The Augmented Misery Index

The original misery index, a combination of the inflation rate and the unemployment rate, was created by Arthur Okun just after the first oil crisis of the 1970s and was popularized by Jimmy Carter during his presidential campaign in 1976. As Okun’s label suggests, when the misery index is larger, people feel worse off. In June 2008, Carsten Hoegh at Credit Suisse added the annual change in house prices to the original misery index to create, in his terminology, an “enhanced misery index.” It seems obvious that when house prices fall, most people feel worse. Falling prices often presage a weak economy, and older Americans especially look to home and retirement-account values as the bedrock of their personal economic security.

We started our analysis from these insights, but we initially took a broader look at asset values than Hoegh, including not only home-price changes but also share-price changes; moreover, we focused on half-year changes, not annual changes as Hoegh did. Subsequently we dropped the share-price component, as we had found it had little correlation with presidential approval ratings.

Table 1 shows semiannual time series data—extending from 1964 H1 to 2008 H1—for each component of our augmented misery index. For the S&P500 index, we calculated percent changes over each six-month period. To construct our housing price index, we spliced the US Census Bureau’s housing price index, covering the years 1964 to 1986, with the S&P/Case-Shiller index for the years 1987 to 2008. The percent changes shown in table 1 are calculated by comparing the average housing price index for the current half-year to the immediately preceding half-year. Since rising home and share prices are generally regarded as a good thing, the signs are reversed when these components are added to the augmented misery index. In other words, if house prices rise by 3 percent, a figure of minus 3 enters into the calculation of the augmented misery index.