- The "misery index" adds up the rates of unemployment and inflation.
- In the past, it's been a good indicator of whether a president will be reelected.
- But there are signs the gauge may now be broken, with many people still gloomy about the economy.
The gap between how economists and many people feel about the state of the nation has rarely been so wide.
Number crunchers including Paul Krugman and Mohamed El-Erian have touted lower inflation, better-than-expected growth, and a resilient jobs market as signs that the economy is enjoying a post-pandemic rebound.
But Main Street has taken a decidedly gloomier view, with recession worries persisting and big-name companies ramping up layoffs. Polls suggest that the majority of Americans don't like "Bidenomics," while many workers are unhappy that their pay hasn't kept pace with inflation.
As a result, the widely-followed "misery index" — used as a simple way of judging the state of an economy — might be broken as a tool for assessing presidents.
Cooling inflation, steady unemployment
Arthur Okun, an economist in the Johnson administration, came up with the misery index in the early 1970s as a means of judging the state of an economy at a specific moment.
It's easy to calculate — all you need to do is add up the inflation and seasonally-adjusted unemployment rates.
Over the first two years of Biden's presidency, the gauge climbed to just under 13%. Since then, the Federal Reserve's aggressive interest-rate hikes have helped tame inflation, while the unemployment rate has held steady at under 4% in the face of that tightening campaign.
The misery index sits at about 7%, close to the lowest level it's been at since the pandemic hit the US in 2020 (the lower the reading, the better the state the economy is in).
The fact it's fallen under Biden would seem to augur well for the 46th president's reelection chances later this year.
The only US leaders who failed to win another four-year term after presiding over a drop in the misery index were Gerald Ford (scarred by the fallout from the Watergate scandal) and Donald Trump (who lost for reasons that had little to do with his economic policies).
Economic doom and gloom
Inflation cooling while the job market holds steady should be good news for Biden. Yet according to a Gallup opinion poll last month, just 37% of Americans believe the president is doing a good job handling the economy.
That dismal approval rating appears to have damaged the 81-year-old's reelection prospects. Trump has opened up a slender lead in the latest polls, per a FiveThirtyEight tracker, while the bookies place Biden's chances of winning in November at about 45%.
Last month, a group of economists including former Treasury Secretary Larry Summers argued that the misery index is broken — because it doesn't account for interest rates anymore.
The Fed has jacked up borrowing costs from close to zero to about 5.5% in a bid to clamp down on inflation, fueling a run-up in mortgage rates and credit-card repayment costs, so perhaps it's no wonder that people aren't feeling cheerful about the economy right now.
For Biden to win in November, he'll have to change their minds — and the credibility of one of the most widely-followed economic gauges will be on the line as well.