The Distress Index

0:00This is much more than the six people I was anticipating yesterday. Nice. Okay, unlike these two previous papers which were serious in, you know, getting in there, this is really just a bit of fun. I put together this thing called the Distress Index. Now, why in the world would I do something like that? Well, we've all heard of the Misery index, right? And that's just simply inflation plus unemployment. And it was used as a political tool to say, aren't the Carter years just horrible and awful? And last fall, Mike Van Winkel of Fee, Foundation for Economic Education, said, hey, what we need is a new index, you know, something to update the misery index. And he said, well, it should be simple, it should be using existing data, and we want something that anyone could basically put together, so it shouldn't be heavily manipulated by all that econometric type stuff, right?

1:06Because look, the misery index was just inflation plus unemployment, okay? So, since this is business cycle theory, too, I figure I should show what a business cycle is, and we see that we've got our peaks, and recessions, and recovery, and peak, and the Austrian cycle theory is really, It's an explanation of this guy right here. It's an explanation of the upper turning point. And so when I put together the index here, I noticed that there was some strong correlation. But if you look at the data, I'm sorry, if you look at the newspapers, they're only talking about recession, right? Well, are we in a recession? Well, December 2007 was the beginning of the recession.

1:52Okay, fine. And then, well, June of 2009, we're out of the recession. Well, what does that mean? Well, that means we're here. That's what it means. If we've hit rock bottom and we're starting to come up, well, that's still bad, right? So, I want to talk about the bad, right? I want to talk about this, right? The stuff underneath, the under the trend part. So, the distress index isn't really trying to say, Are we in a recession? It's, are economic times bad? Are we in distress? So, the goal is to make it simple. The distress index uses no more than a handful of statistics, and they're chosen because they're widely known, widely recognized, and pretty uncontroversial. And all the data is collected from the normal places, from the federal government.

2:50If you go online, you'll see a little thing like this, and you can get that widget, and then you can put it in your own webpage and popularize it. And basically, it's important to emphasize that no statistic will ever fully articulate what's happening in the real economy. The real economy is made up of living, breathing, planning, acting individuals. Statistics are simply an abstraction as such, imperfect, nevertheless, this index can have some value. Why? Well, first it gives us a tool to help us interpret what the media and the government are telling us about the economy, right? If we have a high distress number, you know, well, we're out of the recession, yeah, but we're really hurting still. I think that's more significant. And then secondly, and Mike and I say, we hope it'll give us a voice to the taxpayer and the frustrating conditions he is enduring these days, the hope is that The Index will keep pressure on policy makers and opinion leaders to make decisions that

3:51improve the economy rather than distressing it further. And that's a big hope, right? Are politicians really going to listen? Oh yeah, no, probably not. But maybe, we'll see. Okay, so here it is. Here's what the Distress Index looks like. We'll get to the guts in a little bit. So after a cursory historical analysis on the index, we see that the results were fairly These are the yellow lines. The chart shows that the index from 1967 with the recessions being highlighted. There seems to be at least a superficial correlation of the index breaking above 47 that says, yep, we're in deep trouble. In most cases, the index appears to lead the New recessions beginning and end, which would seem to indicate that the index actually has a little bit of predictive power, but that's not really what it's supposed to be doing.

4:54Okay, so let's focus in on more modern times. And so here's 1996, and here's the recession. So, that brings me to some distressingly fun facts. First of all, the overall average is just under 44 when we're in a recession and when we're not in a recession. So, there's a swing there. by President, by time period, we can see that Carter was averaging about 46 and the 70s was about 44, Reagan, not much better, not much better, I mean if you remember under Reagan, unemployment was 7% consistently, 6 and 7%, under George Herbert Walker Bush, it's coming down, things are improving, and you can see the 90s, the 90s, were actually quite a great time, and I would attribute this to the technological revolution, the invention of, well, the unleashing of the internet and all of the costs coming down as a result of it.

6:16And then George W. Bush, we're back up at 46, and Obama's at 59.1, so, well, they're just distressingly fun facts. Okay, so what are the components? What makes this up? Well, there are five things. First, unemployment, CPI, and we'll just get that from the Bureau of Labor Statistics. Then we have gross domestic product, and people can argue, oh, should we use GDP? But what we're going for is something that people tend to recognize. Okay, now here we have total capacity utilization. Now, usually what this is doing is it's calculating the percentage of how much capacity is being utilized. And what we want to do is we want to take the reverse of that. So we subtract one. So if there's total capacity utilization that's 70 percent, then what we're doing is we're using 30 percent. That's what our Household Financial Obligations as a Percent of Disposable Personal Income Also, we're doing the negative of GDP, because if GDP is going up, then we're less distressed.

8:04So we flipped that around. And people then asked, well, shouldn't you use maybe some other things? And why not use PCE, Personal Consumption Expenditure, instead of CPI? So I looked into that, and the result was not much difference. And then they said, well, maybe you should use monthly GDP numbers from eforecasting.com. And so I plugged that in, and basically all it did was just create a whole bunch of extra noise. It didn't add anything extra. They said, well, maybe you should use real private fixed investment instead of GDP, right? Because that's what you Austrians care about, is capital structures, so maybe we should

9:21Statistical improvements, but the loss was in the simplicity of the index or the recognition of the statistics. Okay, so Here's all the different modifications that I threw in and basically they're all moving basically the same. The one that I do want to focus in on is this yellow one here, which is where I use real private fixed investment. And it looks like this. This is instead of GDP. What do we get? We get much larger swings, much bigger amplitudes, but basically attracts the same. So, what would be more appealing to the average guy on the street, real private fixed investment or GDP? We stuck with GDP. So, here's Distressingly Fun Facts Part 2.

10:19And the ones in red, these guys over here, are the numbers if we put real private fixed investment instead of GDP. And you can see it tracks about the same, right? I mean you just have larger amplitudes, but basically the numbers line up. Although in this one we see that Carter is actually better than Reagan and George Herbert Walker Bush here, The 70s were actually better than the 80s, which I found interesting as well.

11:05Is this something that people are going to be able to run huge econometrics, maybe, if you want. So, where can you get more of this? You're like, yeah, I've got to get this distress index stuff. Well, the fee website has this at distress-index and there's a data sheet that we put together. So, if you want all of the data, you can just download it and run your own regressions and do your own checking and such. and you can get the widget from fee.org and you can email me and if you want to do something or if you use it as part of your forecasting tool, let me know and if you have improvements or suggestions, email me and it will be extra super fun.

11:55So that's my index.