Can the financial ‘misery index’ predict the next US president?

By Lora Benson | Oct 25, 2016
Who will win the US presidential election? None of us have a crystal ball but the “misery index” appears to have been remarkably accurate in forecasting the result.
What is the misery index?

The misery index is an unofficial economic indicator - a basic gauge of the health of an economy - calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.

The index assumes that rising unemployment and inflation influence or affect the prevailing mood of a nation. Rising unemployment when combined with rising inflation has a major psychological, if not actual, impact on the average wage earner, so the theory goes.

How does it help predict the US presidential election?

When a misery index falls over the term of a presidency, it bodes well for the incumbent party, and particularly when the electorate experiences an economic feel-good factor towards the end of a term.

According to analysis by Bloomberg, the misery index has correctly forecast the winner of 11 presidential elections over 50 years, based on a fall in the index toward the end of a presidency.

There are only two occasions during that period where the index has failed to forecast the correct result.

2 November 1976 - Jimmy Carter defeats Gerald Ford

Gerald Ford replaced Richard Nixon in 1974, following the Watergate scandal. The theory would suggest a victory for him after a sharp fall in the index during his two years (see the chart below). But the election was clouded by the scandal. Victory was handed to Jimmy Carter.

3 November 1992 - Bill Clinton defeats George Bush Senior

The recession of 1990-91 had just ended but a late improvement in economic conditions was not enough to save George Bush Senior from defeat to Democrat nominee Bill Clinton.

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