Dow moving sideways… stronger headwinds into 2015
I have written that the Dow will orbit around the 16,800 level and not go much higher from there. My view is based on Effective Demand causing profit rates to peak and decline. Today we see the Dow back down to 16,719 on worries of global growth and profits which start coming out tomorrow.
As I see it, Europe, Japan and China are all hitting their effective demand limits. The US will be hitting within a few months as more data comes out. Yet, the important thing to realize here is that stocks have actually moved sideways since early June… that is 4 months. The stock markets are not growing like they did in the past 3 years.
Stop for a second and think about Fed policy… if global growth is slowing down, and Europe is on the edge of a recession, and profit rates are declining… then the Fed rate will be stuck at the ZLB… OMG!
Stop and think for a second about unemployment… Most see the recent drop in unemployment as a sign that the economy is picking up steam and recovering. They see the end of the business cycle far away. Whereas I see the drop in unemployment as a sign that firms are trying the best they can to maintain profit rates. I see the end of the business cycle within arm’s reach. The stock markets today supported my view.
And one more thing… Potential GDP in the US is much lower than the CBO says. It is even lower in other countries. Olivier Blanchard says so in a video that came out today. (1:35 to 2:10 minute point)
The economics profession is not prepared for a global slowdown. They did not see it coming… and they will expect the US economy to grow through it… Yeah ok, we’ll see… but I expect stronger headwinds going into 2015.
Edward:
“The economics profession is not prepared for a global slowdown.”
Economics should be retitled Economics History. They are very good at telling you what happened after it happened. I will be interested to see if you are right.
I don’t get why Europe, other than the Southern tier, should be showing a low labor share and hitting the limit of effective demand. Most European countries are showing employment-to-population ratios four to 10 percentage points higher than the U.S. in the prime working age group (25-54). Even France is four points higher than we are. That would be equivalent in the U.S. economy to 10 million more jobs — five million more in that specific category.
Not only that, but it seems to be uncommon for top management to try to siphon off extravagant incomes from corporate revenues.
Shouldn’t these combine to make Europe (and Japan) present a different picture on labor share?
The global economic slowdown has been here. So the dow is moving sideways. From a structural pov, it has completed it recovery. Why do you want it to bubble up?
Urban Legend,
Europe as a whole has been steadily increasing its trade surplus.
http://www.tradingeconomics.com/euro-area/current-account
This means that they are increasing their savings as a union. Savings is domestic output minus total consumption. A falling consumption implies a lower labor share, savings rise, which increases their trade surplus.
Also, productivity has been rising faster than real wages in Europe, which means labor share is dropping.
As for Japan, real wages are not rising. Their productivity has been stalled for a couple of years. They have been struggling against the effective demand limit for at least a year. Abenomics is trying to hold out against it, but real wages just are not rising enough. Abenomics is a losing struggle.
Japan and Europe look to be on the edge of a recession.
China is another country to watch. They are showing some signs of being against the effective demand limit too. You hear reports of weak domestic consumption, falling capacity utilization, stalling housing market, drop in consumption by the rich at luxury stores. Profit rates are vulnerable in China.
Economics should have a yellow warning flag up right now. But I really don’t see that.
Hi,
You say “Whereas I see the drop in unemployment as a sign that firms are trying the best they can to maintain profit rates.”. Could you please explain the mechanisms behind that ?
It seems to me that firms would have to cut down on their labor cost by reducing the number of workers if they want to maintain profit in the face of downward nominal wage rigidity.
A.Matthey
Look at the equation for profit rate
Profit rate is (productivity – real compensation)*total labor hours/capital
Increasing labor hours ncreases the profit rate.