MISERY CONSENSUS (Positive Consensus/Bear Market Indicator) Turn that frown upside down people!

March 5, 2015

We humans are quite a resilient bunch, at least the ones here in the first world. No matter how stodgy and “meh” the economy is or whether there is suffering elsewhere, overall we seem to be a very happy-go-lucky village. This sentiment is according to Arthur Okun’s Misery Index. In the latest reading, the Misery Index posted the lowest level of malaise since 1959.

“The Misery Index was proposed by the economist Arthur Okun in the 1970s, while he was a scholar at Washington’s Brookings Institution. When Mr. Okun proposed the index, the U.S. was in the grip of stagflation — a period of both high unemployment and high inflation. To capture the era’s misery, Mr. Okun (who had been on Lyndon Johnson’s Council of Economic Advisers) proposed simply adding the unemployment rate and the annual inflation rate into a new number.

During the most recent recession, the Misery Index peaked in September of 2011, when the unemployment rate was 9% and the inflation rate was 3.8%. It was the highest level of economic misery recorded since the early 1980s.

Since then, inflation has trended downwards and the unemployment rate has declined. But the current 56-year-low reading of the index is something of an anomaly. Inflation has plunged primarily because of the global collapse in oil prices. In January, the annual inflation rate fell by -0.1%.”

The index has remained true to the core parameters of unemployment and inflation, but a lot has changed in the structure of these variables. Still, they provide an interesting look into the psyche of consumers. Right now it appears that it’s all good. Cheap, plentiful money that jacks up stock prices and increases wealth will do that. The question is when interest rates finally go up, will the giddiness remain intact?