Monthly Archives: November 2011

Defining An Economic Depression

What is the official definition of an (economic) depression? Although the term is often heard, the term seems to lack a well-structured definition.

There is a section discussing depressions on The NBER’s Business Cycle Dating Procedure:  Frequently Asked Questions page.  As seen in the discussion, it says:

The term depression is often used to refer to a particularly severe period of economic weakness. Some economists use it to refer only to the portion of these periods when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned to close to normal levels. The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s.


However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.

A January 14, 2009 article in Forbes, titled “What Is A Depression, Anyway?” also examines the issue as to how a depression is defined, and finds “While there’s a fairly standard definition for a recession (two quarters of shrinking gross domestic product), there isn’t one for a depression.”  However, the article later states with regard to a depression:

… a 10% contraction is often cited as the tipping point.

A March 10, 2009 CalculatedRisk blog post titled “What is a depression?” also examines the issue.  An excerpt:

Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.

As well, other sources confirm the lack of a standardized definition, although the 10% decline in economic activity (measured via real GDP) is most commonly cited.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1195.19 as this post is written

Economic Forecast Efficacy Of Recent Years

On November 25, the Liberty Street Economics blog (Federal Reserve Bank of New York) published a post titled “The Failure to Forecast the Great Recession.”

The post examines the inability of the New York Fed, as well as the vast majority of professional forecasters in general, to predict the “Great Recession.”  It also mentions the failure of forecasters to predict the decline in housing.

Although I found the entire post to be worthwhile, here are a few notable excerpts:

Economic forecasters never expect to predict precisely. One way of measuring the accuracy of their forecasts is against previous forecast errors. When judged by forecast error performance metrics from the macroeconomic quiescent period that many economists have labeled the Great Moderation, the New York Fed research staff forecasts, as well as most private sector forecasts for real activity before the Great Recession, look unusually far off the mark.


On the basis of their analysis, one could have expected that an October 2007 forecast of real GDP growth for 2008 would be within 1.3 percentage points of the actual outcome 70 percent of the time. The New York Fed staff forecast at that time was for growth of 2.6 percent in 2008. Based on the forecast of 2.6 percent and the size of forecast errors over the Great Moderation period, one would have expected that 70 percent of the time, actual growth would be within the 1.3 to 3.9 percent range. The current estimate of actual growth in 2008 is-3.3 percent, indicating that our forecast was off by 5.9 percentage points.

Using a similar approach to Reifschneider and Tulip but including forecast errors for 2007, one would have expected that 70 percent of the time the unemployment rate in the fourth quarter of 2009 should have been within 0.7 percentage point of a forecast made in April 2008. The actual forecast error was 4.4 percentage points, equivalent to an unexpected increase of over 6 million in the number of unemployed workers. Under the erroneous assumption that the 70 percent projection error band was based on a normal distribution, this would have been a 6 standard deviation error, a very unlikely occurrence indeed.

The post also examines more recent (April 2011) forecast performance, and finds that “the level of real activity in 2011 has been disappointing relative to expectations.”

My comments:

Economic forecasts and their accuracy is of great importance for a variety of reasons.  It is because of this importance that this blog features many economic forecasts and financial market predictions.

I have previously commented on forecasters’ inability to predict the adverse financial events of 2007-2010.   As well, a page titled “Predictions” serves as “a brief recap (in no way all-inclusive) of some forecasts and predictions that have been made during the Financial Crisis.”

The accuracy of predictions prior to and during the “The Great Recession” serves as a reminder to how difficult financial crises, and their impacts, are to predict.  The inability to predict “The Great Recession” should serve to cast uncertainty on forecasters’ ability to predict future severe economic weakness, especially since the level of complexity inherent in the overall economic environment is, according to my analyses, growing.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1194.85 as this post is written

Long-Term Chart Of The ECRI Weekly Leading Index (WLI)

On an intermittent basis I have commented on ECRI’s methodologies and its indices, including the WLI Growth.  I include the WLI Growth in the monthly update of economic indicators.

Although ECRI’s WLI Growth measure receives far greater attention, it should also be noted that there is a ECRI WLI (Weekly Leading Index) from which the WLI Growth measure is derived.

Here is a simple definition of the U.S. Weekly Leading Index, as seen in the ECRI glossary:

The WLI is a forward-looking composite leading index that anticipates cyclical turning points in U.S. economic activity by 2-3 quarters. Updates are available on Friday mornings to members at 9:00 AM and to the public at 10:30 AM. The monthly data starts in 1949, and the weekly data in 1967.

