I have been in communication with Dwaine over at recessionalert.com and he is using the Effective Demand equations in extraordinary ways to develop nice models for recession detection.

He suggested that I put real GDI, real Gross Domestic Income, into the Effective Demand equation. He said real GDI brings a lot to the party. Ok, so I put real GDI in and did the graph... Here it is...

We still see that Effective demand stays above real GDI, but there is something extraordinary. Do you see how Effective demand comes down and crimps real GDI right before the crisis? That happened in 3Q-2007. The recession actually started in 4Q-2007. There's appears to be some sort of shock to income right before the recession. Let's compare this graph to the one using real GDP. Keep in mind that the other variables in the equation do not change.

The crimping upon GDP output is not seen. Dwaine is right. There is more to see in the real GDI data.

By the way, if you are interested in recession detection, I recommend that you go check out recessionalert.com. I have seen the model that Dwaine has created using some special numbers from the Effective demand equations. He wrote me in the morning and said that the model is the one he will use from now on. and He said he has seen hundreds. I am happy this research is producing such good results.