The model is simply that labor share sets a limit on the utilization of labor and capital. If the utilization of labor and capital goes above an effective labor share, capital starts consuming its own aggregate income.
Like I have said since late 2014, the Dow will orbit around the 17,300 point as an attractor state at the end of the business cycle. The Dow is at 17,230 today after falling below 16,000 in January and February.
The business cycle is still holding out. The cascading effects of recession have not started yet. They have not been sufficiently coordinated so to speak. But I stand by my view of the Dow. It can rise above 17,300, but not rise much above before another move downward would eventually happen.
I foresee the Dow peaking between 17,300 and 17,600 as the time to go defensive.
As for Monetary Policy...
The business cycle has not changed its dynamics much. There is no large bubble with expanding dynamics. Monetary policy is holding value steady as some firms hurt and other firms get strong. The idea of the Fed is to find a balance so that the economy gets healthy through a prolonged steady state dynamic.
Data as of 4thQ-2016
Effective Demand = $17.587 trillion
Real GDP = $16.805 trillion
Productive Capacity is rising to next business cycle =
UT index is rising = +3.9%
demand limit = 75.9%
TFUR = 72.0%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 1.6%
Estimated Natural Real Interest rate = 2.2%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -0.5%
There is no recession for 4thQ-2016. I am expecting a recession by the middle of 2017.
(UT index is rising which implies a recession is on the way.
Click on Graphs below to see updated data at FRED.
UT Index (measure of slack):
z derivatives in terms of labor & capital:
Effective Demand, real GDP & Potential GDP:
ED Output Gap:
Corporate profit rate over real cost of money:
Exponential decay of Inflation:
Measures of Inflation:
YoY Employment change:
Speed of consuming slack: yoy monthly:
Speed of consuming slack: quarterly:
Real consumption per Employee:
Will real wages ever rise faster than productivity?:
Real Wage Index:
Productivity against Effective Demand limit:
Bottom of Initial Claims?:
Tracking inflation expectations:
M2 velocity still falling:
All in one:
Double checking labor share with unit labor costs & inflation: