Dow's 'Record Highs' Misleading Without Including Inflation

The Dow Jones Industrial Average closed at a record high Tuesday, but only if you look at the Dow in non-inflation-adjusted terms. Adam Davidson of the Planet Money team tells Melissa Block that the Dow is of almost no value as a measure of U.S. economic activity.





And I'm Audie Cornish.

And a record close. That's what we've been hearing both today and yesterday as the Dow Jones industrial average climbs upwards.

BLOCK: That may be an ear-grabbing headline after a recession and years of unimpressive growth. But we begin this hour with a different take from Adam Davidson of NPR's Planet Money. Hey, Adam.


BLOCK: And I understand, Adam, that you've been a real wet blanket on this. You've been telling people all over NPR that we shouldn't be covering this story, and one part of that is that you really hate the Dow.

DAVIDSON: Well, I think I have exactly the same feeling that Charles Dow had back in 1896 when he created the Dow Jones industrial average. He knew - he openly talked about how it's a very crude measure. It wasn't even state-of-the-art for 1896. All it does is it takes the stock prices of a handful of companies and adds them up. The more sophisticated indexes today do all sorts of things to take into account lots more stocks and lots more industries and also processes them based on how big they are.

So, for example, just yesterday, just a handful of companies like IBM and HP and Alcoa having particularly good days that can hurtle the Dow Jones index upwards. And anyway, no matter how lousy a measure it is, it did not reach a record this week.

BLOCK: Wait a minute, Adam. That's - and front pages, news programs all over the country, including this one, talked about a record high being set.

DAVIDSON: Here's the thing. For reasons I cannot understand, nobody adjusts for inflation when they're talking about the Dow. I don't understand why. We do that with every other number that matters, from wages to house prices, to GDP. The Dow reached close to 12,000 back in the year 2000. In today's dollars, the Dow's peak back then would be about 15,500 or a little bit higher. So we are still 10 percent below the record it reached 13 years ago.

If I told you, oh, I'm all excited, I'm all excited, my salary is now the same number that it was back in 2000, you would tell me, well, that's not such great news. You should make more dollars now than you did in 2000 because of inflation. And anyway, even if it did reach a record, this is not the measure we should be paying attention to.

BLOCK: OK. Well, if it's not the measure we should be paying attention to, what is?

DAVIDSON: There are, as I mentioned, a handful of indexes that do a much better job, like the S&P 500 or the Wilshire 5000. But the thing is only a tiny percentage of Americans should be watching the stock market on a day-to-day or certainly an hour-by-hour basis. About half of Americans own stocks, but the vast majority of us should not look at it more than once a year - maybe once a quarter.

We know Charles Dow himself only looked at the Dow Jones index once every few months. And the reason for that is we should just be buying and holding and not getting very excited about any one day's movement. But the crucial thing is, no matter how great the measure of the stock market you're using is, all it tells you is how the stock market is doing. And that is not a proxy for the health of the overall economy.

BLOCK: And it does seem, Adam, that we've seen, even when corporate profits are great, the rest of the economy doesn't necessarily follow suit.

DAVIDSON: In fact, we see that the stock market often goes up exactly when unemployment goes up, which is something most of us do not celebrate, do not think is a great thing. The stock market really only has a loose correlation with things like inflation, the overall growth of the economy, the things that really matter to us.

And more crucially, for the last generation, the last 30 years or so, I'd say the central issue in the U.S. economy is that for all the economic growth we've had, that has gone, rather famously now, to a very tiny percentage of the very richest Americans. And it's important to note that 80 percent or so of stocks are owned by the richest 10 percent of Americans.

So if you're measuring the stock market well, and if it does reach a historic high, then all you're celebrating is the fact that the top 10 percent got a little bit richer, and I'm not convinced that's something that the media needs to be running around celebrating.

BLOCK: OK. That's our resident Dow curmudgeon Adam Davidson from NPR's Planet Money team. Adam, thanks a lot.

DAVIDSON: Thank you, Melissa.






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