Yesterday, we asked what the Misery Index would look like if the CPI and Unemployment were reported honestly.
A colleague at Credit-Suisse suggested adding in the annual change in house prices to the misery index. Suddenly, we can see that the consumer is in as much pain as in the early nineties and the early eighties.
Enhanced Misery Index
(added the annual change in house prices)
If house prices, Unemployment and CPI carry on as expected, this index will be at all time high within a year.
By way of comparison, the old format misery index is below:
Traditional Misery Index
The “Enhanced Misery” made me chuckle. Does that mean more or less miserable? Either way it sounds good and will likely be adopted by the administration, along the “Strong Dollar Policy”.
Interesting that its 32 year low was within the past two years. How quickly things change!
overlay the latest leg-up of enhance misery on top of the same period of crude prices
This is pretty rough, Barry. So you are saying that the misery of the 80s and 90s was actually made more tolerable by the fact that housing prices were dropping?
“Enhanced Misery” = “Out of Sight”(?)
As always, your mileage may vary…..
Out of Sight
BOB HERBERT(NYtimes)
http://www.nytimes.com/2008/06/10/opinion/10herbert.html
When the dismal unemployment numbers were released on Friday (at the same time that oil prices were surging to record highs), I thought about the young people at the bottom of the employment ladder.
Below the bottom, actually.
A shudder went through the markets when the Labor Department reported that the official jobless rate had jumped one-half a percentage point in May to 5.5 percent — the sharpest spike in 22 years.
The young people I’m talking about wouldn’t have noticed. These are the teenagers and young adults — roughly 16 to 24 years old — who are not in school and basically have no hope of finding work. The bureaucrats compiling the official unemployment rate don’t even bother counting these young people. They are no one’s constituency. They might as well not exist.
Except that they do exist. There are four million or more of these so-called disconnected youths across the country. They hang out on street corners in cities large and small — and increasingly in suburban and rural areas.
SNIP
cont at http://www.nytimes.com/2008/06/10/opinion/10herbert.html
“….suggested adding the annual change in house prices to the misery index”
I’m assuming that the idea is that falls in house prices worsens the score index?
As a renter that has been effectively been priced out of my local property market (Seattle) for years, a drop in the average house price actually improves the score for me (lessens my misery if you will).
Incidentally, the early 80’s and early 90’s were both great times to be buying stocks.
Like JL, I gather that the change in house prices is inverted –> up = lower misery; down = higher misery.
I would do an even rawer, uglier, more volatile Spot Misery Index (SMI):
SMI =
+ y-o-y change in unemployment
+ y-o-y change in gasoline price
+ y-o-y change in food price
+ y-o-y change in average effective credit card interest rate
– y-o-y change in average house price
These are the five nasties, the ones that really pound folks without savings or cash liquidity.
It would appear that by adding housing data of this sort, you’re essentially integrating a negative wealth effect.
Given the impact the wealth effect had in the general “irrational exuberance” of the 1990s, it seems fair.
you need to start talking about this on CNBC. just this morning Vince Ferret like Dennis (wont get off his) Knees once again trotted out the new-and-improved Misery Index w the massaged #s showing we’ve never had it so good, and THIS BEARS NO RESEMBLANCE TO THE ’70s. the public needs to understand that sinking feeling they’re experiencing in the pit of their stomachs is real, it’s shared, and supported by hard #s.
Add in the president’s approval rating and if you are in an unwinnable war
Barry, of course the enhanced index will never see the light of day anywhere – it makes sense and reflects reality. That’s exactly why we can’t use it.
The Bush administration has moved the goalposts in an attempt to claim victory. FAIL.
I simply don’t care what new POS “index” is trotted out on CNBC — they are complete and utter shills and liars. I watch that channel only for appearances by Schiff, Roubini, you, and a few others.
Don’t forget, Barry — the first consulting study (by McKinsey) justifying “offshoring” assumed that all Americans layed off would find higher-paying jobs in under 1 year. Um, no. Each and every CNBC/Bush administration economic index / datapoint / conclusion suffers from the same delusion of grandeur.
We did, in fact, have it better 30 years ago.
The “boyz” are throwing the kitchen sink at commodities today.. It’s the fault of commodity speculators I guess for all this misery…Ya, good luck with that thesis.
Like inflation, a misery index of any given construction will fail to accurately describe the experiences of the vast majority of us. As was noted above, for example, dropping house prices can cause significant misery for those of us nearing the end of our homeowning days. For those of us just beginning, it’s likely a net benefit.
