By Michael Jeanfreau, Senior Economist
The United States economy is anticipating1 a recession sometime in 2023. The Federal Reserve (Fed) is hiking interest rates and increasing the cost of doing business to curb demand in an effort to aggressively combat uncomfortably high inflation. Gross Domestic Product (GDP) growth is beginning to falter and businesses are cutting back on investment while the unemployment rate is no longer trending downward. During both recessions in recent memory, the Great Recession and the Pandemic Recession, economic fallout was felt across the world.
At the onset of a recession, households may experience a variety of negative effects, including job loss and income reduction, more difficult debt management, and difficulty in obtaining credit. This can lead to increased financial stress and difficulty making ends meet. Some households may also experience a decrease in wealth due to declines in stock prices and other investments. Thus, recessions can lead to increased economic hardship and poverty.
To measure economic distress, American economist Arthur Okun created the Misery Index2, which quantifies the degree of economic distress experienced by the average person. It is calculated by adding the seasonally adjusted unemployment rate and the inflation rate. Essentially, this measures the stress the average person would experience due to the heightened risk of losing a job or being jobless combined with an increasing cost of living.
Misery Index = Seasonally Adjusted Unemployment Rate + Annual Inflation Rate
True to everyday life, it’s almost impossible to have no misery at all. In fact, since 1970, the lowest the Misery Index has ever fallen is to 5.0%. This is because both components of the Misery Index, the unemployment rate and inflation, are expected to rest above zero.
The unemployment rate measures what percentage of the labor force is seeking employment but hasn’t found employment. Since there will always be some level of unemployment, full employment, or when all available laborers are employed in the most efficient way possible, is an ideal that is a largely unachievable goal in the real world. It takes time for workers to move from one job to the next. Hiring processes can add friction to turnover time. Changes in technology or automation can make certain jobs or professions unprofitable and obsolete. With extraneous factors included, most economists agree that the realistic unemployment rate target is between 4% and 5%.3
On the other hand, the Federal Reserve aims for 2% yearly inflation in the long run, stating that when “households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.”4
By combining targeted inflation of 2% with reasonable full unemployment between 4% and 5%, the Misery Index during ideal times should be no more than 7%, shown on the graph below as a red line. A Misery Index of below 6% or 7% shows either below-target inflation or a labor market that is aggressively tight. The average Misery Index from 1970 to the most recent data rests slightly above 10.2%, shown in green.
- Historical high (1970-Present): 21.93%, May 1980
- Historical low (1970-Present): 5.01%, September 2015
The Misery Index was popularized in the 1970’s while the United States was struggling with soaring inflation and rising unemployment rates, a combination known as stagflation. The one-two punch of rising joblessness and an increasing cost of living became a common concern throughout that decade.
Stagflation puts the Federal Reserve in a tricky position. The dual mandate of the Fed is to keep prices stable and keep the labor force at full employment, and it was failing at both. Additionally, stagflation is difficult to respond to using monetary policy since attempting to correct one of the two components can exacerbate the other. Generally, high employment and strong economic growth tend to bring prices up. Inversely, high unemployment and the lower spending associated with it tend to keep prices tempered. Thus, attempts to encourage business to decrease unemployment will likely raise wage inflation, while attempts to curb demand through interest rate hikes will likely increase unemployment.
The Misery Index began 1970 around the all-time average of 10%, but two oil supply shocks combined with loose economic policy caused the Index to rise to nearly 20% in 1975 before falling and then rising again to 22% in 1980. Faced with an impossible choice, Fed Chairman Paul Volcker supported interest rate gains up to double-digit levels that forced the United States into recessions in 1980 and again in 1981-1982. Painful, but his efforts were successful at curbing inflation.
Dropping from its zenith in 1980, the Misery Index fell to 10% by 1986, rising again for the 1990 recession before dropping down to healthy levels below 10% through the 1990’s. It stayed low through the Dot Com bust of the early 2000’s, but began rising during the Great Recession. Interestingly, the Misery Index actually fell precipitously during the tail of that recession only to rise just as quickly during the GDP growth in the early 2010’s. Why?
