As long as we're on the subject of the economy, it's worth noting that the third-quarter GDP number released a couple of weeks ago shows that the economy is running very close to its potential:
This shows GDP as a percentage of potential GDP. As you can see, the economy never surpasses its potential for long without sliding into recession (gray bars). Sometimes it happens quickly, sometime it takes a while, but it always happens.¹
In February of 2020 we were already running above potential and ready to drop into recession when the pandemic hit. We've now nearly regained that level, running at 99.7% of potential.
This doesn't mean that we're ready to fall into a recession, but it does mean that the economy is running about as hot as it can. There's a little bit of headroom left, but not a lot.
¹The CBO revises its estimate of potential GDP frequently. These figures are based on its near-term estimates.
“Sometimes it happens quickly, sometime it takes a while, but it always happens”
Come on, you’re just describing business cycles. You’re basically saying that some time after the economy recovers it will eventually have a recession again. Prior to the last two non-pandemic recessions it was “above potential” for three years. Potential GDP is also constantly being revised.
What happens when the economy has been going well for a long time is that confidence builds, turning into overconfidence, especially in financial markets, which use excessive leverage. This eventually causes a crash and recession. We certainly are seeing signs of overconfidence in the stock market and other areas. The market dipped in early 2020, but recovered very quickly and went on to new records. While the people with the money are gambling away with various speculations, working people are not really advancing. Despite talk in the media, the labor shortage is not resulting in higher real wages and a better standard of living, and the mood seems to be gloomy. But it's the banking and financial sector which causes crashes and recessions (in most cases), and they can't keep going up forever.
"It's worth noting that the third-quarter GDP number released a couple of weeks ago shows that the economy is running very close to its potential"
But in this Ohio diner . . .
In this Ohio diner, running hot still means "Panama" just came on the jukebox, not that joebiden's pandemic recovery is outrunning Donald Trump's, but they do know this: the 1982 & 2001 recessions were the fault of the previous Democrat White House occupants, while the 1992 & 2020 recessions were the result of ex post facto meddling by overwhelmed Democrat successors.
Oh, so the economy slips into recession just in time for the midterms? Convenient!
More likely the opposite.
The US economy is running about as hot as it can.
Mission accomplished! Now it's safe to let the other reconciliation bill die. It turns out that if you give people enough money, they will spend it and overheat the economy. Trickle up economics?
It all still seems like pandemic has so upended global supply chains and workforce participation that this sort of thing should have been expected. Just in time business models don't work in a crisis.
It's also funny that during this period of low gasoline prices, people went out and bought huge SUV and pick ups. I have a hard time feeling sorry for them.
So bring on the inflation! With any luck, the consumers will get pinched to the point where they stop buying all that chinese made junk.
Pandemic may have sped things up, but supply chain problems were going to hit sooner or later. Railroads have been cutting capacity to improve ROI for a while.
Wall Street is not crashing with inflation news. In part, I'm guessing, they see profits going up even faster. That's what shortages and cornering markets will do.
Lol, no way GDP was above potential that much in the late 70's. Subjective graph it is. By the 90's structural growth was declining, creating boomers, the higher numbers make more sense.
FWIW The graph in this Krugman tweet seems to show more of a gap btw GDP and potential.
https://twitter.com/paulkrugman/status/1458790276324069377
Economic measures will remain screwy while supply chain issues continue to be a major factor and coronavirus numbers remain high (avg. of 70K+ new cases and 1K+ deaths per day).
Those aren't high. Total case numbers are trash at this phase.
Inventory related to auto is fading, especially with American domestics as local sources are filling gaps. Much additional lagging "growth" will be added in the 4th quarter and especially the 1st.
The red line or the "measure" of potential GDP is pretty meaningless, but one thing this graph shows, combined with inflation data, is that whether the economy is overheated has nothing to do with inflation. There was very high inflation up to 1980 combined with high GDP, but there were several peaks after that (and before) which did not produce inflation. And contrary to the previous dominant theory of the Philips curve and its successor the NAIRU, very low unemployment at those times did not produce inflation either. In other words, an "overheated" economy, which in Kevin's graph would be the parts above the line, is not what causes inflation. Nor is inflation strictly related to unemployment or wages. What actually did it in the 70's was mostly oil price and there are other factors now. Wages are not involved - as Kevin has shown real wages have not increased during the inflation rise.