When the economy takes a tumble, economic prognosticators turn to the numbers, comparing the downturn to past recessions. The decline of major stock market indexes, such as the Dow Jones Industrial Average (DJIA), the Standard and Poor's 500 and the Nasdaq are closely tracked. In addition, major economic indicators such as the unemployment rate and gross domestic product (GDP) are monitored and opined upon. While these indicators certainly provide insight to captains of industry and Wall Street titans, the Misery Index reflects the country's economic health through the lens of two items that matter most to those of us on Main Street: inflation and employment.

Tutorial: Economic Indicators To Know

The Misery Index, created by economist Arthur Okun (and often incorrectly attributed to Robert Barro), is calculated by adding the inflation rate and the unemployment rate. Government statistics provide both numbers, with the yearly change in the Consumer Price Index (CPI) serving as half of the equation and the national unemployment rate serving as the other half.

The index is used to characterize the current economic condition. The main assumption in this index is that an increasing unemployment rate and high inflation have a negative impact on economic growth.

Fame In the 1970s
The Misery Index gained its fame in 1976 when Jimmy Carter disparaged his competitor for the oval office, Gerald Ford, by suggesting that no man responsible for giving the country a Misery Index as high as that seen during Ford's presidency had a right to even ask to be president. Four years later, the Misery Index topped 20 and set a high-water mark that still stands today. Carter was swept from office when Ronald Regan asked the American people: "Are you better off than you were four years ago?"

A Look Back at Misery

Year Inflation Rate
(%)
Unemployment
Rate (%)
Misery Index
1973 6.16 4.86 11.02
1974 11.03 5.64 16.67
1975 9.20 8.48 17.68
1976 5.75 7.70 13.45
1977 6.50 7.05 13.55
1978 7.62 6.07 13.69
1979 11.22 5.85 17.07
1980 13.58 7.18 20.76

More Recently
The Misery Index declined in popularity after Reagan took office, largely disappearing from popular reference until 2008, when the credit crisis struck and unemployment rose. Suddenly, misery was back. Steadily climbing unemployment numbers and an uptick in inflation revived interest in tracking the nation's misery. (For more in-depth information on the credit crisis, take a look at our article on the Credit Crisis.)

Misery's Return

Year Inflation Rate Unemployment Rate Misery Index
2007 2.8% 4.6% 7.4
2008 3.8% 5.8% 9.6
Source: Bureau of Labor Statistics

How Bad Can It Get?
When unemployment is on the rise and the specter of inflation rears its ugly head, "how bad can it get?" becomes a popular question. While there is no definitive way to answer this question, there are some historical precedents to consider.

In 1980, the national inflation rate hit 13.58% when it peaked under Jimmy Carter. The Misery Index also peak in 1980, hitting 20.76 for the year. National unemployment peaked in 1982 at 9.71% under Ronald Regan.

The national statistics, however, are somewhat misleading. While they provide an average for the nation, they do not reflect reality at the more granular level. Consider that in early 2009 the unemployment rate in the state of California topped 10%. At an even more granular level, El Centro, California posted the highest unemployment rate in the nation at 22.6% in December, 2008 (more than double the 11.1% seen in Detroit, Michigan). By comparison, cities such as McKeesport, Pennsylvania saw unemployment hit 13.7% during the decline of the steel industry in the 1980s.

What You Can Do
While none of us can fix the economy or stop the ax from falling if our job is on the line, we can all take steps to prepare for the worst case scenario. Living within your means is the first step. (Read Five Signs That You're Living Beyond Your Means to learn what to watch for before you find yourself drowning in debt or filing for bankruptcy.)

Once you have the spending under control, it's time to save. Take a look at Are You Living Too Close To The Edge? if a missed paycheck will make your finances collapse, and read Build Yourself An Emergency Fund for help determining if you have enough savings to cover the costs of unforeseen crises.

Planning ahead also comes into play when your job is on the line. If you must leave your job, The Layoff Payoff: A Severance Package will help you go out fighting for the best benefits you can get, and Taking The Lead In The Interview Dance will guide you as you learn the steps that will help lead you to a new career.

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