What is the Economic Stress Index?
The Economic Stress Index gives the public, policymakers, and business people a broad view of the state of the U.S. economy. The higher the number, the more stress there is, the worse the economy is. The lower the number, the better the economy is.
Which stats are used for the ESI?
The index uses three very broad economic numbers:
1) The Underemployment Rate (U-6) which is the broadest view of the employment situation. The U-6 counts the regular unemployed (known as the official Unemployment Rate); those halfway looking for jobs and those who have part-time jobs because they can’t find full-time jobs due to the state of the economy. The Index uses a rolling 3-month, non-seasonably adjusted average of the U-6.
2) The percent change in Gross Domestic Product (GDP) of the latest quarter compared to the same quarter a year earlier. For the Annual ESI, it is the annual percent change in GDP of the current year compared to the year before.
3) Change in Median Household Income for the Annual report and the change in Disposable Personal Income (minus government transfers such as Unemployment benefits) for the monthly report. The monthly report looks at a three-month moving average compared to the same three months a year earlier.
Why does the Index use these three data points?
These three statistics provide the broadest view of the economic situation because while GDP reflects overall economic activity, employment is a lagging indicator, yet income may change sooner than the employment situation.
How are the stats added up?
With the understanding that the higher the index the worse the economy is, let’s take 2009 as an example: The Underemployment Rate for the year was 16.2%. Add to it the year's 2.6% drop in GDP and add also the 0.66% to reflect the drop in income levels for 2009, and it totals 19.46 which is the ESI for 2009. When the GDP and/or Household Income are positive, they reduce the Economic Stress Index such as 1999: The Underemployment Rate was 7.44%. Subtract 4.75 for the 4.75% GDP growth of that year, and subtract another 2.69 that household income rose that year, and the Economic Stress Index lands at 0.0 for 1999.
A Few important notes:
Before 1994, the Bureau of Labor Statistics used Unemployment series U-1 through U-7, while today it uses only U-1 through U-6. The Stress Index uses U-7 for the pre-1994 years. While not measured exactly the same way, it is still the most identical to the U-6.
Secondly, the monthly ESI report before 2020 relied on Household Income data from a private research group. However, they do not provide this data anymore, so we are now using disposable personal income data from the Commerce Department for the monthly report.
Thirdly, the ESI numbers are not weighed or interpreted by any one person. Anyone who understands our simple mathematical metric, as explained above, can add up the Economic Stress Index on their own. The ESI is merely a metric to look in one shot at three broad economic numbers.
When does the Economic Stress Index get updated?
The Index is updated quarterly and is revised as the GDP number is revised. The final annual number is updated after the Census releases Household Income data which is in September of the following year.
Where can one get in contact with the Stress Index staff?
Email Stats@EconStressIndex.com.
The Economic Stress Index was created by Yossi Gestetner