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In this video, I want to talk about a recent tweet by Jeffery Gundlach on the misery index. The original Misery index was created by economist Arthur Okun during the Johnson administration in the 1960s. The misery index helps determine how the average citizen is doing economically and it is calculated by simply adding the Annual inflation rate to the Seasonally Adjusted unemployment rate.
The logic behind the misery index is pretty simple. As inflation rises the cost of living increases and as unemployment rises more people cross the economic line into poverty. Therefore, this index is a quick and dirty metric to gauge the health of the economy since both high unemployment and high inflation are major factors to the average wage earner.
In this chart, we can see the peaks and valleys of the index, with most of the low points occurring above 5%. For the most part, the misery index has remained between 5% and 10%. Recently, in April 2021, due to the COVID-19 shutdown and consequent high unemployment, the Index shot up to 15.03%. June 2021 saw 5.9% unemployment and 5.4% inflation for a total misery index of 11.3%.
In a recent tweet, Jeffery Gundlach pointed out and I quote that The “Misery Index” (sum of CPI and the Unemployment Rate) is back in double digits, with an 11.3% reading for June 2021. No wonder the Consumer Sentiment numbers cratered in last week’s release. To unpack this tweet, first we need to know what the baseline value for the misery index should be in a normal economy.
A healthy economy will produce a misery index of between 6% and 7%. This is also known as a Goldilocks economy, where the ideal rate of growth is 2%-3%. To achieve this level of economic efficiency, employers need to find workers. There needs to exist a natural rate of unemployment of between 4% and 5%.
When the unemployment rate is lower than that, companies can't find enough good workers to maximize production. A healthy economy also requires some inflation. That is because falling prices encourage people to delay non-essential purchases since they could potentially save money by waiting for these products to get cheaper.
In simple words, deflation discourages consumers from spending money which leads to economic slowdown. The Federal Reserve aims for a target inflation rate of 2% year-over-year. I have discussed why deflation is terrible for the economy in another video that I will link here. Since, the unemployment rate in the US at the time of recording this video is roughly around 5%, the unemployment rate is where it should be.
Therefore, Jeffery Gundlach believes that the reason why the misery index is spiking is due to higher inflation rates. The official metric used by the US government to track inflation is the Consumer Price Index (CPI). This chart shows you the Consumer Price Index (CPI) posted on the U.S. Bureau of Labor Statictics’s website.
As you can see, the CPI index has gone up to 5.4% in July 2021. The Federal Reserve has been consistent in telegraphing to the market that the expected jump in inflation will be temporary, but DoubleLine Capital's Jeffrey Gundlach disagrees. Gundlach thinks the Fed is "guessing" when it comes to its view on inflation and has warned that the central bank may be underestimating the impact of its easy monetary policies.
Jeffery Gundlach pointed out in a recent interview with Bloomberg that and I quote "There's plenty of indicators that suggest that inflation is going to go higher, and not just on a transitory basis, for a couple of months". Gundlach pointed to a substantial rise in commodity prices and increased money printing as to why a jump in inflation will not be transitory.
Therefore based on Jeffery Gundlach’s hypothesis, the misery index is actually expected to rise in coming months. Another interesting point to consider is that over the past 30 years, the government has changed the way it calculates inflation more than 20 times. These ‘methodological improvements’ to the CPI are said to give a more accurate measure of consumer prices.
However, these changes have been implemented with the purpose of underestimating the real level of inflation in the US. I have discussed these changes in another video that I will link here. There is actually an interesting website called Shadow Government Statistics (www.shadowstats.com) that reports the CPI numbers without the modifications made by the government.
I have borrowed some charts from their website that show an estimate of inflation for today as if it were calculated the same way it was in 1990. As you can see, the real inflation rate, labeled as SGS which stands for Shadow Government Statistics, is almost twice of the officially reported CPI numbers.
I will add the link to this chart in the description box below so that you can check it out yourself. The reason that I mentioned these methodological changes to the CPI was to point out that the real inflation rate and therefore the real misery index is much higher than what is implied based on the official numbers.
Plus, assuming that Jeffery Gundlach’s hypothesis is accurate that the inflation rate is going to rise, the misery index in the US is going to go even higher.
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