This comes down to the constituent parts of the Misery Index and their antithetical role toward each other. When unemployment rises, demand for goods decreases. As the housing bubble burst in 2008 and companies faced a harsh economic environment, job stability decreased. The desire to spend veered toward caution, savings rose, demand fell, and inflation turned into deflation, or falling prices. While deflation is not necessarily a good thing as it encourages delays in making purchases, for the purpose of the Misery Index the period of deflation in 2008 helped bring the Misery Index from 11.4% in August of 2008 down to 7.3% by the end of that year. As the economy came out of recession and GDP growth resumed, inflation began to rise again, bringing the Misery Index up sharply in the end of 2009, jumping from 7.5% to 12.7% within half a year.
After hovering above 10% through 2012, the Misery Index consistently fell through the 2010’s as the unemployment rate steadily decreased and inflation remained low. In fact, with inflation consistently below the Fed’s 2.0% target, the Misery Index fell as low as 5%, a record low since 1970. That changed drastically with the onset of COVID.
February, March, and April of 2020 show the staggering effects of the global pandemic. Practically overnight, the Misery Index shot from 5.8%, around the minimum, to 15.1%. The opposing effects of unemployment and inflation were seen once again. As unemployment rose to almost 15%, a gain of over 10% in two months, year-over inflation responded by plummeting as demand dried up and uncertainty increased. The Misery Index of 15.1% in April 2020 consisted of 14.7% unemployment and only 0.4% inflation, and was the peak of the Pandemic Recession Misery Index. The Misery Index fell as people returned to their jobs through 2020, although rising inflation buoyed it slightly.
Inflation’s severe impact on misery became evident at the beginning of 2021. Inflation rose sharply in the spring of 2021, bringing the Misery Index to 11.2% in June. By August, inflation overtook the unemployment rate as the primary contributor, when the unemployment rate fell to 5.2% and inflation rose to the same. Inflation has remained above 5% since, while the unemployment rate continued to drop.
In 2022, the national unemployment rate has rested around 3.6%, signaling a fully engaged workforce. Such has a tendency to increase wages, which is often a key foundation to rising inflation. Couple this with a corresponding disruption in the global supply chain and the War in Ukraine’s upward effect on oil prices, together all spurred inflation to rise during the first half of the year, quickly finding a peak in June 2022 at 9%. The Federal Reserve immediately attacked this rise with one of its main tools, a rise in interest rates. The Fed has given every indication of continuing interest rate hikes to curb inflation, and encouraging recent data shows that Consumer Price Index (CPI) readings are beginning to decelerate.
Yet, even as interest rates increase at a historic rate and demand drops, unemployment has failed to increase substantially in response. Layoffs remain below their pre-pandemic levels by several hundred thousand jobs.5 The strength of the labor market has, so far, been able to absorb the interest rate hikes of the Federal Reserve and essentially maintain full employment.
So long as the recent data on inflation are harbingers of a consistent trend of lower inflation in 2023, the key take-away is that misery has likely peaked already. While it’s true that unemployment rates are expected to rise during the anticipated downturn, most estimates don’t expect unemployment rates to go up more than a few percentage points.6,7 Projections show that labor shortages will be a long-term issue, and will tend to hold down the unemployment rate.8 Indicators show inflation slowing.9 While things aren’t perfect, they probably won’t feel worse.
The Misery Index has its flaws. The imprecise nature of how unemployment is measured and any issues in metrics for inflation are baked into the model. It fails to include growth indicators like GDP growth and investment, bank lending rates, or measurements of security built into assets or savings. Additionally, the real effects of inflation and unemployment aren’t equal: a 1% rise in unemployment is generally worse than a 1% rise in inflation. However, it’s important to remember what the Misery Index is for: a quick and dirty metric of the average person’s pain. In 2022, faced with high inflation and the potential for rising unemployment, it seems appropriate.
With this in mind, Utah has consistently fallen below the United States in the Misery Index due to Utah’s lower unemployment rates.
