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Again, nice post. I've been using labor share/capacity utilization to get an idea of what the long-term unemployment rate is. My figures align with your own (7 - 7.5%) but there are periods of biased residuals from my model when fit globally. I get the sense that there's another variable that could help explain these deviations and fit into your framework nicely. I'm leaning towards some investment cycle dynamic, but that isn't backed up by anything solid.

I'll reflect on it and let you know if I stumble on anything. If you have any ideas I'm all ears.

Take care.


Can you describe when those biased residuals are seen?

Yes, absolutely. The two periods I see are about Q1 1991 to Q3 1993 and Q4 1997 to Q1 2002. I would consider it an anomaly but given that the dot-com bubble occurred in that time span I think there's something there.


Does this recent post spark any ideas?

It does. However, I think I might have isolated part of the problem. My statements cover Q4 1997 to Q1 2000. Net domestic investment as a percent of GDP increased during this period while capacity utilization fell and labor share stayed relatively constant. Net domestic investment is inversely correlated with the unemployment rate. So given this information it makes sense why the unemployment rate overshot to the downside somewhat. And curiously you inferred that the effective demand limit became inflated during that period of time.

Take it easy. Always enjoy your work.


I think you hit the nail on the head...
Exactly right, the cap util fell but investment shot way up. So the potential of the economy grew faster than real GDP. The result was a mildly higher labor share, and a bubble. That affected the unemployment rate and produced a bias.

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Data as of 1stQ-2018
Effective Demand = $17.386 trillion
Real GDP = $17.379 trillion
Productive Capacity = $23.479 trillion
UT index is at effective demand limit = +0.03%
Effective demand limit = 74.0%
TFUR = 74.0%
ED Fed rate rule = 3.4%
Estimated Natural Real Interest rate = 2.2%
Short-term real interest rate (fallen from 2.8% peak in 2014) = 2.4%

There is no recession for 1stQ-2018. Chance of recession is growing as economy heads toward 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index



z derivatives in terms of labor & capital:

z derivatives in terms of labor & capital

Effective Demand, real GDP & Potential GDP:

ED, real GDP & pot rGDP

ED Output Gap:

ED Output gap

Corporate profit rate over real cost of money:

Corp profit rate over real cost of money

Exponential decay of Inflation:

Corporate profits impact Inflation

Measures of Inflation:

Measures of Inflation

YoY Employment change:

YoY employment change

Speed of consuming slack: yoy monthly:

Speed of consuming slack

Speed of consuming slack: quarterly:

Speed of consuming slack quarterly

Real consumption per Employee:

real consumption per employee 2

Will real wages ever rise faster than productivity?:

Productivity & Real Wages

Real Wage Index:

real wage index



Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

M2 velocity still falling:

Measures of Inflation

All in one:

All in one

Double checking labor share with unit labor costs & inflation:

My Photo
Edward Lambert: Independent Researcher on Effective Demand.
Some links for economic analysis
Fed Views - San Francisco Fed, around 10th of each month.
Well's Fargo monthly - around 10th of each month
Well's Fargo weekly
Well's Fargo Interest rate report
Well's Fargo Economic indicators
T. Rowe Price weekly market wrap-up
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Member since 03/2013