Update on Potential Real GDP in the Effective Demand model

Basic Effective Demand Limit, L = labor share index * 0.76

Effective demand on real GDP = rGDPeT/L (1 -(1 - 1/e)T/L)

Effective Demand Monetary rule with NGDP targeting = z(T² + L²) - (1 - z)(T + L) + (1+a)current core inflation + acore inflation average - 2acore inflation target

z = (2L + Natural real rate)/(2L² + 2L) ............................ T = capacity utilization*(1 - unemployment rate)
UT index = L - T ... (UT index goes to zero at limit of business cycle.)

New economic thinking... effective demand limit upon the utilization of labor and capital

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05/30/2013

Update on Potential Real GDP in the Effective Demand model

Here is the updated graph of real GDP, potential real GDP and Effective demand.

The dark blue line of Potential real GDP (as calculated with Effective demand principles) is staying low. The trend line is stable. You can actually see a post by Tim Duy today that shows how stable this trend line is for real GDP.

When I look at this graph and see that the Effective demand line is moving vertical at around $14.1 trillion, I see that when real GDP reaches $14.1 trillion there will be a bump against the effective demand limit. Business will be fighting for profit share. It will be interesting because it is an environment for a contraction.

Here is the updated long-run potential real GDP trend line. We have returned to natural growth after years of bubble inflated values. The natural growth path is the exponential growth curve.

Anyone who thinks that real GDP will return to the bubble values without a bubble and without a rise in labor share is delusional.

Posted by Edward Lambert on 05/30/2013 in predictions, recovery | Permalink

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Synopsis of Effective Demand

Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):