Job Stress of 24 to 30 Million, Falling Real Wages, World Inflation and Risk Aversion

 

Job Stress of 24 to 30 Million, Falling Real Wages, World Inflation and Risk Aversion

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011

Executive Summary

I 24 to 30 Million in Job Stress

II Falling Real Wages

III Global Inflation

IV Risk Aversion

V Valuation of Risk Financial Assets

VI Economic Indicators

VII Interest Rates

VIII Conclusion

References

Executive Summary

Total nonfarm payroll employment seasonally adjusted rose by 244,000 in Apr and private payroll employment rose by 268,000. Deeper analysis of employment data in this report attempts to measure the number of people who are not counted as unemployed because they left the labor force in desperation that there would not be a job for them. If people abandoned the labor force because of fears of not finding a job, the participation rate, or percentage of the population in the labor force, would decline, as has been the case, from 66.2 percent in 2006 to 63.9 percent in Apr 2011. Using data not seasonally adjusted, the 66.2 percent can be applied to the population of 239.146 million in Apr 2011 to obtain an adjusted labor force of 158.314 million instead of the official reported labor force of 152.898 million for a difference of 5.416 million people who are actually unemployed because they think there is no job for them and thus do not search such that they are not counted as in the labor force. The number of unemployed is the sum of the 13.237 million estimated by the household survey plus the 5.416 million that cannot be counted for total unemployed of 18.653 million. The actual unemployment rate is 11.8 percent or the percentage of unemployed 18.653 million in the more inclusive labor force of 158.314 million. The number of people in job stress is 24.8 million composed of 13.7 million unemployed (seasonally adjusted), 8.6 million employed part-time for economic reasons, which means they cannot find full-time jobs, and 2.5 million who were not in the labor force but were willing to work but it can be as high as 29.9 million when adding the approximately 5.4 million who gave up employment search in desperation of not finding a job. Using the establishment survey for annual level employment, nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.779 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Mediocre economic growth after the recession explains the unusual weakness in labor markets.

The wage bill is the average weekly hours times the earnings per hour. The wage bill rose 2.3 percent in the 12 months ending in Mar while CPI inflation was 2.7 percent for an inflation-adjusted decline of 0.4 percent. Energy and food increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. Nominal hourly earnings in 2007 were high and compensated for CPI inflation as shown by positive changes in 12 months real or CPI inflation-adjusted average hourly earnings. In 2010 and 2011, real average hourly earnings have been falling with acceleration in Mar because of the high headline CPI inflation of 2.7 percent. Hourly compensation in the first quarter of 2011 rose 2.6 percent at an annual rate, which deflated by the estimated 5.3 percent consumer price increase in the first quarter of 2011 results in a decline of real hourly compensation by 2.5 percent.

Financial markets are experiencing another round of risk aversion. In the current expansion phase of the business cycle after the credit/dollar crisis and global recession of 2007-2009, risk aversion has occurred in the form of: (1) sovereign risk doubts in the euro area; (2) slower growth in China because of the tough tradeoff of inflation and growth; (3) accelerating inflation in the midst of fiscal/monetary accommodation inherited from the recession; (4) geopolitical events in the Middle East and subsequently the earthquake/tsunami in Japan; and (5) mediocre growth, job stress, wage stagnation and fiscal/monetary imbalance in the US. The strongest impact occurred in Apr to Jul 2010 because of the sovereign doubts in Europe, recurring less strongly in Nov 2010 and again in Mar 2011.

Risk aversion rose strongly in the week of May 6. The Dow Jones UBS Commodity Index fell 9.1 percent in the week. The US dollar (USD) traded relative to the euro (EUR) at USD 1.48/EUR on Apr 29 with the dollar appreciating by 3.3 percent to USD 1.431/EUR on May 6. Most equity indexes fell with the DJIA dropping 1.3 percent and the S&P 500 losing 1.7 percent. The rise in risk aversion originates in doubts about sovereign risks in Europe, accelerating inflation worldwide, deceleration of growth in the US and also realization of profits as markets have become less confident on trends of valuations.

I 24 to 30 Million in Job Stress. The Bureau of Labor Statistics (BLS) released on Fri, May 6 the employment report showing an increase in the seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, from 8.8 percent in Mar 2011 to 9.0 percent in May 2011 (http://www.bls.gov/news.release/pdf/empsit.pdf). The number of people in job stress is 24.8 million, compared with 24.6 million in Mar, composed of 13.7 million unemployed (of whom 5.8 million, or 43.4 percent, unemployed for 27 weeks or more) compared with 13.5 million unemployed in Mar (of whom 6.1 million, or 45.5 percent, unemployed for 27 weeks or more), 8.6 million employed part-time for economic reasons (who suffered reductions in their work hours or could not find full-time employment) compared with 8.4 million in Mar and 2.5 million who were marginally attached to the labor force (who were not in the labor force but wanted and were available for work) compared with 2.7 million in Mar (Ibid, 2). Additional information provides deeper insight. Table 1 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.8 percent and the number of people in job stress could be closer to 30 million. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), the employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Apr 2010 and Mar and Apr 2011 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The objective of Table 1 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Apr 2010 and Mar and Apr 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.9 percent by Apr 2011 and was 64.1 percent in Mar 2011, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row LF PART 66.2%) the labor force estimated in the household survey (row LF). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The last row is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 5.416 million unemployed who are not counted because they left the labor force on their belief they could not find another job; (2) the total number of unemployed is effectively 18.653 million and not 13.237 million of whom many have been unemployed long term; (3) the rate of unemployment is 11.8 percent and not 8.7 percent, not seasonally adjusted, or 9.0 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 5.416 million leaving the labor force because they believe they could not find another job. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.7 percent in Apr 2010, 58.1 percent in Mar 2011 and 58.4 percent in Apr 2011 and the number of employed dropped from 144 million to 139 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost five million less people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html).

 

Table 1, Population, Labor Force and Unemployment, NSA

	2006	Apr 2010	Mar 11	Apr 11
POP	229	237,329	239,000	239,146
LF	151	153,911	153,022	152,898
PART%	66.2	64.9	64.0	63.9
EMP	144	139,302	138,962	139,661
EMP/POP%	62.9	58.7	58.1	58.4
UEM	7	14,609	14,060	13,237
UEM/LF Rate%	4.6	9.5	9.2	8.7
NLF	77	83,418	85,977	86,248
LF PART 66.2%		157,111	158,218	158,314
∆NLF UEM		3,200	5,196	5,416
Total UEM		17,809	19,256	18,653
Total UEM%		11.3	12.2	11.8

Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%.

Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted

The last four rows are calculated by applying the labor force participation of 66.2% in 2006 to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%

Sources:

ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf

http://www.bls.gov/news.release/archives/empsit_12032010.pdf

http://www.bls.gov/news.release/pdf/empsit.pdf

 

Total nonfarm payroll employment seasonally adjusted (SA) rose by 244,000 in Apr and private payroll employment rose by 268,000. Table 2 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 2 is that the numbers of monthly increases in jobs in 1983 are several times higher than in 2010 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Professor Michael Boskin of Stanford, former Chairman of the CEA, provides analysis of growth in cyclical expansions in an article for the Wall Street Journal (http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html ). The critical historical perspective is that average quarterly rates of growth in the expansions after a severe recession were incomparably higher than during the current expansion: 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975, 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter in 1983 and only 3 percent in the first four quarters and 2.9 percent forecast in the first 12 quarters after the trough in the third quarter of 2009. GDP grew at the SA quarter-on-quarter yearly-equivalent rate of 1.7 percent in IQ2010, 2.6 percent in IIIQ2010, 3.1 percent in IVQ2010 and 1.8 percent in IQ2011. Growth has been mediocre in the six quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 2 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

 

Table 2, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	-10	-779	14	16
Feb	67	-6	-78	-50	-1266	39	62
Mar	104	-129	173	-33	-213	208	158
Apr	74	-281	276	-149	-528	313	241
May	10	-45	277	-231	-387	432	51
Jun	196	-243	378	-193	-515	-175	61
Jul	112	-343	418	-210	-346	-66	117
Aug	-36	-158	-308	-334	-212	-1	143
Sep	-87	-181	1144	271	-225	-24	112
Oct	-100	-277	271	-554	-224	210	193
Nov	-209	124	352	-728	64	93	128
Dec	-278	-14	356	-673	-109	121	139
			1984			2011	Private
Jan			447			68	94
Feb			479			235	221
Mar			275			221	231
Apr			363			244	268

Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

http://www.bls.gov/webapps/legacy/cesbtab1.htm

http://www.bls.gov/schedule/archives/empsit_nr.htm#2010

http://www.bls.gov/news.release/pdf/empsit.pdf

 

Important aspects of growth of payroll jobs from Mar 2010 to Mar 2011, not seasonally adjusted (NSA), are provided in Table 3. Total nonfarm employment increased by 1,390,000, consisting of growth of total private employment by 1,787,000 and decline by 397,000 of government employment. Monthly average growth of private payroll employment has been 148,917 which is mediocre relative to 24 to 30 million in job stress while total nonfarm employment has grown on average by only 115,833 per month. Manufacturing employment increased by 212,000 while private service providing employment grew by 1,531,000. An important feature is that jobs in temporary help services increased by 221,000. This episode of jobless recovery is characterized by part-time jobs. An important characteristic is that the losses of government jobs have been highest in local government, 233,000 jobs lost, because of the higher number of employees in local government, 14.5 million relative to 5.3 million in state jobs and 2.8 million in federal jobs.

 

Table 3, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands

	Apr 2010	Apr 2011	Change
A Total Nonfarm	129,698	131,088	1,390
B Total Private	106,707	108,494	1,787
B1 Goods Producing	17,520	17,776	256
B1a Manu-facturing	11,423	11,635	212
B2 Private service providing	89,187	90,718	1,531
B2a Temporary help services	1,973	2,194	221
C Government	22,991	22,594	-397
C1 Federal	2,983	2,849	-134
C2 State	5,283	5,253	-30
C3 Local	14,725	14,492	-233

Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3

Source:

http://www.bls.gov/news.release/pdf/empsit.pdf

 

The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table 4 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.779 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.

 

Table 4, Total Nonfarm Employment in Thousands

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,528	2000	131,785
1981	91,289	2001	131,826
1982	89,677	2002	130,341
1983	90,280	2003	129,999
1984	94,530	2004	131,435
1985	97,511	2005	133,703
1986	99,474	2006	136,086
1987	102,088	2007	137,598
1988	105,345	2008	136,790
1989	108,014	2009	130,807
1990	109,487	2010	129,818

Source: http://www.bls.gov/webapps/legacy/cesbtab1.htm

 

The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained 29 percent in 1939 below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).

The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):

“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments.  Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking.  Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”

The number of not seasonally adjusted total nonfarm jobs in the US in Dec 2010 is 108.464 million, declining to 106,079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total nonfarm jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table 5 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final eight rows provide job creation in Apr 1984 to Apr 1985 and from Apr 2010 to Apr 2011. The row “Change ∆%” for Apr 1984 to Apr 1985 shows an increase of total nonfarm jobs by 3.5 percent and of 3.8 percent for total private jobs. The row “Change ∆%” for Apr 2010 to Apr 2011 shows an increase of total nonfarm jobs by 1.1 percent and of 1.7 percent for total private jobs.

 

Table 5, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent

	Total Nonfarm Jobs	Total Private Jobs
06/1981 #	92,288	75,969
11/1982 #	89,482	73,260
Change #	-2,806	-2,709
Change ∆%	-3.0	-3.6
12/1982 #	89,383	73,185
04/1984 #	93,596	77,220
Change #	4,213	4,035
Change ∆%	4.7	5.5
11/2007 #	139,090	116,291
05/2009 #	131,626	108,601
Change %	-7,460	-7,690
Change ∆%	-5.4	-6.6
12/2009 #	130,178	107,338
04/2011 #	131,088	108,494
Change #	910	1,156
Change ∆%	0.7	1.1
04/1984 #	93,596	77,220
04/1985 #	96,854	80,117
Change #	3,258	2,897
Change ∆%	3.5	3.8
04/2010 #	129,698	106,707
04/2011 #	131,088	108,494
Change #	1,390	1,787
Change ∆%	1.1	1.7

Source: http://data.bls.gov/pdq/SurveyOutputServlet

 

II Falling Real Wages. The wage bill is the average weekly hours times the earnings per hour. Table 6 provides the estimates by the BLS of earnings per hour, increasing from $22.52/hour in Apr 2010 to $22.92/hour in Apr 2011, or by 1.9 percent. There was disappointment in financial markets about the pace of wage increases because of rising food and energy costs. Average private weekly earnings increased slightly by $19.26 from $767.93 in Apr 2010 to $787.19 in Apr 2011 or by 2.5 percent. The number of average weekly hours rose from 34.1 in Apr 2010 to 34.3 in Apr 2011, or by 0.6 percent. The wage bill before taxes rose by 2.5 percent (1.019 times 1.006). The wage bill rose 2.3 percent in the 12 months ending in Mar while CPI inflation was 2.7 percent for an inflation-adjusted decline of 0.4 percent. Energy and food increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of the raw materials shock in the form of increases in prices of commodities such as the 37.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Apr 1, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland and in Mar by the earthquake and tsunami in Japan (http://noir.bloomberg.com/markets/commodities/cfutures.html).

