Misery Index redux

A couple of US numbers appeared in the last two days that are a little hard to reconcile, but let's give it a shot.

First we have the US non-farm payrolls data for November, released by the BLS on Friday. The report showed that the US economy added 199,000 jobs in the month, sufficient to push the unemployment rate down to 3.7 percent.  The job gain is slightly below the average gain of 240,000 posted over the past twelve months, but is surely sufficiently large to give the lie to any suggestions that the US economy may be about to slip into recession, let alone that it is already in one.  Moreover, hourly earnings rose 0.4 percent in the month, to stand 4.0 percent higher than a year ago. That pace of wage gains is now higher than the headline inflation rate. 

That all sounds like good news, so how do we explain the second number: President Biden's approval rating among voters now stands at a mere 37 percent, according to CNN. Of course, a lot of factors enter into people's opinions of the President -- the Israel-Hamas war and the endless standoffs in Congress being but two of them -- but the most striking finding is that "Roughly seven in 10 respondents said they would rate the country’s current economic conditions as poor".

Seriously, people-responding-to-polls?  You and everyone you know has a job and wages are rising -- what's poor about that?  If we turn the clock back to the stagflation years of the late 1970s and 1980s, we discover that the distinguished economist Arthur Okun came up with something he called an economic discomfort index, which soon became known by the snappier moniker of "the misery index". It was very simple: the sum of the annual increase in headline CPI and the unemployment rate.  In an era when both unemployment and inflation could veer close to double digits, it was a useful shorthand way of showing just how bad things were.

Those bad days are, thankfully, long gone, and the misery index no longer seems useful. A rough calculation would show that the current value for it is close to 7 percent, a far cry from the 16 percent levels seen during the Ford and Carter presidencies -- and indeed, well below the level seen earlier in the Biden presidency.  What seems very clear is that in an economy where low unemployment is considered normal, the main factor that makes people feel miserable about the economy is inflation. This makes intuitive sense -- even in a severe recession, maybe 10 percent of the population will be affected by unemployment, whereas high inflation affects just about everyone. 

Now, it's true that the negative public opinion of Biden's economic management has diminished somewhat in recent months, which seems reasonable enough, given the steady decline in headline inflation. And yet 70 percent of the population is seemingly unimpressed. It is not easy to find a scientific explanation for this. However, one thing that long experience confirms is that people always and everywhere overestimate the current rate of inflation -- you would not find many Americans who believe that inflation really is close to 3 percent. 

Another factor is the growing role of social media as a news source. Lord knows, the traditional media have never been especially good at communicating economic data. However we now live in a world in which people get their economic updates from online experts who don't know the different between monthly and annual figures, or even worse, blowhards who assert without any evidence whatsoever that the official inflation figures are routinely rigged to understate the true picture. 

Good luck turning that around, Team Biden.