The 1st quarter real GDP number came out today. I had predicted that it would go upwards to about $13.800 trillion. The number came out today at $13.750 trillion. Thus, I expect it to be revised up next month.
Let's look at the AS-ED model for the past 3 quarters.
First, the blue dots are where the economy is in terms of real GDP and the inflation rate. (1 is 3Q-2012, 2 is 4Q-2012 and 3 is 1Q-2013) The red dots determine the Natural level of real GDP (LRAS, Long-run aggregate supply).
We can see that from 3Q-2012 to 4Q-2012, real GDP did not change much, but the Effective demand curve slid along the aggregate supply curve. The cause was effective demand shifting right due to a steep rise in labor share of income when many people took income before the tax changes of 2013. As a result, the LRAS vertical line shifted right also.
In the 1stQ-2013, much of that extra income was spent, even on housing. Thus we see in the 1stQ-2013 that the aggregate supply curve shifted strongly to the right. This was expected after a surge in effective demand. The LRAS curve shifted also. I have colored in a zone where the LRAS curve will be once we get the labor share of income number within two weeks. I put in a high (labor share 0.5% over the 4Q-2012) and a low (labor share 0.5% below the 4Q-2012). Between the two is the range to visualize where the economy went in the 1stQ-2013.
It is important to watch the price levels of the red dots (crossing point of effective demand and aggregate supply with the LRAS curve). Right now it is holding steady at around 4% to 5%.
Here is a quick graph to show that LRAS curve price level since 1988.
The LRAS curve price level will reach a low point before a recession. What happens is that this interest rate falls in an economic expansion toward the inflation rate. It bottoms out when it is close to the inflation rate.
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