 

Table 6, Earnings per Hour and Average Weekly Hours

Earnings per Hour	Apr 10	Feb 11	Mar 11	Apr 11
Total Private	$22.52	$22.88	$22.95	$22.95
Goods Producing	$23.94	$24.27	$24.30	$24.35
Service Providing	$22.18	$22.55	$22.59	$22.62
Average Weekly Earnings
Total Private	$767.93	$784.78	$786.16	$787.19
Goods Producing	$950.42	$968.37	$967.14	$971.57
Service Providing	$731.94	$748.66	$749.99	$753.25
Average Weekly Hours
Total Private	34.1	34.3	34.3	34.3
Goods Producing	39.7	39.9	39.8	39.9
Service Providing	33.0	33.2	33.2	33.3

Source: http://www.bls.gov/news.release/pdf/empsit.pdf

 

Average hourly earnings in the first four months of 2007, 2010 and 2011 are shown in Table 7 together with their 12-months change, CPI 12 month inflation and 12-month percentage changes in CPI inflation-adjusted average hourly earnings. Nominal of hourly earnings in 2007 were high and compensated for CPI inflation as shown by positive changes in 12 months real or CPI inflation-adjusted average hourly earnings. In 2010 and 2011, real average hourly earnings have been falling with acceleration in Mar because of the high headline CPI inflation of 2.7 percent. CPI inflation excluding food and energy in the three first months of 2010 was 1.6 percent in Jan, 1.3 percent in Feb and 1.1 percent in Mar, or 1.3 percent on average, and in the first three months of 2011 was 0.9 percent in Jan, 1.1 percent in Feb and 1.2 percent in Mar, or 1.1 per cent on average. Headline 12-month CPI inflation in the first quarter of 2011 has been 2.1 percent, which is closer to average 2.3 percent in the first four months of 2010 than to average 1.3 percent for CPI inflation excluding food and energy.

 

Table 7, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and %

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan	$20.60	4.2*	2.1*	1.8*
Feb	$20.67	4.1*	2.4	1.7*
Mar	$20.78	3.6	2.8	0.8
Apr	$20.85	3.5	2.6	0.9
2010
Jan	$22.44	1.9	2.6	-0.7
Feb	$22.48	1.9	2.1	-0.2
Mar	$22.48	1.8	2.3	-0.4
Apr	$22.52	1.8	2.2	-0.4
2011
Jan	$22.86	1.8	1.6	0.2
Feb	$22.88	1.8	2.1	-0.3
Mar	$22.92	1.9	2.7	-0.8
Apr	$22.95	1.9

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees

Source: http://data.bls.gov/cgi-bin/surveymost?bls

 

The Bureau of Labor Statistics (BLS) calculates labor productivity “by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers” (http://www.bls.gov/news.release/pdf/prod2.pdf). Business output is measured as “a chain type, current-weighted index constructed after excluding from gross domestic product (GDP) the following outputs: general government, nonprofit institutions, and private households (Ibid). Business output had a share of 75 percent in the value of GDP in 2009 and nonfarm business output of 74 percent of 2009 GDP. Productivity measures “the changes from period to period in the amount of goods and services produced per hour” (Ibid). Various factors affect productivity such as technology, investment and others. Labor compensation “includes accrued wages and salaries, supplements, employer contributions to employee benefit plans and taxes” (Ibid). Unit labor costs are defined by BLS as “the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour end to reduce them” (Ibid). Real hourly compensation is obtained by diving hourly compensation by the consumer price index. Increases in hourly compensation raise unit labor costs while increases in labor productivity could soften increases in compensation, lowering unit labor costs. The report on productivity and costs of the BLS is important because of the measurement of activity accounting for three quarters of GDP and the motivation for investment by business in exploiting opportunities for increases in productivity and decisions on the use of labor.

Table 8 provides the data for nonfarm business sector productivity and costs for IQ2011 as seasonally adjusted annual equivalent rate, IQ2011 relative to a year earlier and the change in annual averages in 2010 and 2009. Reflecting increases in output of 3.1 percent and of 1.4 percent in hours worked, nonfarm business sector labor productivity rose at a seasonally-adjusted annual equivalent (SAAE) rate of 1.6 percent in IQ2011, as shown in column 2 “IQ2011 SAEE.” The year-to-year increase of labor productivity from IQ2010 to IQ2011 was 1.3 percent, reflecting increases in output of 3.2 percent and of hours worked of 1.9 percent, as shown in column 3 “IQ2011 year to year.” Unit labor costs rose by 1.0 percent in IQ2011 and by 1.2 percent in IQ2011 year to year. Hourly compensation in IQ2011 SAAE rose 2.6 percent, which deflated by the estimated 5.3 percent consumer price increase SAAE in the IQ2011 results in a decline of real hourly compensation by 2.5 percent. The increases in productivity of 3.9 percent in the 2010 annual average and 3.7 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.2 percent in 2010 and 7.2 percent in 2009. The report on productivity and costs confirms a weak economy in IQ2011 and losses in real hourly compensation of labor.

 

Table 8, Nonfarm Business Sector Productivity and Costs %

	IQ2011 SAAE	IQ2011 Year to Year	2010 Annual Average	2009 Annual Average
Produc-tivity	1.6	1.3	3.9	3.7
Output	3.1	3.2	3.7	-3.8
Hours	1.4	1.9	-0.2	-7.2
Hourly Comp.	2.6	2.5	2.3	2.0
Real Hourly Comp.	-2.5	0.3	0.7	2.4
Unit Labor Costs	1.0	1.2	-1.5	-1.6
Unit Nonlabor Payments	1.2		4.2	4.6
Implicit Price Deflator	1.1		1.0	0.8

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

 

III Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 9, updated with every post, provides the latest yearly data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). CPI inflation accelerated to 5.4 percent in China and to 2.8 percent in the euro zone that has already increased interest rates. Food prices in China soared by 11.7 percent in Mar after 11.0 percent in Feb, 10.3 percent in Jan and 9.6 percent in Dec (http://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.html#axzz1J7CmnPhC). PPI inflation accelerated in Japan to 2.0 percent. EUROSTAT provides a flash estimate of 2.8 percent inflation in the Monetary Union (euro area) Index of Consumer prices for Apr (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-29042011-BP/EN/2-29042011-BP-EN.PDF) and 0.7 percent in Apr for the PPI with 12-month rate of increase of 6.7 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03052011-CP/EN/4-03052011-CP-EN.PDF). The euro area unemployment rate is estimated at 9.9 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-29042011-AP/EN/3-29042011-AP-EN.PDF). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration. The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see section IV in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html); (2) the tradeoff of growth and inflation in China; (3) slow growth (see http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011_03_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html), weak hiring (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html and section III Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html ) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see I above http://cmpassocregulationblog.blogspot.com/2011/04/twenty-four-to-thirty-million-in-job_03.html http://cmpassocregulationblog.blogspot.com/2011/03/unemployment-and-undermployment.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the earthquake and tsunami affecting Japan that is having repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.

