Dissecting the Pain Index

by: Brian Powers

The Pain Index is calculated by adding the current year over year inflation rate to the unemployment rate. For this chart, I have used core CPI and the BLS household survey. The premise behind the index is that inflation and unemployment are the primary economic forces affecting consumer spending. U.S. consumers account for about 70% of our economy. As they feel more pain, it becomes more likely that the U.S. economy could suffer.

The first chart shows almost fifty years of the Pain Index.

Black line - Pain Index

Pink line - twelve month average

Blue line - ten year average

It can be seen that for ten years, from 1973 to 1982, U.S. consumers were in a lot of pain. From November, 1973 to March, 1975, the country suffered a severe recession. Then, from July, 1981 to November, 1982 the U.S. endured another. The Pain Index held solidly at double digit levels.

From 1982 until 1999, the index dropped fairly steadily (with one notable exception in the early 1990s). We know that this drop in the Pain Index corresponds to one of the greatest economic expansions in U.S. history.

Right now, the level of pain is fairly low historically. After spending more than twenty years over 8%, the last thirteen years have remained between 5% and 8%.

You can see the sharp spike up from Friday's household survey. A move of that size is rare for the unemployment rate, but the Pain Index is not currently at extreme levels.

Investors and economists, however, will be concerned about the direction and speed at which the index is moving. Right now, the short term direction is up and that may lead some to be conservative going forward. A few may even say that the Pain Index has bottomed, but it will require more data for that to be confirmed.

I note that you can use any inflation measure when calculating the Pain Index. What is important is the velocity the index is moving, not the overall level.

I have always found this index interesting over the long term. It is simple and sensible and not necessarily dependent on exact data (which can be helpful when relying on seasonally adjusted government figures).

The U.S. economy is feeling some pressure, but I personally do not think we are in a recession right now. As a long term investor, I have raised a little cash from more speculative holdings and I remain confident in most of my current positions.

I will be watching the data closely.