What is the Economic Stress Index?
The Economic Stress Index gives the public, policy makers and business people a broad view of the state of the U.S. economy. The higher the number, the worse the economy is. The lower the number, meaning there is less Stress, the better the economy is.
What 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), plus 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. In the Annual section 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 Disposal Personal Income (minus government transfers such as Unemployment benefits) for the monthly report. The monthly report looks at a three month moving average of current levels 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, and 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 2008 as an example: The Underemployment Rate for the year was 10.5%. Add to it the 0.1% drop in GDP in 2008 from the 2007 levels and add also the 3.6% that income fell in 2008. All three stats were negative/bad so it adds to the Index and thus generated an Economic Stress Index of 14.2 (10.5 + 0.1 + 3.6 = 14.2). 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 GDP growth, and subtract another 2.69 that household income rose, and the Economic Stress Index was 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 disposal personal income data from the Commerce Department for the monthly report.
Please note that 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 once a month. However, the annual data is updated after the Census releases Household Income data and also after GDP numbers are corrected every few years.
Where can one get in contact with the Stress Index staff?Email Stats@EconStressIndex.com.