In this research of effective demand, real GDP is said to be now hitting the limit of effective demand. This means that we should see some signs that the economy is turning toward a recession.
So... do we see any signs?
Starts of recessions are vertical red lines.
Calculated from th NIPA tables, the capital savings rate has hit a historic low level of around 60% and bounced back in 3rd quarter 2013.
Why would a rise in the capital savings rate signal a contraction? At first take, it doesn't make sense. Owners of capital are making more funds available for lending. For example, in 3rd quarter 2013, capital savings roughly rose $300 billion, while government borrowing and private investment rose by roughly the same amount. That doesn't seem like a cause for a recession if investment increases.
When you look at the graph above, a rise in capital savings of off 60% will occur before a recession. Why?
If capital income is saving more, they must by consuming less. We see this in the following graph.
Capital income reached a high in 2nd quarter 2013, and then fell in the 3rd quarter. As you can see, this change has preceded the last two recessions.
When profits run high, capital income consumes. Yet, the aggregate profit rate also reaches a high. Here is the aggregate profit rate.
The aggregate profit rate has been flat for 2 years. A decline in the aggregate profit rate would lead us into the next recession. This needs to be watched over the next 2 quarters.
The aggregate profit rate will decline in response to a rise in capital savings.
This graph shows that when the aggregate profit rate reaches a maximum, the capital savings rate is roughly reaching a minimum. The lines in this graph are roughly showing that the economy will start turning toward a contraction. (red vertical lines are starts of recessions.)