 

Table 9, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.9	2.7	5.8	8.8
Japan	2.5	0.0	2.0	4.6
China	9.7	5.4	7.3
UK	1.8	4.0* RPI 5.3	5.3* output 17.6* input 12.2**	8.0
Euro Zone	2.0	2.8	6.7	9.9
Germany	4.0	2.4	6.1	6.3
France	1.5	2.2	6.7	9.6
Nether-lands	2.4	2.0	10.8	4.2
Finland	5.0	3.5	8.8	8.2
Belgium	1.8	3.5	10.2	7.7
Portugal	1.2	3.9	6.9	11.1
Ireland	-1.0	1.2	5.4	14.9
Italy	1.5	2.6	6.1	8.4
Greece	-6.6	4.3	8.1	15.1
Spain	0.6	3.5	7.8	21.3

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics

PPI http://www.statistics.gov.uk/pdfdir/ppi0511.pdf

CPI http://www.statistics.gov.uk/pdfdir/cpi0411.pdf

** Excluding food, beverage, tobacco and petroleum

 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

 

Table 10 provides data on the fiscal situation of the euro area, European Union, various member countries of the euro area, UK and US both the Federal government and the general government, which is the typical convention internationally and used by Standard & Poor’s (2011Apr18 for US rating analysis). Most countries need consolidation to reduce their budget deficits and growing debts. The adjustment is harder for countries growing more slowly or even negatively because of the difficulty in increasing revenues that depend on income growth. Government outlays are tied to mandatory programs, creating difficult choices in consolidation strategies. Sovereign risk issues may return to plague financial markets. Higher world inflation can raise borrowing costs at a time of budget and debt pressures.

 

Table 10, Government Outlays, Revenue, Deficit and Debt As Percent of GDP 2010 %

	Gvt Outlays	Gvt Revenue	Govt Balance	Govt Debt
Euro Area	50.4	44.4	-6.0	85.1
European Union	50.3	44.0	-6.4	80.0
Germany	46.6	43.3	-3.3	83.2
France	56.2	49.2	-7.0	81.7
Nether- lands	51.2	45.9	-5.4	62.7
Finland	55.1	52.3	-2.5	48.4
Belgium	53.1	48.9	-4.1	96.8
Portugal	50.7	41.5	-9.1	93.0
Ireland	67.0	34.6	-32.4	96.2
Italy	50.5	46.0	-4.6	119.0
Greece	49.5	39.1	-10.5	142.8
Spain	45.0	35.7	-9.2	60.1
UK	50.9	40.6	-10.4	80.0
US Federal  Govt 2010	23.8	14.9	-8.9	62.1
US Federal Govt 2012	23.3	16.3	-7.0	73.9
US 2010 General Govt (IMF)	43.5	30.8	-10.6	64.8
US 2011 General Govt 2011 (IMF)	41.2	30.5	-10.8	72.4

Note: Govt: government

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF

http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10-ReducingTheDeficit.pdf

http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

 

The Organization for Economic Co-operation and Development (OECD) measures 12-month consumer price inflation in its member area of 34 countries (http://www.oecd.org/pages/0,3417,en_36734052_36734103_1_1_1_1_1,00.html) at 2.7 percent in Mar 2011, increasing from 2.4 percent in Feb (http://www.oecd.org/dataoecd/40/51/47739864.pdf). Rising inflation is attributed to acceleration of energy prices from 10.2 percent in Feb to 12.4 percent in Mar with food prices increasing from 3.1 percent in Feb to 3.2 percent in Mar. Consumer prices excluding food and energy rose 1.4 percent in the 12-months ending in Mar 2011, which is the highest rate since Mar 2010.

The consumer price index of Australia rose by 3.3 in the year ended in the first quarter of 2011, accelerating from 2.7 percent in the fourth quarter of 2010 (http://www.rba.gov.au/inflation/measures-cpi.html). The governor of the Reserve Bank of Australia (RBA), Glenn Stevens, explained the decision by the Board of the RBA on May 3 to leave unchanged the policy cash rate at 4.75 percent (http://www.rba.gov.au/media-releases/2011/mr-11-07.html):

“The global economy is continuing its expansion, led by very strong growth in the Asian region. The recent disaster in Japan is having a major impact on Japanese production, and some effects on production of manufactured products further afield. Commodity prices, including oil prices, have generally continued to rise over recent months, pushing up measures of consumer price inflation in many countries. A number of countries have been moving to tighten their monetary policy settings. Overall, though, financial conditions for the global economy remain accommodative. Uncertainty remains over the prospects for resolution of the banking and sovereign debt issues in Europe. Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.”

The Apr Report on Business of the Institute for Supply Management (ISM) finds that 17 of the manufacturing industries surveyed paid higher prices in Apr (http://ism.ws/ISMReport/MfgROB.cfm). The paid prices index has risen from 81.5 in Jan 2011 to 85.5 in Apr 2011 with the percentage of those paying higher prices rising from 64 in Jan 2011 to 72 in Apr 2011. The Apr non-manufacturing Report on Business of the ISM finds that all 18 non-manufacturing industries paid higher prices in Apr for the second consecutive month (http://ism.ws/ISMReport/NonMfgROB.cfm). While the index of paid prices has declined from 72.1 in Jan 2011 to 70.1 in Apr 2011, the percentage of those paying higher prices has risen from 45 in Jan to 57 in Apr.

Another symptom of inflation is revealed by double-digit increases in nominal values. Table 11 provides the percentage changes of values of manufacturers’ new orders. The month to month changes are seasonally adjusted and the change in the first quarter of 2011 relative to the first quarter of 2010 is not seasonally adjusted. There are no adjustments for inflation in any of the changes, which are purely nominal. New orders for manufacturers rose 3.0 percent in Mar from Feb and 11.5 percent in Jan-Mar 2010 relative to Jan/Mar 2010. New orders excluding transportation and defense and new orders for durable goods rose by similarly high percentages. A substantial part of nominal growth is explained by inflation in view of weak overall economic growth as shown by real GDP increasing 1.8 percent seasonally adjusted annual equivalent (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html).

