I have updated the graph for the Aggregate Supply-Effective Demand model. The model has CPI inflation (less food & energy) on the y-axis. Then it has real GDP (billions of 2009 $$) on the x-axis.
The graph shows the last 9 quarters (2Q-2012 to 2Q-2014). The blue dots moving to the right below show real GDP with the CPI inflation rate at the time.
The down-sloping lines show the effective demand limit. The difference between a blue dot and its corresponding effective demand limit line shows slack in terms of the utilization rates of labor and capital. As time goes by, the slack declines until it reaches 0% when real GDP enters the zone of the natural effective demand limit.
There is a consistency with the effective demand limit lines. 7 of the past 9 lines are grouped together in a band with only two quarters being outliers. What happened in those 2 quarters? Both outlier quarters happened in the 4th quarter of the past 2 years. In 2012, more income was shifted to labor before a rise in capital income taxes. In 2013, more income was shifted to capital before a rise in labor taxes.
Real GDP actually bumped against the ED limit back in 4thQ 2013. We saw real GDP contract a bit. After that we saw effective demand jump back into the band of lines. Also real GDP grew again. I realize part of the contraction in real GDP was due to weather, but not all of it.
The projection now is for real GDP to enter the zone of the effective demand limit between $16.000 trillion and $16.160 trillion. This will happen before 2014 ends assuming the calibration of 0.762 for effective labor share is within a close margin of error.
What will happen to real GDP when it enters the zone? Real GDP will slow down and not want to surpass the natural limit because firms begin to lose profits in the aggregate. However, if firms are willing to accept lower profits by raising labor share, then the effective demand limit can be shifted right and real GDP will continue to grow. That scenario happened at the end of the 1990's. But so far, the ED limit line has not moved above its band to show that firms are willing to to share profits. So far, firms are stubbornly holding onto their profit rates.
Since the Fed rate is so low still, we may see real GDP push beyond the natural limit like in the 1960's and 1970's. I suspect not though, because firms are more tuned in to profit rates with the use of computers. They know instantly when the profit rate is being cut. And they can react faster than they did back in the 60's and 70's by cutting production.However, it is possible for real GDP to go up to $16.250 trillion before it puts on the brakes. Yet, I suspect not.