Is Effective Demand showing the limit of the Business Cycle… again?
Effective Demand is basically a demand limit upon the business cycle. Wouldn’t it be great if it could be determined? Then we would know where the limit of a business cycles is. Well maybe we can determine effective demand.
A simple equation for the Effective Demand Limit relates labor share to the utilization of labor and capital. Labor share represents the Effective Demand limit.
EDL = Non-farm business labor share * 0.762 – (capacity utilization*(1 – unemployment rate))
EDL will want to stay above zero, such that, labor share*0.762 (underlined on left) will stay above the utilization of labor and capital (underlined on right).
Here is the graph of the data. (link)
Recessions are in gray. The zero x-axis in the graph represents when the plot falls to near zero before each recession. EDL again has hit the same point that was hit twice before the 2008 recession.
I do not see a recession yet. Some are saying that we are close. Anyway, if a recession was to form again with the plot staying above zero, the equation would show an unusual consistency in predicting the limit of business cycles.
Well, Trump says that 93 million Americans are unemployed. Yikes.
The robots must be doing a heckuva job.
Re effective demand , I think we might repeat the mid-90s pattern on your chart , where we just bounce along the baseline until something happens. Since another dotcom boom or housing boom seems unlikely , policy makers will look to the next best option – a big , expensive war.
Because freedom , of course.
Yes the FRED chart does not lie. It has been almost 8 years since the last bubble burst. Soon will be the China bubble or maybe another financial engineering bubble from Wall St. The graph is trying to tell us that the time is near the 8 year mark. My only problem is that there is nothing we, any of us can do about it when 95% of all corp. earnings go to stock buy backs, dividends and acquisitions. Nothing is going to capital or people long term investment… Even Trump will get trumpted on this one.
Inventories are going up.
Consumers can not spend what they do not have and producers will not produce what they can not sell.
Or stated another way, unless labor share is increased, consumer spending on discretionary goods must decrease. (As the prices on non discretionary goods increase.)
JimH you are so right but this is what happens when we fully participate in the greed that perpetuates the race to the bottom in supporting other countries economies rather than our own. We must create new domestic demand and raise the tide of our own economy for a change.. Not China’s, Mexico’s, South Korea’s or Vietnams. Artificially inflating stock prices on Wall St. does not constitute a growing economy or economic recovery. We need to actually make things here again to create new wealth of which our economy will grow again and not to be gamed by the greedy few at the top. Then real wages will rise along with greater domestic consumer demand. To me the US economy means much more than the current short sighted-term artificially inflated stock price buy back capital gains game that is being played out again on Wall St. for the benefit of the 1% . Please go read today’s PCR.com if you cannot see what is really happening to our country.
William Ryan:
No. The wealthy won’t let this happen. Given the high discount rate our wealthy masters seem to be using, more profit can be derived by plundering the American economy than investing in it. As the purchasing power of the American consumer declines to that of its trading partners, the extra-normal profits the wealthy derive from the trading will also decline and disappear, as will the rationale for outsourcing. As will China’s market, and the driving force behind its growth.
The interests of the wealthy are not the interests of the rest of society, and once the wealthy gain sufficient control over a society, they exploit it to the ruin of its people.
“[Unless] labor share is increased, consumer spending on discretionary goods must decrease.”
I do not follow that logic.
Back to my basic “Smithian” understanding of economics, corporate gross income goes to the wages of labor, return on capital, rent, and taxes. Your assumption seems to be that taxes and the wages of labor will be spent on buying goods and services, but less so will rent and return on capital be so spent.
But if they are not spent, what will the capitalists and landlords do with that money?
Hello Warren,
You are right to say that spending on discretionary goods is not directly related to labor share.
I will say one thing here… the more that capital receives, the more unstable consumer spending becomes near the end of the business cycle. This is one of the triggers for recession. I will post the spending by capital income in a future post.
Edward:
During the last recession, what didn’t the holders of money (namely banks [the holders of capital])? Make loans to push the economy. Whether that money come from interest, the Gov, or whatever; banks slowed the economy.
Well, Edward, that makes sense. Near the end of the business cycle, the return on capital falls, so discretionary spending by the capital investors would also fall, resulting in the downward spiral into recession.