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07/28/2016

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Edward,

1. Where is the last 16 years in your chart?

2 Where is the last 8 years in your chart?

3. Can you identify data plots before and after 1995 for us.

It seems to me that utilizing cheap foreign labor should have pushed corporate profits up since at least 1995.

And since by least 1995 American workers were losing the power to negotiate higher wages. (In the aggregate) That should have pushed profits higher on domestic production.

So it seems to me that free foreign trade could be overwhelming other factors affecting profitability.

Jim,
On the right in my blog, you will see a graph called, "Exponential decay of inflation". You can click to that graph and change the dates at FRED.
When select for dates from 1995 to present, you will see core inflation slide from over 2% to under 2%.

Edward,

I use 1985 as a beginning because I do not want to be confused by extremely high oil prices in the 1970s and Volker's extremely high interest rates in the early 1980s.

When I set the beginning at January 1985 and the end at June 1992, profit is always on the negative side of zero.

When I set the beginning at April 2001 and the end at June 2016, profit is always on the positive side of zero. (How much of that profit is speculation with cheap money?)

When I set the beginning at July 1992 and the end at March 2001, profit is distributed between about -0.0125 to about +0.015. (It is noisy and with 9 data points lower than zero and 25 data points higher than zero.)

So it appears that the economy was transitioning between July 1992 and March 2001. Profit patterns were changing.

Confining myself to January 1985 to June 2016, still shows a change in the CPI from about 4.5% with lower profits, down to about 2% with higher profits. (By guesstimating some average.)

This data seems to parallel a run up in foreign trade. The Japanese were already causing huge problems for the American automakers in the 1980s. Enough that the Japanese put on voluntary quotas in the early 1980s and moved some production to the US in the late 1980s.

I would say that the CPI fell when Americans had to begin to limit their discretionary spending because of jobs losses and stagnant wages. By 1996 they were ramping up the withdrawal of equity from their homes.
See Table 2 line 1 on Page 16 here: https://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf

After 1984, the Effective Fed Funds rate was reduced further and further to prop up the US Economy. See: https://fred.stlouisfed.org/graph/fredgraph.png?g=67Vz

Those low interest rates were also affecting the economy. Speculators could use cheap money to drive up oil prices in the 2000s. That would have forced consumers to limit their other discretionary spending or borrow to subsidize it. I suppose the counter argument would be that whether consumers were buying gasoline or US made products is irrelevant. But it was not irrelevant to workers producing goods in the US and how much of the price of a barrel of oil went to foreign oil producers? Circular flows in the US economy were affected.

Raise labor share and we will get more inflation. Continue to lower labor share or leave it at current levels and we will get deflation.

The Fed has not been a driver since Chairman Volcker dealt with high inflation in the early 1980s. After 1984, when confronted with a sicker and sicker economy the Fed put it on life support. But lower interest rates only served to delay the inevitable, unless the US Congress reversed itself on free trade and they did not.

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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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