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12/03/2014

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Better, to impart the key demand constraint on "capacity"?:

Productive capacity is how much the economy would produce if there were sufficient demand to employ all available labor and capital.

HI Steve,
Productive capacity implies no demand constraint on production. All labor and capital is employed. It's Says Law fulfilled.

But, counterfactual: If there were more demand, both capacity utilization and the unemployment rate (*and* the employment rate) would be different.

So productive capacity is a function of demand. Which is why effective demand, not capacity, is always the limiting factor.

As we approach a post-scarcity society where producers can always deliver more on demand, it seems like the old notion of capacity -- how much factories could be producing, running full-tilt -- is increasingly anachronistic and confused.

Make sense?

Hi Steve,
I am with you on that one. Demand is a limiting factor for productive capacity. Moreover, when effective demand is lowering, we see its effects on productive capacity. If effective demand was to start rising, we would see productive capacity rise too. More investment...
As Keynes said, "All production is for the purpose of ultimately satisfying a consumer." Chapter 5, General Theory.
It may be that the notion of capacity is confused because it is being warped by the demand effects of lowering labor shares in many countries.

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Data as of 3rdQ-2017
Effective Demand = $17.424 trillion
Real GDP = $17.157 trillion
Productive Capacity is rising to next business cycle = $23.558 trillion
UT index is falling= +1.1%
Effective demand limit = 73.9%
TFUR = 72.8%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 2.2%
Estimated Natural Real Interest rate = 2.2%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -1.7%

There is no recession for 3rdQ-2017. Chance of recession is growing as economy heads toward 2nd effective demand limit in this business cycle. I am forecasting economic contraction in 2018.




Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index

z-vertical:

z-vertical

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:

Productivity

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:

ULC LS CPI
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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