Methodology:

The goal being simplicity, the Distress Index uses no more than a handful of statistics. The included statistics were chosen because they are widely held to be significant and uncontroversial. All the data for the index is collected by the Federal Government.

Included Statistics:

• Unemployment: A measurement of unemployed individuals collected by the Bureau of Labor Statistics.
• Consumer Price Index: The official measure of inflation kept by the Bureau of Labor Statistics.
• Gross Domestic Product: GDP is the market value of all final goods and services in a particular geographic area over a period of time. It is the most widely recognized measure of the “health” of economy. The DI substracts percent change in the GDP from the previous year  from the index. Source: St. Louis Federal Reserve.
• Total Capacity Utilization (TCU): This is a measure of the utilization of the all available capital goods. The DI uses one minus this percentage, since higher utilization is generally a good thing. So for instance, if TCU is at 70 percent, we would add 30 percent to our index as a measure of the idle capacity. Source: St. Louis Federal Reserve
• Household Financial Obligations as a percent of Disposable Personal Income (FODSP): This measure is intended to gauge the ability of individuals to participate in the consumer economy. Source: St. Louis Federal Reserve

It is important to emphasize that no statistic will ever fully articulate what is happening in the real economy. The real economy is made up of living, breathing, planning, acting individuals. Statistics are simply an abstraction and, as such, imperfect. Nevertheless, FEE feels this index has substantial value for two reasons.

First, it gives us a tool to help interpret what the media and government are telling us about the economy. Second, we hope it will give voice to the taxpayer and the frustrating conditions he or she is enduring these days. We hope the index will keep pressure on policy makers and opinion leaders to make decisions that improve the economy rather than distressing it further.

Historical Perspective:

Historical High: 63.9 in March of 1975
Historical Low: 29.5 in February of 1973
High during the current Recession: 61.7 in June 2009
1970s Average: 44.47
1980s Average: 46.72
1990s Average: 40.07
2000s Average: 46.58

Index By President:

Jimmy Carter: 46.5
Ronald Reagan: 46.3
George H.W. Bush: 44.0
Bill Clinton: 38.0
George W. Bush: 46.4
Barack Obama: 59.8

After a cursory historical analysis on the index, we can see that the results were pretty impressive. The chart below shows the Distress Index since 1967 with economic recession periods highlighted. There seems to be at least a superficial correlation between the index breaking 47.0 and the economy falling into recession. (Note we have not tested the strength of this correlation). In most cases the index appears to lead the recession’s beginning and end, which would seem to indicate that the index is actually useful in telling us where we are headed, not just where we’ve been.

View Data Table or Download CSV.

About Paul Cwik:

Paul Cwik is an associate professor of economics at Mount Olive College. He holds a B.A. from Hillsdale College, an M.A. from Tulane University, and a Ph.D. from Auburn University. He has taught classes at several colleges and universities, including Auburn University, Campbell University, and Walsh College. His work has been published in academic journals that include The Quarterly Journal of Austrian Economics, New Perspectives on Political Economy: A Bilingual Interdisciplinary Journal, and Business Ethics: A European Review. As an Austrian economist who is unafraid to use numbers, he specializes in econometrics and business cycle theory and is particularly interested in the blending of Austrian macroeconomics with finance.

About Mike Van Winkle:

Michael Van Winkle is Web Director for the Foundation for Economic Education. He received his M.A. in Social Sciences from the University of Chicago and has been published in the Chicago Tribune, the Chicago Sun-Times, and various online publications.

About the Foundation for Economic Education:

The Foundation for Economic Education (FEE) is a non-political, non-profit, tax-exempt educational foundation dedicated to the study and advancement of the “first principles” of freedom: the sanctity of private property, individual liberty, the rule of law, the free market, and the moral superiority of individual choice and responsibility over coercion. The Foundation’s periodicals, The Freeman: Ideas on Liberty, Notes from FEE, and In Brief (an e-commentary) offer timeless insights on the positive case for human liberty to thousands of people of all ages in America and around the world. FEE’s publications, lectures, programs, and seminars have been bringing individuals together to explore the foundations of free enterprise and constitutionally limited government since 1946.