Funny, It Doesn't Feel Like a Recovery

Even as the global economy creeps out of its worst recession since World War II, a key indicator of well-being is flashing red for policymakers. From the U.S. to Europe, so-called misery indexes—the sum of a country's unemployment and inflation rates—are rising toward levels unseen for much of the last two decades. That's particularly worrisome because the anxiety generated by the actual or anticipated loss of a paycheck alongside accelerating prices could leave average consumers unable or unwilling to spend enough to keep the economic recovery alive. Public officials may also face pressure to keep stimulating their economies or risk losing the support of voters.

An invention of American economist Arthur Okun, an adviser to President Lyndon Johnson, America's misery index now stands at 11.8%, the highest since May 1991 and more than 3 percentage points above its average since.

For now, the gloom is not as deep in other industrial economies. But that may change as payrolls keep shrinking and inflation picks up after the deflation scare of 2009. That's especially true in Europe, where tighter hiring and firing rules tend to delay job cuts. While well below the 36.1% of Venezuela and the U.S.'s 1980 peak of 22%, the misery indexes for Britain, Canada, and the 16-nation euro zone are already higher than a year ago.

Many eco-watchers believe the malaise will linger, thanks to a jobless recovery. U.S. unemployment, already near its highest level in 26 years at 10%, won't peak until it reaches about 10.75% in 2011, predict economists at Goldman Sachs (GS). And the European Commission forecasts joblessness in the euro zone will average 10.9% next year, up from 9.8% in October and the highest since the single currency debuted in 1999.

Already, companies are scrambling to entice anxious consumers. Wal-Mart (WMT), for example, offered a $50 gift card to purchasers of an Xbox 360 game console after Christmas. And McDonald's (MCD) began offering a $1 breakfast menu nationally for the first time this month.

The last time the U.S. misery index was this high, in the early 1990s, gains in consumer prices accounted for almost half its reading. Today inflation makes up less than a fifth of the measure. That lack of price pressure should allow central banks such as the Federal Reserve to delay raising interest rates until employment improves. The median forecast in a recent Bloomberg survey of economists was for the Fed to leave its benchmark rate near zero until the third quarter, and then only lift it to 0.75% by yearend.

Governments won't have as many options to goose their economies since they have already run up record budget deficits to fight the financial crisis. The U.S. has a shortfall of more than $1 trillion, while 13 of the nations using the euro are under EU-imposed deadlines to reduce their deficits. That means even if they wanted to curb joblessness and appease voters, many governments lack the resources to further cut taxes or boost spending.

That's why economist Pierre Cailleteau of Moody's Investors Service (MCO) believes combining the unemployment rate and budget deficits as a share of gross domestic product may yield a better measure of modern misery.

On that score the U.S. has an index of just over 20%, evenly split between its budget gap and joblessness. That's more than double where it was in 2007. Spain's index is almost a bruising 30%.

Whichever methodology you use, the misery metric will likely have political implications near-term. British Prime Minister Gordon Brown must call an election by June with his traditional misery index now at 10.6%, while U.S. President Barack Obama faces his first midterm congressional elections in November. Their opposition will surely seek to capitalize on voter discomfort with the economy.

That's what happened in 1976 when Jimmy Carter exploited a misery index of around 13% to help defeat Gerald Ford for the Presidency—only to see it rise to more than 20% four years later, costing him the same job. So unless they can cut their current indices, lawmakers could suffer their own form of misery this year: lost elections.

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