Economics

Can the financial ‘misery index’ predict the next US president?

The “misery index” is a gauge of the health of the economy. It also appears to have a remarkable record of predicting who the next US president will be, but what is it telling us now?

20/10/2016

David Brett

David Brett

Investment Writer

Who will win the US presidential election? None of us have a crystal ball but the “misery index” appears to have been remarkably accurate in forecasting the result.

What is the misery index?

The misery index is an unofficial economic indicator - a basic gauge of the health of an economy - calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.

The index assumes that rising unemployment and inflation influence or affect the prevailing mood of a nation. Rising unemployment when combined with rising inflation has a major psychological, if not actual, impact on the average wage earner, so the theory goes.

How does it help predict the US presidential election?

When a misery index falls over the term of a presidency, it bodes well for the incumbent party, and particularly when the electorate experiences an economic feel-good factor towards the end of a term.

According to analysis by Bloomberg, the misery index has correctly forecast the winner of 11 presidential elections over 50 years, based on a fall in the index toward the end of a presidency.

There are only two occasions during that period where the index has failed to forecast the correct result.

2 November 1976 - Jimmy Carter defeats Gerald Ford

Gerald Ford replaced Richard Nixon in 1974, following the Watergate scandal. The theory would suggest a victory for him after a sharp fall in the index during his two years (see the chart below). But the election was clouded by the scandal. Victory was handed to Jimmy Carter.

3 November 1992 - Bill Clinton defeats George Bush Senior

The recession of 1990-91 had just ended but a late improvement in economic conditions was not enough to save George Bush Senior from defeat to Democrat nominee Bill Clinton.

What is the misery index telling us?

The most recent reading for the misery index, based on official government data for year to August, is 5.96% - calculated by adding 4.9% unemployment and 1.06% inflation.

That was up from the previous month’s 5.74% and well above a low of 5.06% a year earlier. With inflation at historically low levels, the major component of the misery index is joblessness.

How presidents have performed, according to the misery index

Current White House incumbent Barack Obama lies fifth in the league table just behind Bill Clinton, who was at the helm during the economic recovery of the 1990s.

Harry Truman enjoyed a post-war resurgence in employment to top the league. Ronald Regan, second in the table, famously won the 1980 presidential election using a slogan that nodded to the misery index: "Are you better off than you were four years ago?"

Richard Nixon and Jimmy Carter, both in power during the inflationary 1970s, endured the toughest tenures, according to the index.