Update on path to next recession
Real GDP came out today. The number was $15,790 billion for the 3rd quarter 2013.
Back in July, I posted an article that Real GDP had an appointment to keep with Effective Demand. I showed a series of graphs from the past of how real GDP grows up to the effective demand limit before a recession. The two meet at the natural level of output. Well, I simply want to update the latest graph.
Graph updated with long-run supply curve after comment by Arne in the comment section below.
It looks like they will meet within 2 to 4 quarters depending on how slow 4th quarter 2013 turns out to be with the government shut down.
Both real GDP and effective demand are staying on trend. When they meet, theoretically output will reach the natural level and further increases in demand would get translated into inflation. But inflation may not appear this time. Most likely labor and capital utilization will stop increasing and real GDP will try to push upward on the effective demand limit. Then it becomes a game to see if a recession will occur or if the effective demand limit can be pushed higher to avoid a recession.
I will add one more update on the aggregate profit rate. (up to 3Q-13)
The aggregate profit rate may be peaking. Then it starts to slide downward signalling an eventual contraction of the economy. The aggregate profit rate turning downward tends to coincide with real GDP hitting the effective demand limit.
Just keeping an eye on these things.
Since (as I understand it) youare telling us that the system dynamics will change when Real GDP reaches Efective Demand, it becomes meaningless to extrapolate along the trend after that point. It might be worth drawing attention to that by redrawing your chart with two curves ending at a point rather than two curves intersecting at a point.
It’s like the AS-AD model where you have the short run supply curve go beyond the long run supply curve. What I should do is add a vertical long run supply line at the point where the two curves meet.
I updated the graph with a LRAS curve. I put the curve where the lines meet, but the zone of the LRAS curve would get triggered between 73.0% and 74.0% TFUR on the x-axis.
I an unsure whether I think that helps with the point I was trying to make. It you were plotting the trajectory or an artillery shell, you would not bother to show it past where it hit the ground. Not interesting and not valid.
Here, the curves to the right of the LRAS are beyong the models boundaries. Since they would be interesting, it may be even more important to visualize that they are not valid.
But real GDP can go past the LRAS curve and start to create something like a demand pull inflation. So those curves are normally drawn beyond the LRAS curve. It is not like they automatically stop. sometimes they do, sometimes they don’t.
Here is an example…
Good ‘stuff’ – I simply want to note that ‘rate of profit’, contrary to your chart, has not been flat or tending upwards but the opposite. Whether the Chicago Fed or many Marxists, the rate has been tending downwards – something I take to be central to, particularly, post-1970 political economics, both national and global.
Do you know how they calculating the profit rate? It is important to have good numbers for value of equipment, buildings, private fixes assets… and you have to make sure real and nominal values are separated.
The first link is from 1988. Kind of out of date.
Here’s M. Roberts short answer —
”michael roberts Says:
August 10, 2012 at 10:33 am |
The graph is from my own work using US BEA NIPA and fixed asset tables. This particular version is what I call the ‘whole economy’ measure – namely GDP (less depreciation) less employee compensation for surplus value divided by net fixed assets plus employee compensation. This graphic was first used in my book, The Great Recession (2009), but I updated it with forecasts to 2015 here. The book outlines the method used in an appendix. There are a myriad of issues in measuring the rate of profit for the US and elsewhere, some of which have been debated on this blog. I have dealt with these issues at length in my paper, Measuring the rate of profit, profit cycles and the next recession, 2011.”
Differing methods are used, e.g., I believe Andrew Kliman’s is closer to Marx’s method…while Fred Mosely took unproductive labor into account.
And yes, I know the CFRB article is from ’88, my point though being that not only the left speaks to falling rate of profit. Still, not using a labor theory of value does put a dent in the CFRB;s work.