A truer measure of shared misery probably lies in the sign, magnitude, and dispersion of changes in rates of changes, as opposed to just the changes themselves. For example, any particular rate of inflation (or deflation) will be adjusted to over time. The real misery happens when price changes become unpredictable in sign, magnitude, and dispersion. Instead of moving to a new equilibrium state with a higher degree of certainty, the economy as a whole has to bear a deadweight cost to build in added price uncertainty risk.
The misery in the 70’s wasn’t caused by high inflation. It was caused by high uncertainty and a profound sense of unease that assumptions previously held to be nearly axiomatic were unravelling.
Estragon is very wise.
Though uncertainty enhances misery, the present misery isn’t just the uncertainty. It’s the certainty of real loss of income and wealth, both in absolute terms and relative to that going to the top 1%.
That is: Estragon proposal makes sense. But, I worry (er, expect) that people (e.g., the administration) might think “eliminating the uncertainty” alone takes care of the problem.
That reminds me of the administration’s response to foreign policy problems: fund more Voice of America programs and send Kathleen Harris (was it her?) on a speaking tour, as though talk itself IS the action required.
agree with Estragon.
I dont feel much miserable than before. We have more convenience now than any generation before i think. do i feel more miserable than last year? actually no, because i dont own a house yet, so you may say i am feeling more cheerful than last year…
Having lived through the late 1970s and early 1980s, I really cannot see the comparison in terms of misery with our present circumstances.
For example, rates for 30-year mortgages hit 18.45% in Oct. 1981. They went over 12% in 1979 and did not go below 12% until Nov. 1985. Today, a 30-year mortgage is a bit over 6%. Maybe 7% for a jumbo.
When Volcker jacked up interest rates, bondholders had losses of 50-60%. Stocks were crushed. Demand for oil cratered. The drilling industry practically shut down. The car industry collapsed. Minerals, mining too.
Today, we have falling home prices and the housing industry is collapsing. Financial services companies are staggering too. However, both industries had horrible problems in the early 1980s along with most other industries.
Inflation was in double digits for 1979,1980,1981. Today it is perhaps 4%. Even if Bill Gross is right and CPI is understated by 1%, there is still no comparison to those inflationary days.
Gas prices are high, but adjusted for inflation are they really much higher than the early 1980s?
Kurt, you make some good points. I guess a major factor to consider in this era is that this generation of Americans carry much more debt than the generation of the 70’s-80’s. While mortgage rates are considerably lower, there are many Americans carrying credit card debt of 23% approximating the levels of 1980 circa mortgages.
Also, consider that while mortgage rates were much higher in the 1980’s, people were carrying mortgages of $50,000-150,000 in many cases as house prices were much lower. People carrying mortgages of $500,000-$1,000,000 these days are mightily stretched having most likely bought more house than they could afford. Had to keep up with the other overextended Joneses.
Finally, you mention that inflation adjusted gasoline isn’t much higher than 1980. Estragon pointed out the speed of the rise is an important factor here. Compared to $1.20 gasoline in 2001 these prices are parabolically higher. Not to mention, the price of heating oil now is akin to having a second mortgage payment for 5 months of the year for many people living above the Mason-Dixon line.
I lived through all those decades as well. Inflation, morgage rates and unemployment were each about double what we have today. It is a joke to say that times were better back then.
The worst of our recent years is better than the best years experienced a generation ago.
Today we live in bigger and nicer houses. Drive better and more luxurious cars. Eat more and better food – more use of restaurants, and better resaurants. Go on more extravangant vacations. International vacations are affordable for the average person. We have multiple electronic gadgetry and TVs…
There is no comparison.
Living this well is beyond what people even dreamed of achieving a generation ago.
And yes, it has been a struggle for people to maintain this amazing abundance in recent years.
Kurt, you’re flat-out wrong.
When you compute inflation today the same way it was measured in the 70’s (use the same formulas.. they’re still around) – the US is over 12% right now. Today.
That’s exactly what I referenced when I stated that Bush has moved the goalposts. He decreased the items in the inflation formula so that he could report a lower inflation rate. “Core” doesn’t exist outside of the BLS fantasy world.
Unsympathetic, which items did Bush “decrease” in the inflation formula??
Sorry, but I don’t believe that inflation is 12 percent. Read the research on how BLS calculates inflation. There were good reasons for changing the methodology. Remember, if you think housing prices should be used to calculate the housing portion for CPI, then inflation is probably close to zero as the drop in housing prices in the last year cancels out food and gas price increases.
Or maybe you don’t believe in the hedonic adjustments? Then you’re saying you are willing to trade your new I-Mac for the new Kaypro I bought in 1982. Either they are the equivalent product (no adjustment for quality, you’re willing to swap) or they aren’t (one is MORE computer than the other, so we should adjust).
Read the research with an open mind.