As I look at the data, space is still opening up for Effective Demand. Even as plans to raise the Fed rate look more solid, effective demand is still increasing.
But the economy is close to the effective demand limit. So at some point, probably 2016, effective demand will once again start to bite down on the utilization of labor.
This assumes...
- capacity utilization stays between 79% and 80%.
- unemployment rate goes to 5% by 1st quarter 2016.
- labor share ticks up slightly until 2016 expecting some wage inflation.
- real GDP growth stays around 2.2%.
- headline inflation returns to +1% by 2016.
- year over year difference between Fed rate and 10 year treasury levels back to 0%.
- core inflation stays around 1.4%.
- Fed rate rises to 0.5% by 2016.
I believe that this chart is tainted by the holes in our statistics. Holes created during the period of your chart.
Your 1-unemployment rate is the employment rate. But that is artificially high now since the labor participation rate has been driven lower and underemployment has been driven higher. Using these techniques we could get back to 2007 unemployment rates but that fact would be meaningless to the health of the overall economy.
I note that some are saying that the lower labor participation rate is the 'boomers' retiring. But unless I have missed some new phenomena, retirees do not take their jobs with them. And there are plenty of recent graduates who would gladly take those jobs or the starting positions which would open up as employees moved up the ladder.
And beginning in about 1996 consumer borrowing played a larger and larger role in the economy. Until about 2008, when total household debt peaked. Total household debt is rising again but it is only creeping up when compared to the previous growth rates in total household debt.
You noted in your post on 2/20/2015 that "Those ED limit lines show more consistency than before."
I speculate that this is because there are fewer and fewer compensating mechanisms available to consumers and that joblessness is worse than our statistics show.
The overall effect is an economy that is overstressed and liable to fail suddenly.
In fact what I find most intriguing about your chart above is that the blue graph drops suddenly and further, than one would expect from a mere correction. I find myself asking why doesn't it just follow ED down? Hmmmmm?
Posted by: JimH | 03/10/2015 at 07:56 AM
Jim,
The ED limit lines showing consistency is related to productive capacity not growing. If productive capacity was growing, then those ED lines would be creeping to larger numbers.
And the unemployment rate is what it is. It is not artificially low. Underemployment is seen in productivity and capacity utilization.
Posted by: Edward Lambert | 03/10/2015 at 11:10 PM
When you wrote "Those ED limit lines show more consistency than before", I thought you meant less erratic???
Posted by: JimH | 03/11/2015 at 06:29 AM
The lines were more consistent in that they pointed to a smaller area at the ongoing inflation rate of 1.5% to 2.0%.
So if inflation kept steady in that range, effective demand would constrain around $16.3 trillion. And we saw something to that effect through the stock markets, but then oil dropped and long rates were coming down. That combination is shifting effective demand to a higher level over $16.5 trillion.
Posted by: Edward Lambert | 03/11/2015 at 09:02 AM