For reference purposes, here are two charts that depict the ECRI WLI.  Both are from Doug Short’s post of November 21.  The first is a long-term weekly chart of the ECRI WLI:

This next chart depicts both the WLI and WLI Growth measures, as noted, for comparison:


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1167.43 as this post is written

Updates On Economic Indicators November 2011

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The November Chicago Fed National Activity Index (CFNAI)(pdf) updated as of November 21, 2011:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the November 8 update titled “Index forecasts weaker growth” :

The October update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 1.1% by March. Persistent unemployment, elevated debt levels, high energy and food prices and low confidence have stalled consumer spending. Businesses are hesitant to expand amid uncertainty.

The ECRI WLI (Weekly Leading Index):

As of 11/11/11 the WLI was at 122.1 and the WLI, Gr. was at -7.8%.

A chart of the WLI Growth since 2000, from Doug Short’s blog of November 18 titled “ECRI Recession Watch:  Decline in Growth Index Continues to Moderate” :

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of August 31 was at 41.5, as seen below:

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, depicting 11-12-09 to 11-12-11:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the November 18 release, the LEI was at 117.4 and the CEI was at 103.5 in October.

An excerpt from the November 18 release:

Says Ataman Ozyildirim, economist at The Conference Board: “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded. Improving consumer expectations, stock markets, and labor market indicators also contributed to this month’s gain in the LEI as did the continuing positive contributions from the interest rate spread. The CEI also rose somewhat, led by higher industrial production and employment.”


I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1192.98 as this post is written

The November 2011 Wall Street Journal Economic Forecast Survey

The November Wall Street Journal Economic Forecast Survey was published on November 10, 2011.  The headline is “Economists See Smaller Chance of U.S. Recession.”

I found various aspects of the survey to be interesting, including the following excerpts:

The 52 economists surveyed in November—not all of whom answer every question—put 1-in-4 odds that the U.S. will experience a recession in the next 12 months, down from a 1-in-3 chance they were seeing just two months ago, when concerns were at their highest level since the recent recession ended in June 2009.


The economists, on average, put 2-in-3 odds that the euro zone will fall into recession.

The current average forecasts among economists polled include the following:


full-year 2011 : 1.7%

full-year 2012:  2.3%

full-year 2013:  2.6%

Unemployment Rate:

December 2011: 9.0%

December 2012: 8.7%

December 2013: 8.1%

10-Year Treasury Yield:

December 2011: 2.17%

December 2012: 2.79%

December 2013: 3.36%


December 2011:  3.3%

December 2012:  2.2%

December 2013:  2.3%

Crude Oil  ($ per bbl):

for 12/31/2011: $88.68

for 12/31/2012: $91.60

(note: I comment upon this survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)


I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1192.98 as this post is written

“America’s New Poor” Segment – Notable Excerpts

Yesterday, CBS aired a segment on its “Sunday Morning” show titled “America’s new poor.”

While dynamics similar to those discussed in the segment have been noted in previous posts on this blog, this segment is yet another notable reminder of the changing economic condition and the growing need for food assistance.  This segment focuses on an area, Forsyth County, near Atlanta.

Here are some excerpts that I find especially notable:

But for more families here, prosperity is a pretense. The job’s lost, the savings are gone, and the big house is either in foreclosure or on its way. And just keeping food on the table is a struggle.

So Forsyth’s newly-needy file into local food banks.

Yesterday’s GIVERS have become today’s TAKERS.


“The new poor could be you, me, your neighbor, your church member, somebody who has been affected by the economy,” she said. “Many of our people who have come for assistance used to be our donors. And they’ll say, ‘I never thought I’d have to do this, never in my wildest dreams.'”


Nearly 15 percent of Americans are now receiving food stamps, a record level, and a jump of about two-thirds since 2007.

One in SIX Americans – 49 million people – say they have trouble putting food on the table.

At Forsyth County’s Lambert High, eight percent of kids now get free lunch, double the number three years ago.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1215.65 as this post is written

Building Financial Danger – An Update

On October 17 I wrote a post titled “Danger Signs In The Stock Market, Financial System And Economy.”  This post is a brief update to that post.

My overall analysis continues to indicate that there is an elevated and growing level of danger.

Many prominent parties seem to be fixated on the European financial problems, and seem to be overlooking other problem areas.  While I believe that the European debt problems are very serious and have broader implications, (as explained in yesterday’s post “Europe And Contagion – Broader Implications“) the other problems are of great concern as well.

