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Americans Are The Most "Miserable" In Decades

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by Tyler Durden
Tuesday, Nov 09, 2021 - 07:25 PM

In his latest economic daily, BofA's chief economist Ethan Harris eyes the recent article from the New York Times which summarized the foul mood Americans are in as follows “Americans Are Flush With Cash and Jobs. They Also Think the Economy Is Awful,” and lays out his view as to why this is happening. In a nutshell:

  • The growth outlook is very strong, but this is offset by the first serious bout of inflation in decades.
  •  The “misery index”, a simple sum of the unemployment rate and consumer price inflation, has moved sharply higher.
  • This "misery" is expected to fall in the months ahead as easing supply constraints lower both unemployment and inflation.

First, a quick primer: in the late-1960s, Arthur Okun created a simple statistic to capture the cost of stagflation. His “misery index” simply added the unemployment rate to headline inflation. Over time the index dropped off the radar screen, but in the past year it has staged a dramatic comeback.

Putting the index in context, after today's record PPI print tomorrow consensus expects year-over-year CPI inflation to rise from 5.4% to 5.9% for October, more than offsetting the drop in the unemployment rate, and boosting the misery index to 10.5%. That, according to Harris, is the highest in recent decades, outside of a couple years around the Great Financial Crisis, and the 1990 recession and oil price spike.

Of course, some positive spin is mandatory here, and the BofA chief economist writes that "the good news is that a big chunk of this is the temporary impact of supply constraints. Worker shortages and capacity issues have both slowed the drop in the unemployment rate and caused many prices to spike higher." Furthermore, with the Delta wave receding, BofA expects the labor market to pick up speed even as headline inflation cools. It's why the bank expects the Misery Index to drop to 6.3%, with a 3.5% unemployment rate and 2.8% inflation.

That said, such an optimistic forecast is hardly encouraging to those Americans who are suffering from runaway inflation now.

It's also why besides the obvious social implications, this index is important to both the economic and political outlook. On the economic front, high inflation acts as “tax” on real spending power, although this is currently offset by massive cash balances (which benefit mostly the top 10%) and a recovering labor market.

On the political front, BofA notes that a standard model of elections includes three variables: high inflation and weak growth in the election year hurts the party in control of the White House, and there is a tendency for the incumbent party to do poorly in the midterms regardless of the economy.

As BofA concludes, if these models are correct, then Democrats may be in better shape by next fall when the misery index is expected to dip, although as Harris admits, "split government is probably still the most likely outcome."

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