Futility Index

  The Futility Index

An Updated Measurement to More Accurately Capture the

American Economic Sentiments of The Consumer

Cheer up, America! This is the admonition from economists, politicians, and prognosticators. Unemployment is low. Inflation is back in its cage. And, yet, our experts remain puzzled by the dour attitude of Americans when it comes to their economic prospects.

We thought we had a pretty good bead on economic sentiments with the Misery Index, a relatively new construct from the 1970s, that taps into how average people were faring economically by primarily coupling the unemployment rate with the inflation rate.

Today, the Misery Index is significantly is below the 2008 crisis and its repercussions that carried into 2012, and only slightly above the pre-COVID, prosperous five-year stretch between 2015 and 2020.

Yet, the specter of an impending crisis hovering above the American populace today is palpable, like a thick, ominous fog. Consumer confidence data supports widespread foreboding. Either this fear is irrational or the Misery Index has fundamental deficiencies that are missing something important.

The specter of an impending crisis hovering above the American populace is palpable

Misery Index Deficiencies

We believe the Misery Index comes up short is the social, economic, and psychological impact of interest rates, debt, and the deficit. “Misery” as a concept is ephemeral and transitory in nature. Wars eventually end. Jobs return. Supply chains break free. Gas prices fluctuate but eventually moderate.

However, interest rates and their impact on individual and national debt and deficits are incalcitrant, obstinate, and stubborn. They last across generations and can ruin families. They are relentless to the point where they cause fatigue and ultimately, a sense of futility.

Employment rates, which seem foundational to any economic sentiment indicator, become less relevant compared to stunted buying power and eroding wages. You might have a job and a 3% annual raise. But that means little when inflation and your debt obligations exceed any income growth. People may certainly become justifiably miserable, but they become something much worse: demoralized.

Employment rates become much less relevant compared to stunted buying power and eroding wages

History of the Misery Index

The Misery Index has been a historically useful economic statistic that was developed by Art Okun, a scholar and Economist at the Brookings Institution, during the 1970s.  The Misery Index intends to depict how the average person is doing economically based on combining the seasonally adjusted unemployment rate and the annual inflation rate.  There are several variations on the Misery Index theme including the Barro Misery Index which combines the core misery index with the interest rate and the difference between the actual and trend rate of GDP growth. 

These indices are useful in capturing the prevailing plight of citizens in light of the current economic elements of employment rates and inflation in the case of the misery index or employment, inflation, interest costs, and current economic trend in the case of Barro’s misery index. With the unemployment rates averaging approximately 5.7% over the last 35 years below 4% for the last 3 years, the Misery Index has moderated in recent years to just over 7% at the end of 2023 compared with 12-13% range in the 1970s and 1980s and yet consumer sentiment as measured by the University of Michigan fell for the fourth straight month as they remain less confident in the economy than before the pandemic.

The Futility Index: Lost Buying Power, Personal Debt and National Debt Obligation

The current U.S. consumers’ outlook reflects ongoing concerns about the current rate of inflation as money continues to lose its buying power, higher interest rates that affect mortgage rates, credit card debt and other consumer loans further draining financial resources, and the looming and growing obligation of our national debt which represent a harbinger of higher taxes, reductions in benefits, or other currency debasement initiatives such as printing more money. 

As a result, BankerAdvisor created a modified index that ignores the unemployment rates and incorporates interest rates and increases in the national debt as an alternative economic indicator that may be useful given the current economic conditions – the Futility Index. 

The Futility Index combines:

• The annual rate of inflation
• The Federal Reserve Funds Rate, and
• The increase in the U.S. national debt as a percent of GDP.

Combined these three measurements more accurately illustrate the average consumers’ current and inevitable future challenges resulting from significant additions to national debt arising from fiscal policy management decisions.

In an era of relatively full employment, the Futility Index focuses squarely on the eroding value of wages, interest rate costs and the prospects of more of both of these – the relative increase in the national debt.

Fiscal and Monetary Policy Management Challenges

The U.S. monetary and fiscal policies cycles over the last several years featured slower economic growth, relatively low unemployment, higher interest rates, and increased levels of inflation fueled by intentionally large government deficit spending (expenditures levels exceeding GDP by 3% or more) leading to unsustainable borrowings and a public debt to GDP ratio.  The national debt as a percentage of GDP has doubled since 2008 following the global financial crisis.  More recently, our economic policies seem to include both expansionary and contractionary policy actions at the same time seemingly in an attempt to maintain the current economic trend.

The U.S. budget deficit is projected to be $1.9 trillion in 2024. The Congressional Budget Office recent projections indicate that the expectation that the U.S. debt will exceed $56 trillion by 2034 as a result of increase spending and interest expense exceeds tax revenue.  A record amount of U.S. government debt is maturing in 2024 which will require the U.S. to sell upwards of $10 trillion in U.S. government to finance the maturing debt, the current deficit shortfall, interest costs, and the Federal Reserve’s balance sheet runoff of Treasury securities. The U.S. government may be forced to increase the interest rate on treasury securities in order to attract sufficient investment levels or in response to a change in our debt rating from a rating agency leading to higher interest rates for consumers and businesses.

The U.S. consumer confidence declined in June with surveys citing fatigue over a prolong period of high inflation and interest rates. Recently, the IMF warned that the U.S. is running deficits that are too large which creates risks for the global economy. There is growing concern that the accumulated deficits and debt service can over time ultimately result in the diversion of money away from private investment impeding economic and wage growth as a result of increasing debt service obligations. The U.S. economy is likely to begin to see the effects of the significant increases in national debt and debt service including congressional debates about the debt ceiling, increasing taxes and reducing government spending or both. If all of these deteriorations proceed unabated, the Futility Index could reach historic highs and present more significant challenges for the U.S. economy.