As we wrap up 2011, the likelihood of a new economic downturn in the U.S. appears to be diminishing. Recent assessments suggest that the fears of an impending recession are lower than they were a few months back. While opinions vary among experts, many economists are beginning to express optimism about the future. For example, a recent CNN poll of 20 economists shows a collective estimation of a 20% chance of recession—down from 30% just three months prior. “Preliminary data indicates solid GDP growth in the fourth quarter, which should sustain the economy for the next six months,” states Sean Snaith, an economics professor at the University of Central Florida.
Irving Fisher was a pioneer in economic thought, and while his investment guidance may have fallen short during his time, his macroeconomic insights were invaluable. During the onset of the Great Depression, he diagnosed both the problem and its solutions. Although his work is dated, its relevance today is noteworthy. The St. Louis Federal Reserve has made several of Fisher’s important works available, including the 1932 publication Booms and Depressions: Some First Principles. Among economists whose insights resonate today, Fisher stands out. The specific issues we face now may differ, and the disinflationary pressures we experience are less intense than those of the early 1930s. However, the historical echoes are unmistakable. While history doesn’t repeat itself, it often shares striking similarities. This can also be said of suggested remedies. Although we may not have anticipated our current circumstances, they appear familiar in retrospect. Explore some excerpts from Booms and Depressions and consider reading the full text.
Predicting Recessions: A New Approach for Identifying Leading Indicators and Forecast Combinations
Chikako Baba and Turgut Kisinbay (IMF) | October 2011
This study introduces a data-driven algorithm designed to pinpoint a selection of indicators from a comprehensive dataset aimed at forecasting recessions. The algorithm identifies leading recession indicators based on the forecast encompassing principle and synthesizes these forecasts. An analysis applied to U.S. data reveals that forecasts derived from this algorithm ranked among the best in a broad comparative forecasting examination at various time horizons. Furthermore, the selected indicators align well with those typically monitored by business cycle observers. The proposed algorithm boasts several advantages, including versatile applicability and objective variable selection.
Inflation is typically straightforward, but economic conditions can complicate the matter. In the U.S., there is a prevailing belief that rising inflation is always negative, while low or declining inflation is inherently positive. This viewpoint is understandable, particularly in light of historical inflation trends in fiat monetary systems. Generally, higher inflation is deemed unfavorable, while lower inflation is considered favorable. However, complications arise during periods dominated by disinflation or deflation, as has been the case recently.
Models can sometimes produce unexpected outcomes, cautions Emanuel Derman
“Wishing everyone a Merry Christmas, and to all a good night!”
The past year has been significant for finance and economic publishing, yielding numerous noteworthy titles. Below is a compilation of some memorable books featured in my weekly Book Bits column throughout 2011. Stay tuned for Part II, but for now, here is the first round of recommended reads from last year:
According to a report from the Bureau of Economic Analysis, disposable personal income (DPI) dipped slightly last month, while personal consumption spending in November saw a minimal increase of just 0.1%. This report reflects a generally disappointing trend and marks the softest month for spending and income since August.
The equal weighting investment strategy offers two compelling benefits: it is both simple to understand and competitive. This combination is hard to beat. For insights into why equal weighting performs well, you can refer to my article in the December issue of Financial Advisor: Model-Free Investing.
New claims for unemployment benefits fell once again last week, decreasing by 4,000 to a seasonally adjusted total of 364,000. While this reduction is modest, it follows a significant drop from the previous week that resulted in new claims reaching a three-and-a-half-year low. The continuity of this decline suggests that the recent trend in jobless claims may indicate a genuine improvement. If this is the case, it paints a slightly more optimistic picture for the labor market, an essential factor in interpreting the broader economic climate in the U.S.