Overall, my analysis indicates that this continues to be an environment of rising risks and therefore is dangerous in nature.  As far as the stock market is concerned, the situation as described in the October 20 post (“Thoughts On The Next Stock Market Decline“) still applies.

As reference, below is one view of the stock market that I find interesting.  It is a 1-year daily chart of the S&P500 (through November 17) with annotations by Ron Walker of the The Chart Pattern Trader:

(click on chart to enlarge image)(chart courtesy of, annotations by Ron Walker)


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1216.13 as this post is written

Europe And Contagion – Broader Implications

Yesterday, The Wall Street Journal had an article titled “Turmoil Spreads in Europe.”  The subtitle is “Bond Market Selloff Hits Nations Seen as Healthy, Raising Specter of Contagion.”

An excerpt:

Europe’s debt troubles on Tuesday spilled over to top-rated nations that had been largely untouched by the crisis—including Austria, the Netherlands, Finland and France—in an ominous sign for European policy makers.

My comments:

I continue to believe that “contagion” already exists.

Also, the broader implication of the European situation – and one that is entirely lacking recognition –   is whether the overall concept of sovereign debt is (in the process of) being repudiated.  If so – and it appears too early to definitively answer – the implications are massive.

Here is what I wrote about both of these issues in a January 10 article titled “10 ‘Front and Center’ Problem Areas That Pose a Threat to the Economy” :

European debt crisis: This situation appears to be unresolved in many respects. In fact, it almost appears to be a slow-spreading contagion. One interpretation of this overall situation is that it may signal a repudiation of (sovereign) debt. Should this interpretation prove accurate, it would not bode well for our highly-indebted global economy.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1230.63 as this post is written

Walmart’s Q3 2012 Results – Comments

I found various notable items in Walmart’s Q3 conference call transcript (pdf) dated November 15, 2011.  I view Walmart’s results and comments as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented on their quarterly results; these previous posts are found under the “paycheck to paycheck” tag.

Here are various excerpts that I find most notable:

comments from Mike Duke, page 7:

While we feel good about the progress in our stores, our
customers remain concerned about jobs, and only one in 10 Walmart Moms that we surveyed view the state of the U.S. economy as good.  They want to save money. They’re juggling credit cards, using coupons, and skipping restaurants and vacations. There is a real sense
that the economic strain is taking its toll.

from Bill Simon, page 14:

Economic conditions in the third quarter remained largely unchanged.  Our core customer was still impacted by high unemployment and continued uncertainty over the economy, leading to declining consumer confidence. Although they remained higher than a year ago, gas prices, which positively affect customer trips, moderated during the quarter.

from Bill Simon, page 14:

Rising food costs continue to be a major concern for customers. We hear from some shoppers that they believe it will be more difficult than ever to afford holiday meals for their families.

from Bill Simon, page 14:

As others in the industry reported, customers continue to see food prices rise in key categories, such as produce, dairy and meat. Walmart continues to invest in absorbing some of these increases to ensure price leadership in our markets. During the quarter, grocery inflation was
approximately 4 percent, in line with what’s been seen throughout the industry. But given our price investment, the impact to our customers was substantially less.

from Bill Simon, page 16:

Customer feedback on the return of layaway has been
overwhelmingly positive and layaway transaction volume continues to exceed plan. Our customers tell us that they appreciate that we’ve brought back this service, and it’s a great way to help families on a tight budget shop for Christmas. As a reminder, we’ve added service fees to reduce layaway cancellations in the fourth quarter.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1247.72 as this post is written

Philadelphia Fed – 4th Quarter 2011 Survey Of Professional Forecasters

The Philadelphia Fed Fourth Quarter 2011 Survey of Professional Forecasters was released on November 14.  This survey is somewhat unique in various regards, such as it incorporates a longer time frame for various measures.

The survey shows, among many measures, the following expectations:


full-year 2011 : 1.8%

full-year 2012 : 2.4%

full-year 2013 : 2.7%

full-year 2014 : 3.5%

Unemployment Rate: (annual average level)

for 2011: 9.0%

for 2012: 8.8%

for 2013: 8.4%

for 2014: 7.8%

As for “the chance of a contraction in real GDP in any of the next four quarters,” estimates range from 11.8-17.3% for each of the quarters through Q4 2012.

As well, there are also a variety of time frames shown (present through the year 2020) with the expected inflation of each.  Inflation is measured in Headline and Core CPI and Headline and Core PCE.  Over all time frames expectations are shown to be in the 1.4-3.6% range.


I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1257.81 as this post is written