 

Table 11, Percentage Changes of Value of Manufacturers’ New Orders % Seasonally Adjusted for Monthly Changes and Not Seasonally Adjusted for Jan-Mar 2011/Jan-Mar 2010, Without Adjustment for Price Changes

	Mar/Feb SA	Feb/Jan SA	Jan 11/Dec 10 SA	Jan-Mar 11/Jan Mar 10 NSA
All Mfg	3.0	0.7	3.3	11.5
Ex Transport	2.6	0.6	0.7	11.8
Ex Defense	3.0	1.3	3.0	12.4
Durable Goods	2.9	0.8	3.7	9.9

Note: Mfg: manufacturing; SA: seasonally adjusted; NSA: not seasonally adjusted. Data are not adjusted for changes in prices.

Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

 

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). A counterfactual of the 1970s immediately rises out of Table 12, which consists of simulating current monetary and fiscal policies in doses much more aggressive than in the 1960s and 1970s proposed as a true rose garden without thorns (http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). What would have been the Great Inflation and Unemployment if the Federal Reserve would have lowered interest rates to zero in 1961, in fear of deflation because of 0.7 percent CPI inflation, and purchased the equivalent of 30 percent of the Treasury debt in long-term securities, subsequently engaging in quantitative easing II in 1964 after CPI inflation of 1.0 percent? The counterfactual would not be complete without including the unknown path of the US debt, tax and interest rate increases to exit from unsustainable debt and the largest monetary accommodation in US history. In one of his multiple important contributions to the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

 

Table 12, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982

	∆% GDP	∆% CPI	UNE
1960	2.5	1.4	6.6
1961	2.3	0.7	6.0
1962	6.1	1.3	5.5
1963	4.4	1.6	5.5
1964	5.8	1.0	5.0
1965	6.4	1.9	4.0
1966	6.5	3.5	3.8
1967	2.5	3.0	3.8
1968	4.8	4.7	3.4
1969	3.1	6.2	3.5
1970	0.2	5.6	6.1
1971	3.4	3.3	6.0
1972	5.3	3.4	5.2
1973	5.8	8.7	4.9
1974	-0.6	12.3	7.2
1975	-0.2	6.9	8.2
1976	5.4	4.9	7.8
1977	4.6	6.7	6.4
1978	5.6	9.0	6.0
1979	3.1	13.3	6.0
1980	-0.3	12.5	7.2
1981	2.5	8.9	8.5
1982	-1.9	3.8	10.8
1983	4.5	3.8	8.3
1984	7.2	3.9	7.3
1985	4.1	3.8	7.0
1986	3.5	1.1	6.6
1987	3.2	4.4	5.7
1988	4.1	4.4	5,3
1989	3.6	4.6	5.4
1990	1.9	6.1	6.3

Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series

Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bls.gov/web/empsit/cpseea01.htm

http://data.bls.gov/pdq/SurveyOutputServlet

 

There is a false impression that there is a monetary policy “science,” measurements and forecasting to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table 13 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table 13 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without Fed tightening because of the long lag in effect of monetary policy on inflation. The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether exotic policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability. A glance at Table 13 shows CPI inflation of 0.7 percent in 1961, creating a counterfactual of what would have been the Great Inflation if the Fed had set the policy rate at zero and purchased a third of the outstanding Treasury debt. The symmetric inflation target of “a little less than 2 percent,” or an infinitesimal neighborhood of 2, is an extremely dangerous misplaced analogy with the Great Depression that may bring the economy closer to the relevant historical event of the Great Inflation of the 1970s that ended with the rate hike that reached 22.36 percent for fed funds on Jul 22, 1981 and the Great Bond Crash of 1994.

 

Table 13, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

 

Table 14, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with the new coupon of 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 14. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. The Fed has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East and subsequently by the tragic earthquake and tsunami in Japan. The yield of 3.147 percent at the close of market on May 6, 2011, would be equivalent to price of 95.5542 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price loss of 5.6 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic earthquake and tsunami affecting Japan and recurring fears on European sovereign credit issues. Important causes of the rise in yields shown in Table 14 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html), rising from 40.8 percent of GDP in 2008 and 53.2 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html). On Apr 27, the line “Reserve Bank credit” in the Fed balance sheet stood at $2703 billion, or $2.7 trillion, with portfolio of long-term securities of $2468 billion, or $2.5 trillion, consisting of $1358 Treasury nominal notes and bonds, $58 billion of notes and bonds inflation-indexed, $125 billion Federal agency debt securities and $927 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1473 billion or $1.4 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. The yield of the 10-year Treasury note fell steadily during the week from 3.282 percent on Mon May 2 to 3.147 percent on Fri May 6 while the yield of the 10-year German government bond fell from 3.25 percent on Mon May 2 to 3.17 percent on Fri May 6 (http://noir.bloomberg.com/markets/rates/germany.html). Risk aversion from various sources, discussed in the following section III, has been affecting financial markets for several weeks. Suzanne Walker in an article at Bloomberg attributes the fall in yields to the drop in commodity prices and the flight to safe haven because of rumors about Greece (http://noir.bloomberg.com/apps/news?pid=20601087&sid=ahv9MingFKRw&pos=2). The yield of the 2-year Treasury note fell to the lowest level since Mar (Ibid), closing at 0.55 percent per year (http://noir.bloomberg.com/markets/rates/index.html). Treasury is auctioning $32 billion of 3-year notes on May 10, $24 billion of 10-year notes on May 11 and $16 billion of 30-year bonds on May 12 (http://www.treasurydirect.gov/instit/annceresult/press/press_secannpr.htm). The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

 

Table 14, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020 

 

IV Risk Aversion. Financial markets are experiencing another round of risk aversion. In the current expansion phase of the business cycle after the credit/dollar crisis and global recession of 2007-2009, risk aversion has occurred in the form of: (1) sovereign risk doubts in the euro area; (2) slower growth in China because of the tough tradeoff of inflation and growth; (3) accelerating inflation in the midst of fiscal/monetary accommodation inherited from the recession; (4) geopolitical events in the Middle East and subsequently the earthquake/tsunami in Japan; and (5) mediocre growth, job stress, wage stagnation and fiscal/monetary imbalance in the US. The strongest impact occurred in Apr to Jul 2010 because of the sovereign doubts in Europe, recurring less strongly in Nov 2010 and again in Mar 2011.

