Long-term Outlook: Deflationary Depression

Last Update: January 2009

The first chart illustrates that the economy remains very weak. As long as the Slump Index remains below -1.00%, the economy is in recession. In general, the deeper the index went, the more severe was the recession. What is different this time is that the economy is threatening to slip into a deflationary depression. The consumer price index (CPI) for December 2008 was unchanged from December 2007; in other words, the annual CPI inflation rate fell to 0.0% for the year.

Deflationary depressions have surfaced on average every eighty-four years in the US, following on the heels of financial bubbles like the one that began in 1994 and proceeded to unwind beginning in 2000. The last one was very severe and lasted twelve years from 1929 to 1941. The current one began in December 2007 and will likely last into 2011. The official unemployment rate was reported at 7.2% in December but the real rate is much higher. When the discouraged workers who have given up looking for work and those who have accepted part-time work when they really want full-time work are added in, the number of unemployed climbs to 13.5%.

As far as the stock market goes, financial bubbles always end up at the same level they began at. In other words, the S&P 500 was 460 in December 1994 when the mania surged. Now the panic side of the bubble will likely take the S&P back down to that level. Should that occur, the following long-term stock market indicator will push up into the "stocks cheap" zone of the declining channel. In other words, it would present an historic buying opportunity.