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05/15/2016

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Edward,

Bravo! I believe this is your best overall explanation yet.

I would add that your flows not only leave out government but that they leave out the effects of free trade on the US labor market.

Before about 1990 laborers could find another job with higher pay. But as free trade became more and more dominant, there were not enough jobs to employ all those who wanted jobs, so moving between employers was less and less an option.

Free trade has had a huge impact on US labor share. Especially in the areas of lower capacity utilization in the US and a weakening utilization of labor in the US.

This makes your last 2 paragraphs especially true.

Consumers can not spend what they do not have, and producers will not produce what they can not sell.

Supply siders could assume demand, until free trade reduced labors ability to consume.

HI Jim,
The whole model is different from anything out there. All the equations are unique.
It allows us to see things that we have only been able to sense before.

Edward

Edward,

I agree that your model is unique. I saw the merit of the direction of your work the first time that I saw it.

Your work will gain more acceptance after our "next" recession.

We have not recovered from the Dec 2007 recession. If we had recovered, the FED would have raised interest rates back to normal levels. The labor participation rate would have returned to the rates before 2008. The jobs created since 2008 would have been better paid full time jobs, not low wage part time jobs.

The YOY change in Retail Sales would have been going up since 2011 not down:
See: https://research.stlouisfed.org/fred2/graph/?g=4sUs

I believe that after revisions, we will find that GDP growth went negative for the 1st qtr 2016. If not then the link between a YOY negative change in the Industrial Production Index and recessions will be broken. (For the first time in over 75 years.) That would raise other serious questions.

When the next run of negative GDP growth occurs, the FED and the US Congress are going to be in unexplored territory. Heaven only knows what their response is going to be. That should cause a few supply side leaning politicians to explore other models.

A decade or two after that, the majority of the 'powers that be' will finally accept that assuming ever present demand was always a serious flaw in the the models they were using.

The only way for supply siders to save their reputations would be for them to find some excuse to move some production back to this country. But old habits die hard and free trade has become an old habit.

Currently, some economists still fervently embrace supply side economics and the others are too timid to revise their thinking about demand. (They have always ridden this now dead horse, this way!) The field has been left to you.

Hi Jim,
Interesting graph on retail sales. The graph even includes e-commerce.

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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%
Effective 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):

The UT Index

Recession Alert (developed at recessionalert.com):

recession alert

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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