Capital Income Consumption is Finally Falling

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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06/07/2018

Capital Income Consumption is Finally Falling

One factor in the economy that I track is the percentage of Capital Income that is used for Consumption. The number is attained by using the NIPA tables and labor share.

Here is the updated data up to 1st quarter 2018.

The last 2 quarters show that capital income is spending less on consumption. The percentage is falling. This normally sets up a trend toward a recession.

What does it mean when capital income starts consuming less? Basically capital income is choosing to save its money thinking that an economic contraction is coming. The idea is to protect assets by consuming less and saving more.

Here is the percentage of capital income going to savings.

Capital income is saving more in the last two quarters. (The vertical red lines show the starts of recessions)

These trends in capital income in the last two quarters would normally signify a path toward recession.

Posted by Edward Lambert on 06/07/2018 in business cycle | Permalink

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This is a very interesting indicator. Thanks, Prof!

Posted by: Gary Anderson | 06/09/2018 at 09:54 AM

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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):