Using an adjusted CPI based on each state’s region10 and the most recent state unemployment11 rates from the U.S. Bureau of Labor Statistics, comparisons between states can be made as well. As of November 2022, Utah is the fourth “least miserable” state in the United States, behind North Dakota, South Dakota, and Minnesota, which all fared better than Utah due to regional differences in inflation. Still, Utah is a full percentage-point and a half below the national average.
While economic contractions aren’t generally pleasant experiences, it seems likely that the most miserable parts of this recessionary period are in the past. After a record jump in misery due to pandemic-related unemployment followed by another spike a year later due to high inflation, it seems possible that things will get less “miserable” as the next year progresses.
“The Conference Board Economic Forecast for the US Economy.” The Conference Board, 10 Jan. 2023, https://www.conference-board.org/research/us-forecast#:~:text=We%20currently%20anticipate%20three%20quarters,begins%20to%20loosen%20monetary%20policy.
Nessen, Ron. “The Brookings Institution's Arthur Okun – Father of the ‘Misery Index.’” Brookings, Brookings, 28 July 2016, https://www.brookings.edu/opinions/the-brookings-institutions-arthur-okun-father-of-the-misery-index/.
Team, The Investopedia. “Full Employment.” Investopedia, Investopedia, 8 Feb. 2022, www.investopedia.com/terms/f/fullemployment.asp.
“Why Does the Federal Reserve Aim for Inflation of 2 Percent over the Longer Run?” Federal Reserve.gov, Board of Governors of the Federal Reserve System, 27 Aug. 2020, www.federalreserve.gov/faqs/economy_14400.htm.
“Layoffs and Discharges: Total Nonfarm.” FRED, St. Louis Fed, 30 Nov. 2022, fred.stlouisfed.org/series/JTSLDL.
Steemers, Frank. “How High Will US Unemployment Go?” The Conference Board, The Conference Board, 31 Oct. 2022, www.conference-board.org/topics/recession/how-high-will-US-unemployment-go.
Egan, Matt. “US Economy Will Soon Start Losing 175,000 Jobs a Month, Bank of America Warns | CNN Business.” CNN, Cable News Network, 10 Oct. 2022, www.cnn.com/2022/10/10/economy/jobs-recession-unemployment.
“Noncyclical Rate of Unemployment.” FRED, 26 May 2022, https://fred.stlouisfed.org/series/NROU#:~:text=The%20natural%20rate%20of%20unemployment,the%20long%2Dterm%20natural%20rate.
“12-Month Percentage Change, Consumer Price Index, Selected Categories.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, Jan. 2023, https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm.
“Consumer Price Index News Releases.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, Dec. 2022, www.bls.gov/regions/subjects/consumer-price-indexes.htm.
“Table 1. Civilian Labor Force and Unemployment by State and Selected Area, Seasonally Adjusted - 2022 M11 Results.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, 16 Dec. 2022, www.bls.gov/news.release/laus.t01.htm.
“Consumer Price Index for All Urban Consumers: All Items in U.S. City Average.” FRED, St. Louis Fed, 13 Dec. 2022, fred.stlouisfed.org/series/CPIAUCSL#0.
FocusEconomics. “Misery Index: Which Will Be the Most Miserable Economies in 2023?” FocusEconomics | Economic Forecasts from the World's Leading Economists, FocusEconomics, S.L.U., 15 Nov. 2022, www.focus-economics.com/blog/most-miserable-economies-2023-misery-index.
Halton, Clay. “Misery Index: Definition, Components, History, and Limitations.” Investopedia, Investopedia, 3 Nov. 2022, www.investopedia.com/terms/m/miseryindex.asp.
Mandel, Emily, et al. “Stress-Testing States: Looking Toward the Next Recession.” Stress-Testing States: Looking toward the next Recession, Moody's Analytics, Oct. 2022, www.moodysanalytics.com/whitepapers/pa/2022/stress-testing-states-looking-toward-the-next-recession.
Naudus, John. “United States Misery Index - How Miserable Do You Feel?” US Misery Index, NPA Services, Inc., Dec. 2022, www.miseryindex.us/.