Update on Real GDP and the Output Gap

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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07/30/2014

Update on Real GDP and the Output Gap

With today's revisions of real GDP, I want to post two graphs.

Trending Real GDP according to Effective Demand

So after the rise late last year, and the dip in the 1st quarter and the rise in the 2nd quarter... The potential GDP of Effective Demand is simply back on its exponential trend line. Yet, real GDP is closer to its projected effective demand limit roughly around $16.1 to $16.2 trillion.

The Output Gap

The output gap as determined by Effective Demand is based on the % difference between capacity utilization and effective labor share. The output gap is currently in range for a normal top to the business cycle. The implication is that there is little spare capacity left in the business cycle.

Posted by Edward Lambert on 07/30/2014 in business cycle, output gap | 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):