Equity indexes continued to increase in the week of Apr 29 with percentage gains of: 2.4 DJIA, 1.9 S&P 500, 1.9 NYSE Financial, 2.2 Dow Global, 0.5 Dow Asia Pacific, 1.7 Nikkei Average, 1.3 Stoxx 50 and 3.0 DAX Germany (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html Table 18). There was a contradiction in that the yield of the 10-year Treasury note declined from 3.402 percent on Apr 22 to 3.290 percent on Apr 29 (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html Table 15). The Swiss franc (CHF) traded at a strong CHF 0.868/USD on Apr 29 for appreciation of 29.1 percent relative to Nov 21, 2008 (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html Table 20). Risk aversion was showing signs in the flight to safe haven of dollar denominated assets and deposits in strong financial centers.

Risk aversion rose strongly in the week of May 6. The Dow Jones UBS Commodity Index fell 9.1 percent in the week (see Table 17 below). Partly because of fears of slowing US economic growth and resulting decline of valuations of financial risk assets but also in realization of profits, WTI crude oil futures prices fell from around $113/barrel on Mon Apr 2 to around $97/barrel by Fri Apr 6, or by 14.2 percent, while Brent oil futures collapsed from around $126/barrel to about $109/barrel, or by 13.5 percent. Gold fell from about $1540/ounce on Mon May 2 to $1485/ounce on Fri May 6, or by 3.6 percent. The US dollar (USD) traded relative to the euro (EUR) at USD 1.48/EUR on Apr 29 with the dollar appreciating by 3.3 percent to USD 1.431/EUR on May 6. Most equity indexes fell as shown in Table 17 below.

A common joke is that economists and meteorologists both err in their forecasts but the meteorologists typically agree on what happened. Risk aversion had been growing in markets because of the five risk factors outlined in the first paragraph of this section. Continuing signs of slowing US economy with accelerating inflation together with doubts on Europe as two-year Greek government notes traded at yields above 24 percent appeared to have been important determinants of the current unease about financial risk exposures.

Mario Blejer in an article in the Financial Times (Blejer 2011May5) argues that the bailout process of countries in Europe occurs in a euro area agreement where bailouts were ruled out. Countries are given new money to bridge temporary illiquidity but not insolvency with resources being used to pay existing debt service such that after a period of adjustment they would be able to move on their own. Blejer (2011May5) finds that debt/GDP ratios of bailed out countries will increase significantly. New funds will be required in the future and should continue to be provided as long as there is political capital in avoiding crisis in the rescuing countries that have high exposures of their banks in the bailed out economies. Continuation of the process requires provision of new money.

The European Union is engaged in a new bank stress test exercise (see section IV http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html section IV http://cmpassocregulationblog.blogspot.com/2011/04/twenty-four-to-thirty-million-in-job_03.html). The view of Standard & Poor’s is that the European Stability Mechanism (ESM) agreed in the European Union meeting on March 24-25, 2011 is likely to require sovereign debt restructuring as a condition of borrowing from the ESM, with senior unsecured government debt being subordinated to loans from the ESM. These conditions are “detrimental to the commercial creditors of EU sovereign ESM borrowers” ((http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245301741237). The ESM provides for principal losses to holders of private debt securities of sovereigns after 2013. New private-sector money, which was essential in earlier debt management, may not be forthcoming.

Marcus Walker, Charles Forelle and David Crawford, writing in the Wall Street Journal on the Fri May 6 emergency meeting of European Union finance ministers, inform that the assistance to Greece from euro area governments and the IMF totals €110 billion, or around $157 billion, but the program provides for Greece to raise €30 billion of financing in bond markets in 2012 (http://professional.wsj.com/article/SB10001424052748704810504576307242643218636.html?mod=WSJ_hp_LEFTWhatsNewsCollection). Because of the difficulty in funding through private bond markets, European officials may have to consider providing fresh money to Greece (Ibid), which is the main point raised by Blejer (2011Apr5). James G. Neuger and Brian Parkin write in Bloomberg that there could be requirement of collateral for new aid by European governments to Greece in an effort to avoid sovereign restructuring, as revealed by an informed source (http://noir.bloomberg.com/apps/news?pid=20601087&sid=akqKlfjoiIuw&pos=2). The collateral for additional funds would be in the form of assets or sales of assets. There is tough sale of bailouts in some European countries and another idea could be to lower interest rates and increase terms of bailout assistance. News of the emergency meeting of finance ministers contributed to the depreciation of the euro relative to the dollar from USD 1.453/EUR on Thu May 5 to USD 1.431/EUR on Fri May 6.

IV Trends and Cycles of Valuations of Risk Financial Assets. Near zero interest rates encourage the carry trade of borrowing at extremely low short-term rates and taking long positions in risk financial assets such as commodities, currencies, stocks and so on. Families, investors and most everybody worldwide were encouraged to benefit from the low interest rates originating in Fed policy of 1 percent fed funds rate in 2003-2004 and housing subsidies by borrowing significantly or high leverage, ignoring potential future adverse events or taking high risks, investing fully or having little or no cash assets or low liquidity and induced easy lending or taking unsound credit decisions. The carry trade of borrowing at extremely low short-term rates and taking long positions in risk financial assets is shown in Table 15 in the form of high valuations in most risk financial assets and then eventual collapse in the form of the credit/dollar crisis and global recession after 2007. The financial crisis and global recession were caused by interest rate and housing policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4).

 

Table 15, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	05/06 /2011
Rate	1.1423	1.5914	1.192	1.431
CNY/USD	01/03 2000	07/21 2005	7/15 2008	04/29 /2011
Rate	8.2798	8.2765	6.8211	6.493
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

Sources: http://online.wsj.com/mdc/page/marketsdata.html

http://www.census.gov/const/www/newressalesindex_excel.html

http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

 

Table 15A extracts four rows of Table 15 with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 24.2 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 18, the dollar has devalued again to USD 1.431/EUR or by 20.1 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.4930/USD on May 6, 2011, or by an additional 4.8 percent, for cumulative revaluation of 21.5 percent.

 

Table 15A, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	6/26/03	7/14/08	6/07/10	05/06 /2011
Rate	1.1423	1.5914	1.192	1.431
CNY/USD	01/03 2000	07/21 2005	7/15 2008	04/29 /2011
Rate	8.2798	8.2765	6.8211	6.493

Source: Table 15.

 

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) at 3.2 percent of GDP in 2011 and also in 2012, as shown in Table 16. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.7 percent of GDP in 2011 to 6.3 percent of GDP in 2012, as shown in Table 16.

