The Economic Depression Indicator measures 6 main components that can serve as indicators of sharp economic downturn. The components are as follows: The Stock Market, GDP, Unemployment, Strength of the Currency, Industrial Production and Bad Consumer Debt. The author recognizes the difficulty in measuring economic health with numbers. However, there is always that part of economics which is subjective. The measure of the EDI reflects the eccentricities and views of the author.
These variables are operationalized in the following manner:
The Stock Market is measured as the percentage that the Dow Jones Industrial Average sits below its 5 year high. That percentage represents the number to be averaged along with the other equal variables. If the market is positive, the score is 0.
Industrial Production is measured on a scale between 70-90% of capacity. Any score 70 or below receives 100 points. 90% of capacity would receive 0 points.
Unemployment is measured by taking the current rate and multiplying it x10. This will sometimes produce results that are greater than 100. However, this works out in relation to variable 1 which will always be less than 100.
Strength of the Currency is measured by using the J.P. Morgan Daily Weighted Currency Index. This index is an excellent predictor of economic downturns and their relative severity. The historic scale runs from 89-132. That is a range of 33. 3 points are awarded for every one point on the scale. 89 would get a score of 100 and 132 a score of 0.
Bad Consumer Debt is measured by taking the most recent Charge-off data from the Federal Reserve Board. The rate for all loans not seasonally adusted is multiplied x10. This will also occasionally produce a score over 100.
GDP is measured by taking the current rate of increase or decrease and applying it to a scale. Any negative growth automatically receives a score of 100. The scale runs from 0 to 3. Any growth above 3% gets a score of 0.
To compute the EDI, average these six variables.