The Misery Index Provides Perspective

In yet another sign of the times, the three Atlantic City casinos once run by Donald Trump filed for bankruptcy protection Tuesday. Although Trump maintains that he has little to do with the businesses other than having his name on the buildings, it does reflect the fact that things are pretty tough out there for everyone - even “The Donald”.

Trump Is Not Alone

Of course, Trump Casinos are not alone. Businesses the world over are feeling the pinch of a global economic downturn. And in recent days, word that Japan’s economy contracted at its fastest pace in over three decades in the final quarter of 2008, disappointing corporate earnings, renewed talk of bankruptcy in the U.S. auto sector and continuing skepticism over the $790 billion dollar fiscal stimulus package proposed by the Obama administration once again have investors fretting over the future. This concern has weighed on stock markets in recent days. The MSCI World index has closed down for six straight sessions and in North America, while the S&P 500 declined 4.6% to it’s lowest level since November.

These days, it seems like the negative headlines are relentless. But in my mind, that simply means that we have to dig a little deeper to maintain an emotional even keel in today’s environment, which for a good year now has been solidly tilted to the negative side of the dial. I saw an article about the “misery index” in Tuesday’s Globe & Mail that I think put some of the doom and gloom into perspective.

The Misery Index

The Misery index was devised by a Yale professor back in the sixties who was also an economic adviser to Presidents John F. Kennedy and Lyndon Johnson. It’s calculated by adding the unemployment rate to the inflation rate - two key factors that can damage a country’s economy. The premise is that adding the two together paints a picture of how bad things are.

Many comparisons have been made between today’s situation and severe economic downturns of the past. But if we consider today’s misery index within a historical context, it’s clear that things are different now. Case in point - because inflation is so low, the misery index is far below its peak levels from the 1980s when unemployment was sky high and inflation was rampant.

In both Canada and the United States, the misery index peaked well above 20 in the early 1980s. Today, while unemployment rates in both countries have moved above 7 percent, low inflation is keeping the misery index at around 8. Although this may not be any consolation for thousands of people who have lost their jobs, it does comment on the bigger picture to some degree.

While the misery index certainly shouldn’t be considered the definitive indicator of economic health, given all of the negative news that’s out there, it’s another way to help maintain a balanced perspective in today’s environment.

“The key to your success in the bull market is what you do in the bear market”.

Comments

[ecliptix543:]

And what exactly would the index look like if actual unemployment and inflation numbers were used as opposed to the spun-down gov't versions? Hmm.. probably over 20 I'd guess...

Feb 18 12:27 PM

[Moon Kil Woong:]

LOL Donald went bankrupt and had to be bailed out by his dad. His casino has been on debt restructuring for ages even though he inherited billions when his dad kicked the can (Funny that he insisted his dad was the failure when he was). He hasn't made a penny asides from what any ordinary schmooo would have made with his money.

So I don't think anything related to him reflects misery asides from his own miserable self aggrandizement. Without his Dad underwriting his billion dollar bankrupt loans he would not have been anything. In fact he still isn't anything. Last I heard he was suing a winner on his Apprentice show (he should be managing his assets not making a few tens of millions on a show) for stealing his real estate deals from under him.

America's misery index is up there because of poor management like his. If he blows his dad's $4.5 billion I wonder who will bail him out since he has 0 friends in business (he screwed them all and still usually wound up with a bad deal). Thank goodness he didn't go into banking where he could loose the public's money as well.

Feb 18 10:03 PM

[Derek Gendvil:]

Can the misery index peak at 20% in four years? That's right, can you say 20%? Expect more doom & gloom in the next four years under Obama, but expect Republicans to come back stronger in 2010 & 2012.

Feb 20 10:54 PM