 

Table 16, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2012	CAD%GDP 2012	Debt %GDP 2012
US	15227	-10.6	-3.2	64.8	-10.8	-3.2	72.4
Japan	5821	-9.9	2.3	127.8	-8.4	2.3	135.1
UK	2471	-8.6	-2.4	75.1	-6.9	-1.9	78.6
Euro	12939	-4.4	0.03	66.9	-3.6	0.05	68.2
Ger	3519	-2.3	5.1	54.7	-1.5	4.6	54.7
France	2751	-6.0	-2.8	77.9	-5.0	-2.7	79.9
Italy	2181	-4.3	-3.4	100.6	-3.5	-2.9	100.4
Can	1737	-4.6	-2.8	35.1	-2.8	-2.6	36.3
China	6516	-1.6	5.7	17.1	-0.9	6.3	16.3
Brazil	2090	-2.4	-2.6	39.9	-2.6	-2.9	39.4

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

 

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 15 after the first policy round of near zero fed funds and quantitative easing by withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, low wages, depressed hiring and high job stress of unemployment and underemployment in the US. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets with fluctuations provoked by events of risk aversion. Table 17, which is updated for every comment, shows the deep contraction of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough” and the sharp recovery after around Jul 2010 in the last column “∆% Trough to 05/06/11” with all risk financial assets in the range from 14.9 percent for European stocks to 32.1 percent for Dax, excluding Japan that has currently weaker performance because of the earthquake/tsunami, while the dollar devalued by 20.1 percent and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 5/06/2011” shows the fall of most risk financial assets because of the risk aversion in the week of May 6. Aggressive tightening by the Fed to maintain the credibility of inflation not rising above 2 percent—in contrast with timid “measured” policy during the adjustment in Jun 2004 to Jun 2006 after the earlier round of near zero interest rates—may cause another credit/dollar crisis and stress on the overall world economy. The choices may prove tough and will magnify effects on financial variables because of the corner in which policy has been driven by aggressive impulses that have resulted in the fed funds rate of 0 to ¼ percent and holdings by the Fed that move toward 30 percent of Treasury securities in circulation.

 

Table 17, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 5/ 06/11	∆% Week 5/ 06/11	∆% Trough to 5/ 06/11
DJIA	4/26/ 10	7/2/10	-13.6	12.8	-1.3	30.5
S&P 500	4/23/ 10	7/20/ 10	-16.0	10.1	-1.7	31.1
NYSE Finance	4/15/ 10	7/2/10	-20.3	-1.6	-2.6	20.5
Dow Global	4/15/ 10	7/2/10	-18.4	5.8	-2.1	29.7
Asia Pacific	4/15/ 10	7/2/10	-12.5	7.6	-1.3	22.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-13.5	0.1	11.7
China Shang.	4/15/ 10	7/02 /10	-24.7	-9.5	-1.6	20.2
STOXX 50	4/15/10	7/2/10	-15.3	-2.6	-0.8	14.9
DAX	4/26/ 10	5/25/ 10	-10.5	18.3	-0.3	32.1
Dollar Euro	11/25 2009	6/7 2010	21.2	5.4	3.3	-20.1
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	9.9	-9.1	28.6
10-Year Tre.	4/5/ 10	4/6/10	3.986	3.147

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

Source: http://online.wsj.com/mdc/page/marketsdata.html.

 

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis by the Fed on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 18 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. There were still fluctuations. Reversals of valuations are possible during aggressive changes in interest rate policy. In the week of May 6, return of risk aversion, resulted in moderation of the valuation of the DJIA to 12.8 percent and that of the S&P 500 to 10.6 percent.

 

Table 18, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from earlier date	∆% DJIA from Apr 26	∆% S&P 500 from earlier date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6

Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004

 

Table 19, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation and the large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection).

 

Table 19, Exchange Rates

	Peak	Trough	∆% P/T	May 6 2011	∆T May 6 2011	∆% P May 6  2011
EUR USD	7/15 2008	6/7 2010		5/06 2011
Rate	1.59	1.192		1.431
∆%			-33.4		16.7	-11.1
JPY USD	8/18 2008	9/15 2010		5/06 2011
Rate	110.19	83.07		80.61
∆%			24.6		2.9	26.8
CHF USD	11/21 2008	12/8 2009		5/06 2011
Rate	1.225	1.025		0.874
∆%			16.3		14.7	28.7
USD GBP	7/15 2008	1/2/ 2009		5/06 2011
Rate	2.006	1.388		1.636
∆%			-44.5		15.2	-22.6
USD AUD	7/15 2008	10/27 2008		5/06 2011
Rate	1.0215	1.6639		1.07
∆%			-62.9		43.8	8.5
ZAR USD	10/22 2008	8/15 2010		5/06 2011
Rate	11.578	7.238		6.697
∆%			37.5		7.5	42.2
SGD USD	3/3 2009	8/9 2010		5/06 2011
Rate	1.553	1.348		1.239
∆%			13.2		8.1	20.2
HKD USD	8/15 2008	12/14 2009		5/06 2011
Rate	7.813	7.752		7.771
∆%			0.8		-0.2	0.5
BRL USD	12/5 2008	4/30 2010		5/06 2011
Rate	2.43	1.737		1.615
∆%			28.5		7.0	33.5
CZK USD	2/13 2009	8/6 2010		5/06 2011
Rate	22.19	18.693		16.852
∆%			15.7		9.8	24.1
SEK USD	3/4 2009	8/9 2010		5/06 2011
Rate	9.313	7.108		6.302
∆%			23.7		11.3	32.3
CNY USD	7/20 2005	7/15 2008		5/06 2011
Rate	8.2765	6.8211		6.4930
∆%			17.6		4.8	21.5

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

Source: http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

http://markets.ft.com/ft/markets/currencies.asp

 

The double-edged sword of commodity price increases and appreciation of the dollar for countries producing raw materials and mineral for exporting while also trying to maintain and develop internal economic activities is shown vividly in the Statement of the Reserve Bank of Australia on its monetary policy meeting (http://www.rba.gov.au/publications/smp/2011/may/pdf/overview.pdf http://www.rba.gov.au/publications/smp/2011/may/html/index.html):

