentiment as it relates to the economy.

Rising inflation is clearly the main culprit in this year’s high misery index. “The scourge of inflation, which hit a 39-year high of 6.8 percent in November, has returned with a vengeance and is the main culprit behind the latest increase,” Schwartz noted.

Last week’s inflation CPI report found inflation had ballooned in November from the previous year by 6.8%, continuing the worst bout of inflation in the almost four decades. Prices increased across the board for consumer goods, as gasoline, food, and new and used cars all experienced price hikes.

Though the reasons for high inflation may be both numerous and complex in nature, the effects are relatively apparent. Higher prices have eaten away at wages, wiping out much of the gains associated with increased worker compensation resulting from labor shortages.

“Simply put, the wage increases are still not keeping up with inflation,” the Oxford Economics report stated. “With November’s 6.8 percent increase in consumer prices over the past year outpacing the 4.8 percent increase in average hourly earnings for workers, the purchasing power of worker earnings continue to deteriorate.”

According to the report, in inflation-adjusted dollars, today’s average hourly earnings are no higher now than they were in March 2020. This represents a 5.2 percent loss since April of last year. “Hence, it is understandable that households feel they need to run faster just to stay in place, which is not a confidence-building dynamic.”

Tears don’t stop the spending
Lower public sentiment may not necessarily translate to unfavorable consumer spending, however. The report suggests that consumers are more responsive to the hot labor market than the troubling inflation data.

“To be sure, the critical issue for the economy is how people act not how they feel, although the reverse may be true for politicians,” Shwartz explained. “From the macro lens, households are responding more to the upbeat job market than to the downbeat sentiment readings or the spike in the misery index. Consumers are spending freely and spurring a vigorous growth rate in the current quarter that should carry over into next year.”

The misery index fails to account for certain key variables, like excess savings accumulated from several Covid-stimulus payments, which have elevated economic activity.

Thus far, only looking at spending data, consumers appear to be unfazed by higher prices. This holiday season, companies have rejoiced while feeling comfortable passing on price hikes to consumers.

Last month, Pepsico. (PEP) executives told investors that price elasticity was “better than we had initially [estimated] in our models.” McDonald’s (MCD) similarly noted that higher prices “have been pretty well received by customers.” Economists have observed that companies’ feel emboldened by consumers’ apparent willingness to pay higher prices.

However, even if consumer sentiment doesn’t translate into reduced spending just yet, it could be a cause for concern in the long run, the report found. “The longer inflation erodes purchasing power, particularly after pandemic-related savings runs out, the greater the risk that consumers will pull back,” Schwartz wrote in the report. “It’s important to note that while inflation is racing ahead at the fastest pace in four decades, household long-run inflation expectations remain in check. Hence… consumers are more likely to view price increases as a deterrent to spending, particularly if they do not expect to receive corresponding wage increases going forward.”

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