U.S. Misery Index Falls Sharply With Lower Energy Prices

During the past year, the misery index has fallen sharply as a result of the decline in energy prices which have offset the rise in the unemployment rate. During the last three months the decline stalled, however, as the decline in prices stabilized and unemployment moved higher. The March index reading of 8.1 compares to 9.6 in 2008.

The so-called misery index is a constructed U.S. business cycle indicator. It adds the year-to-year change in the CPI to the unemployment rate. Thus, for those who are employed it reflects the degree to which their incomes are being eroded by higher prices. For those who are unemployed, it reflects the diminished income and the anxieties produced by a higher level of joblessness.

Lower prices for gasoline (-39.3% y/y) and for heating oil (-30.5% y/y), along with reduced growth in "core" prices (1.8% y/y), have dropped the gain in overall consumer prices to -0.4%. This first negative reading on record has gone some way in bolstering real consumer spending power. That gain works for all consumers, whether employed or unemployed. And it counters the drastic increase in the number of those unemployed as reflected in the rise to 8.5% in the jobless rate, nearly double the low of two years ago.

Along with lower taxes, these forces together recently have combined to lift the gain in real disposable income to 2.2% from 1.3% during all of last year. During the last twenty year there has been a negative 55% correlation between the level of the misery index and the growth of real disposable income.

The misery index can be found in Haver's USECON database under Business Cycle Indicators.

A white paper describing the process and methodologies employed by the federal banking supervisory agencies in their forward-looking capital assessment of large U.S. bank holding companies was published on Friday. It can be found here.

Recession Catches Rural America from the Federal Reserve Bank of Kansas City can be found here.

The consumer confidence reading for Italy has been weak in this cycle but not quite as weak as it was in the previous two downturns in the early 1980s and early 1990s. Despite the bad press this business cycle keeps getting, in Italy consumers have not generally gotten as despondent as in the past two cycles nor have they stayed as depressed for as long. That is probably against public perceptions of this recession. Indeed, when I looked at these results I double checked the spread sheet to see if I’d entered the dates correctly – and I had. I was (I am!) surprised.

The chart on Italy’s consumer disposition is demonstrating a clear uptrend, albeit in an oscillating fashion. This month’s reading is the highest it has been Since December 2007. Moreover the 5.1 point jump m/m is the fifth largest month-to-month jump in the index since early 1992. The level of the index is still low but the jump is large.

The rise in the index is notable – especially given the size of the rise - since Italian unemployment is expected to rise further and consumer conditions are importantly a reflection of labor market conditions. In Germany, too, the GfK index of consumer sentiment which is a survey that projects readings for May shows consumer confidence unchanged even though last week the leading German research institutes came out with harsher assessments for the German economy for 2009. For some reason- and Italian consumers are not alone in this – consumer confidence is firming in the face of news that is in many ways worsening.

The devil is in the details -- Italian consumers assess their own mood with an index value of 104.9 which stands in the 33rd percentile of its range of values back to January of 1992. The index is weaker than this level only 27% of the time. So while these are low readings they are not among the worst ever. The overall situation for the past 12-months is evaluated as in the 58th percentile of its range, ranking 121st out of 208 observations leaving it in the bottom 41st percentile of its range. These statistics give the raw readings more meaning by putting them in the context of the range of values and in the context of rankings (frequency). We use ‘the percentile of the range of value’ instead of ‘percent of mean’ since these components can move in both positive and negative ranges: ‘percent of mean’ is just not meaningful. Being in the 58th percentile means that although the reading is above the mid point of its range it is still a moderate reading: In fact it appears as an even lower reading in this case since 60% of the time the assessment is better than this. In this way we can use percentage of range and ranking data to close in on what the current reading really means

Over the next 12 months the reading for the overall situation is, however, lower residing in the 20th percentile of its range and being lower only 16% of the time. By this reading we see that conditions have not been good and they are expected to get worse. Still, in the last two recessions these metrics were even worse. Unemployment for the next 12-months remains very bad, in the 75th percentile of its range but with the fifth worst reading overall- a ranking that puts it in the top 3% all time. That is to say that unemployment fears have been worse than this only 3% of the time.

The household financial situation is in the 38th percentile for the last 12 months and is expected to be in the 49th percentile of range for the next 12-months. While 49th percentile is a ‘mid range’ reading that is misleading since the actual reading is lower than that level only about 17 percent of the time. Apparently the range is wide and skewed.

Perhaps the real reason Italian consumer sentiment is not so bad is that Italians remain optimistic about the future, despite their adverse sentiment. When they assess if it it’s the right time to make a major purchase they put the current situation in the 40Th percentile of its range. But when they assess the future they put it in the 95th percentile of the range. So Italian consumers seem to admit that the current situation is bad and may get worse in the period ahead. Yet they remain optimistic that there will be a better time to buy things in the coming months by a wide margin. Consumer optimism on the time to make major purchases stands in marked contrast to assessments of the overall situation for the next 12months as well as to fears of unemployment and pressures on the household budget. We might be encouraged to dismiss some of this optimism except we see it arising in Germany as well. It’s a trend to watch for elsewhere.

The IFO index in German rose in April sparking some optimism that the index has made its financial cycle low.

Sectors are improving across the board. MFG improved forma diffusion reading of -42.9 to -38. Wholesaling improved to -30.6 from -31.7. Retailing is up to -26.5 from -28.3. Services stands at -7 after posting a -10 in March. On construction slipped on the month to -24.3 from -22.1.

The IFO diffusion indices are still deeply into negative territory. The overall index stands in the bottom 5 percentile of its range. The combination of weakness across sectors is clearly unusual since the overall IFO is at a lower position in its range than are ANY of its components. The IFO’s signal joins that of the Zew index and of the Markit MFG and Services sector indices that point to a turnaround but continue to embrace very low current readings