Does it work? A test against history
A pressure index is only useful if it rises when households are actually struggling. We recalculated it for every month since January 2005, the earliest month for which the Federal Reserve publishes the household debt-service ratio, using exactly the formula behind today’s reading.
The 2021–2023 inflation shock: the index climbed from 13.5 in December 2020 to 68.0 in October 2022, its highest reading in the series, as prices rose faster than after-tax income.
The 2008 financial crisis: it was already elevated going in, reached 58.8 in August 2008, and stayed high through 2010 as unemployment peaked.
The 2020 pandemic: this is where the index falls short. It peaked at only 22.8 in April 2020, below its long-run average, even though unemployment hit 14.8%. Stimulus payments pushed real income and the saving rate to records, which offset the job losses in the formula. That is partly accurate (household finances on average did hold up) but it misses the hardship of the millions who lost work.
Bottom line: the index is a good gauge of broad cost-of-living and balance-sheet strain, and a weak gauge of sudden job-loss shocks. Read it alongside the unemployment rate, not instead of it.
How it’s calculated
Each input is scaled from 0 (no pressure) to 100 (severe pressure) between fixed bounds, then weighted:
| Dimension | Weight | Input and bounds |
|---|---|---|
| Cost pressure | 22% | CPI inflation, 1.5% → 8% |
| Real income | 18% | Real disposable income growth, +4% → −2% |
| Employment | 18% | Unemployment rate, 3% → 10% |
| Housing | 22% | 30-year mortgage rate 3% → 9% (55%); shelter inflation 1.5% → 8% (45%) |
| Balance sheet | 20% | Debt service ratio 8% → 15% (50%); saving rate 10% → 2% (50%) |
History uses monthly averages of the weekly mortgage rate and carries the quarterly debt-service ratio forward until the next release; today’s reading uses the latest weekly mortgage rate, so it can differ slightly from the last point on the chart. Methodology version 2.0, unchanged since it was introduced.