Checking-in with the UT index

The UT index is a simple measure of the business cycle. Think of it as the first approximation of the effective demand limit. It measures labor share against the utilization of labor and capital. The idea is that the composite utilization of labor and capital, (capacity utilization x (1 - unemployment rate), will not go much above an effective labor share number (labor share index x 0.765).

Here is the updated graph with data up to the 1st quarter of 2015.

The index has reached its effective lower zero bound... and rose in the 1st quarter, 2015. It is following a basic pattern of reaching the zero bound, bouncing around there for a bit of time and then rising toward a recession.

There is not much of a prospect of a recession at the moment even though some are saying that maybe the US has entered a recession. No, effective demand is rising because headline inflation was falling and long-term interest rates were falling. But I foresee that the UT index will head back down toward zero in the next three quarters due to the Fed lifting off the Fed rate, headline inflation heading back up, unemployment falling some more and long-term rates rising. Then the economy will be in a vulnerable position to start heading toward a recession.

I will post the more complicated version of the UT index later which includes factors beyond labor share. But the UT index itself is following its basic pattern of saying that the business cycle is reaching its end.

Comments

[JimH]

So, the UT Index is a measure of slack. At the end of the business cycle the economy is booming and slack is at its minimum.

But that always occurs just before the bust. So the Index can not tell us if we are already in a recession, especially if we are still producing but only increasing inventory.

Next our economy is much different than the one in the late 1980's. Total household debt is so high that it must mean that consumers can not increase discretionary spending. They are increasing student loan debt which cannot be shed by bankruptcy so those lenders are still lending. They are acquiring light vehicles because they NEED to replace an old vehicle and the replacement is thru subprime lending or leasing which causes a problem for automobile companies later. So we have a debt ridden consumer who is probably getting marginally worse by the year, that was not true of the late 1980s.

We are continuing the Great Recession, regardless of the official definition of recessions. In that sense, we are repeating 1937. We have a little boomlet which is leaving out part time employees, or those who have left the labor force because they can not find a job. And wages are still more or less stagnant. This economy does not have any reserves to draw on.

Under those conditions I would expect the economy to be fragile. Businesses are the key borrowers now. When the FED lifts rates, I expect the economy to slow, and the number of employee layoffs to increase.

And since we are the net importers, as our economy slows Japan and Europe will be in deep trouble. As their economies slow, China and the rest of the southeast Asian exporters will be in deep trouble.

Given that very likely scenario, I doubt that the FED will raise rates.

[Edward Lambert]

JIm,
My sense is that the Fed will raise the Fed rate by September. The reason to raise rates is a very good one. The economy is weakened by persistent low interest rates. There is a need to raise the level of discipline.
Yes, there will be a slowdown, but the economy eventually gets stronger.