‘Misery index’ explains why households are still spending, says economist Sharon Zollner

The mystery of why so many people claim to be worried about money, but aren’t saving like it, is explained by the misery index, ANZ economist Sharon Zollner says.

Zollner was invited by the Financial Services Council (FSC) to help interpret its latest round of financial resilience research, which showed that one in two people worried about money daily or weekly, and that 300,000 more people were trapped in the worry bubble than this time last year.

“People say it’s a terrible time to buy a major household item, and yet, they have been spending,” Zollner said. “You can explain that with a wonderful economic indicator called Was life really harder in 1990, last time inflation peaked?

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“>the misery index, which is a very simple thing,” she said. “It’s the unemployment rate, plus the inflation rate.”

The Misery Index was created originally by Yale University economist Arthur Okun in the 1960s as the Economic Discomfort Index, but was supposedly renamed by United States president Ronald Reagan.

Okun designed it to give policymakers a handy chart to understand conditions in households across the US.

But Zollner said while inflation was a problem for households, it didn’t frighten them into spending less.

“Inflation, while being seriously annoying, and a serious issue for those with very little spare in their budget each week, it’s no reason not to spend all of your money, whereas the fear of unemployment is,” she said.

So while inflation had driven down consumers’ feelings of confidence, the low unemployment rate meant people felt secure in their jobs, and that appeared to be a factor in continued strong spending.

Unemployment was revealed at 3.4% on Wednesday, remaining unchanged on the previous month.

With the “pleasant surprise” of inflation having come down slightly in the March quarter, the misery index score for New Zealand actually decreased from 10.6 in December to 10.1 in March.

People were spending less because more money was being sucked out of their pocket, both by inflation and higher interest rates, she said.

Zollner forecast the economy would be confirmed as having gone into recession towards the end of the year.

But, she said recession only became “real” for the ordinary person in the street when it started threatening their job security.

The labour market lagged the broader economy on both the way up, and the way down, by three to six months, she said.

On the way down employers are reluctant to let good staff go, she said.

The Reserve Bank Te Pūtea Matua would be successful in dampening inflation, however, Zollner said: “The debate is rather around whether they will engineer a soft landing, or whether it will be something a little crunchier.”

Currently economists were forecasting a soft landing, she said.

That didn’t mean it would be pain-free, she said.

Jarrod Haar, Dean’s Chair and Professor of Management and Māori Business Massey University, was also on the FSC panel brought together in a webinar to interpret the survey data.

“We’re in this unique history time. We’ve never had such a tight labour market,” he said.

Job opportunities remained strong, however the combination of high inflation, and people’s home loan repayments increasing would be an increasingly large drag on their ability to spend.

“People’s disposable income will tank,” Haar said. “People will have to reduce their discretionary spending just to service the mortgage. We are in for some challenging times ahead.”

Also on the panel was Andrew Inwood, chief executive of the CoreData market research company, who said: “I think New Zealand will weather the storm as it weathers all storms with resilience and character, but it’s going to impact people.”

Those who would feel the crunch worst would be people who had recently entered into the housing market, he said.

On Tuesday, the Reserve Bank said households with a mortgage,would see the share of disposable income required to service the interest component of their mortgage debt more than double from its recent low of 9% to around 22% by the end of the year.

Deputy governor Christian Hawkesby said: “We are not currently seeing widespread financial distress amongst households or businesses, which reflects the strength in the economy and labour market to date. However, more borrowers may fall behind on their payments this year, given the ongoing repricing of mortgages and expected weakening in the labour market.”

What the FSC survey showed

• Almost 50% are worrying about money daily or weekly, equating to an increase of 300,000 people since last year.

• 59% say financial issues have affected their overall wellbeing, up from 53% in 2022.

• 64% of respondents aged 37 or below worry about money daily, weekly or monthly, more than any other age group.

• Only 53% of Kiwis could access $5,000 within a week in a time of emergency, down from 59% in 2022.

• 87% of Kiwis are worried about inflation, up from 80% in 2022.