“Over the past few months, the US dollar has depreciated significantly, partly reflecting the difference in the stance of monetary policy in the United States compared with most other countries. While the renminbi has been allowed to appreciate a little against the US dollar, on a trade-weighted basis it has depreciated back to around its level at end 2009. The currencies of most other emerging market economies have recorded significant appreciations against the US dollar over the past year, although many of these countries have introduced or extended capital controls in an effort to limit short-term capital inflows. A number of emerging economies also continue to accumulate foreign reserves at a rapid pace. In Australia, the rise in commodity prices is providing a significant lift to real national income and is underpinning very strong investment plans in the resources sector, while also creating some of the same sorts of inflationary pressures seen elsewhere. Australia’s terms of trade are likely to rise further in the June quarter, to be above the level assumed a few months ago – and at their highest level in at least 140 years – boosted in particular by high prices for iron ore and coal. While the prices of these commodities are generally expected to decline over the period ahead as new supply comes on line, strong growth in steel demand in Asia is expected to see them remain at historically high levels. The strong terms of trade have been accompanied by a significant appreciation of the exchange rate. In trade-weighted terms, the real exchange rate is at its highest level since the mid 1970s. The appreciation has significantly lowered the price of imported goods for Australian consumers and businesses (see below), but has also adversely affected the competitive position of many firms, particularly in the manufacturing and tourism industries.”

Countries with both commodity export capacity and industrial parks that can produce for domestic and foreign markets are caught in an exchange rate squeeze that prevents diversification of economic activity to provide employment for large populations.

V Economic Indicators. The manufacturing purchasing managers’ index (PMI) of the ISM fell 0.8 points from 61.2 in Mar to 60.4 in Apr but has remained above 60 for four consecutive months and expanding for 21 months (http://ism.ws/ISMReport/MfgROB.cfm). The new orders segment fell 1.6 points from 63.3 in Mar to 61.7 in Apr and production declined by 5.2 points from 69.0 in Mar to 63.8 in Apr but employment fell only 0.3 points from 63.0 in Mar to 62.7 in Apr. The nonmanufacturing PMI of the ISM fell 4.5 points from 57.3 in Mar to 52.8 in Apr but still above the frontier of contraction at 50 (http://ism.ws/ISMReport/NonMfgROB.cfm). Business activity/production fell 6.0 points to 53.7, new orders declined 11.4 points to 52.7 and employment fell 1.8 points to 51.9 (http://ism.ws/ISMReport/NonMfgROB.cfm). Construction spending seasonally adjusted at an annual rate was $768.9 billion in Mar, which is 1.4 percent higher than $758.6 billion in Feb but 6.7 percent below the Mar 2010 estimate of $824.0 billion (http://www.census.gov/const/C30/release.pdf). Table 20 shows first quarter construction spending, not seasonally adjusted or adjusted by inflation. First quarter construction fell by 7.8 percent in 2011 relative to 2010, 37.2 percent relative to 2006 and 30.6 percent relative to 2005.

 

Table 20, Value of Construction Spending Put in Place in the US, NSA, Millions of Dollars

IQ2011	$161,195
IQ2010	$174,785
∆% 2010/2011	-7.8
IQ2006	$256,545
∆% 2011	-37.2
IQ 2005	$232,134
∆% 2011	-30.6

Sources: http://www.census.gov/const/C30/release.pdf

http://www.census.gov/const/C30/pr200703.pdf

http://www.census.gov/const/C30/pr200603.pdf

 

The Energy Information Administration weekly petroleum status reports finds an increase of 3.4 million barrels in the week of Apr 29 in US commercial crude oil inventories, excluding the Strategic Petroleum Reserve, reaching 366.5 million barrels. Average imports of crude oil by the US were 8.9 barrels per day in the week of Apr 29 and have averaged 8.7 million barrels per day in the prior four weeks, which are 839,000 below the same four-week period a year ago. The average world crude oil price was $120.79/barrel on Apr 29, 2011, which was $2.41 higher than in the prior week and $37.23/barrel above the price a year earlier. Conventional gasoline spot price in New York Harbor was $3.295/gallon, higher by $0,982/gallon relative to a year earlier (http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Table 21 shows the first monthly increase in revolving credit since 2008 by 2.9 percent in Mar 2011 (http://www.federalreserve.gov/releases/g19/current/g19.htm). Consumer credit rose by 2.1 percent in the IVQ2010 and by 3.0 percent in IQ2011.

 

Table 21, Consumer Credit Seasonally Adjusted Annual Percentage Rate and Billions of Dollars

	1Q2011	Jan	Feb	Mar
∆%
Total	3.0	2.2	3.8	3.0
Revolving	-2.3	-5.9	-3.9	2.9
Non- revolving	5.6	6.2	7.5	3.0
$ Billions
Total	2425,5	2411.9	2419.5	2425.5
Revolving	796.1	796.8	794.2	796.1
Non- Revolving	1629.4	1615.2	1625.3	1629.4

Source: http://www.federalreserve.gov/releases/g19/current/g19.htm

 

The volume of retail sales in the euro area fell 1.0 percent in Mar 2011 and 1.7 percent relative to March 2010 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04052011-AP/EN/4-04052011-AP-EN.PDF).

VI Interest Rates. The 10-year Treasury paying coupon of 3.625 percent and maturing on 02/15/2011 traded at yield of 3.15 on May 6 equivalent to price of 104.00 (http://noir.bloomberg.com/markets/rates/index.html), which is not comparable to the price in Table 14, which is for a hypothetical bond paying coupon of 2.625 percent and maturing in exactly ten years. The yield curve is essentially flat along the segment below one year with the 3-month bill yielding 0.01 percent per year, the 6-month yielding 0.06 percent per year and the 12-month yielding 0.16 percent per year. Interest rates along large segments of the yield curve are yielding negative real rates of interest relative to expected inflation because of the highest historical monetary policy accommodation. The 10-year government bond of Germany traded at yield of 3.17 percent on May 6 (http://noir.bloomberg.com/markets/rates/germany.html) for a rare positive spread of two basis points relative to the 10-year Treasury note. The 10-year government bond of Australia traded at yield of 5.543 percent on May 6 (http://noir.bloomberg.com/markets/rates/australia.html), which is significantly higher than yields of US and German equivalent bonds. In contrast, the 10-year government bond of Japan traded at yield of 1.15 percent (http://noir.bloomberg.com/markets/rates/japan.html), which is significantly lower than for comparable securities of the US, Germany and Australia.

VII Conclusion. The US job market is fractured with 24.8 to 30 million in job stress. Those fortunate to remain employed are facing declines in real or inflation-adjusted remuneration. Economic growth has been inadequate as has been the case after similar contractions to absorb the unemployed and underemployed left behind by the recession. Risk aversion returned with low growth, inflation and sovereign risk doubts. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10 )

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© Carlos M. Pelaez, 2010, 2011