Decline of United States New House Sales by 46 percent since 1963 while Population Increased 72 Percent, World Financial Turbulence, Global Inflation and World Economic Slowdown: Part II

 

Decline of United States New House Sales by 46 percent since 1963 while Population Increased 72 Percent, World Financial Turbulence, Global Inflation and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I United States New House Sales

II United States House Prices

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

Executive Summary

The depressed level of residential construction and new house sales in the US is evident in Table ES1 providing new house sales not seasonally adjusted in Jan of various years. Sales of new houses in Jan 2012 are substantially lower than in any year between 1995 and 2010. There is only an increase of 4.8 percent between Jan 2011 and Jan 2012 that will likely disappear as the year proceeds. Sales of new houses in 2012 are lower by 8.3 percent in relation to 2010 and also 8.3 percent below the level in 2009. The housing boom peaked in 2005 and 2006 when increases in fed funds rates affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan 2011 relative to the same period in 2005 fell 76.1 percent and 75.3 percent relative to the same period in 2006. Similar percentage declines are also observed for 2011 relative to years from 2000 to 2004. Sales of new houses in Jan 2012 fell 53.2 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hoobs and Snoops 2012, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table ES1 reveals catastrophic data: sales of new houses in Jan 2012 of 22 thousand units are lower by 47.6 percent relative to 42 thousand units houses sold in Jan 1963, the first year when data become available, while population increased 72.2 percent.

Table ES1, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan 2012	22
Jan 2011	21
∆%	4.8
Jan 2010	24
∆% Jan 2012/ Jan 2010	-8.3
Jan 2009	24
∆% Jan 2012/ Jan 2009	-8.3
Jan 2008	44
∆% Jan 2012/ Jan 2008	-50.0
Jan 2007	66
∆% Jan 2012/ Jan 2007	-66.7
Jan 2006	89
∆% Jan 2012/Jan 2006	-75.3
Jan 2005	92
∆% Jan 2012/Jan 2005	-76.1
Jan 2004	89
∆% Jan 2012/Jan 2004	-75.3
Jan-Dec 2003	76
∆% Jan 2012/ Jan  2003	-71.1
Jan 2002	66
∆% Jan 2012/ Jan 2001	-66.7
Jan 2001	72
∆% Jan 2012/ Jan 2001	-69.4
Jan-Dec 2000	67
∆% Jan 2012/ Jan 2000	-67.2
Jan 1995	47
∆% Jan 2012/ Jan 1995	-53.2
Jan 1963	42
∆% Jan 2012/ Jan 1963	-47.6

Source: http://www.census.gov/construction/nrs/

Table ES2 provides the entire available series of new house sales from 1963 to 2011. The level of 304 thousand new houses sold in 2011 is the lowest since 560,000 in 1963 in the 48 years of available data. In that period, the population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. In fact, there is no year from 1963 to 2010 in Table ES2 with sales of new houses below 400 thousand.

Table ES2, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323
2011	304

Source: http://www.census.gov/construction/nrs/

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table ES3. The percentage change of new house sales from 1963 to 2011 is minus 45.7 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2011 fell 54.4 percent relative to the same period in 1995.

Table ES3, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2011	-45.7	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2011	-54.4	NA
2000-2011	-65.3	NA
2005-2011	-76.3	NA

NA: Not Applicable

Source: http://www.census.gov/construction/nrs/

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply the analysis of Merton (1974) to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

V World Economic Slowdown. The International Monetary Fund (IMF) has revised its World Economic Outlook (WEO) to an environment of lower growth (IMF 2012WEOJan24):

“The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. Global output is projected to expand by 3¼ percent in 2012—a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO).”

The IMF (2012WEOJan24) projects growth of world output of 3.8 percent in 2011 and 3.3 percent in 2012 after 5.2 percent in 2010. Advanced economies would grow at only 1.6 percent in 2011, 1.2 percent in 2012 and 3.9 percent in 2013 after growing at 3.2 percent in 2010. Emerging and developing economies would drive the world economy, growing at 6.2 percent in 2011, 5.4 percent in 2012 and 5.9 percent in 2012 after growing at 7.3 percent in 2010. The IMF is forecasting deceleration of the world economy.

World economic slowing would be the consequence of the mild recession in the euro area in 2012 caused by “the rise in sovereign yields, the effects of bank deleveraging on the real economy and the impact of additional fiscal consolidation” (IMF 2012WEOJan24). After growing at 1.9 percent in 2010 and 1.6 percent in 2010, the economy of the euro area would contract by 0.5 percent in 2012 and grow at 0.8 percent in 2013. The United States would grow at 1.8 percent in both 2011 and 2012 and at 2.2 percent in 2013. The IMF (2012WEO Jan24) projects slow growth in 2012 of Germany at 0.3 percent and of France at 0.2 percent while Italy contracts 2.2 percent and Spain contracts 1.7 percent. While Germany would grow at 1.5 percent in 2013 and France at 1.0 percent, Italy would contract 0.6 percent and Spain 0.3 percent.

The IMF (2012WEOJan24) also projects a downside scenario, in which the critical risk “is intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank deleveraging and sizable contractions in credit and output.” In this scenario, there is contraction of private investment by an extra 1.75 percentage points in relation to the projections of the WEO with euro area output contracting 4 percent relative to the base WEO projection. The environment could be complicated by failure in medium-term fiscal consolidation in the United States and Japan.

There is significant deceleration in world trade volume in the projections of the IMF (2012WEOJan24). Growth of the volume of world trade in goods and services decelerates from 12.7 percent in 2010 to 6.9 percent in 2011, 3.8 percent in 2012 and 5.4 percent in 2013. Under these projections there would be significant pressure in economies in stress such as Japan and Italy that require trade for growth. Even the stronger German economy is dependent on foreign trade. There is sharp deceleration of growth of exports of advanced economies from 12.2 percent in 2010 to 2.4 percent in 2012. Growth of exports of emerging and developing economies falls from 13.8 percent in 2010 to 6.1 percent in 2012. Another cause of concern in that oil prices in the projections fall only 4.9 percent in 2012, remaining at relatively high levels.

The JP Morgan Global Manufacturing & Services PMI^™, produced by JP Morgan and Markit in association with ISM and IPFSM, rose to 54.6 in Jan from 52.7 in Dec, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9159). This index is highly correlated with global GDP, indicating continued growth of the global economy for nearly two years and a half. The US economy drove growth in the global economy in Dec and Jan. New orders are expanding at a faster rate, increasing from 51.5 in Dec to 54.0 in Jan, suggesting further increase in business ahead. The HSBC Brazil Composite Output Index of the HSBC Brazil Services PMI^™, compiled by Markit, rose from 53.2 in Dec to 53.8 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156). Andre Loes, Chief Economist of HSBC in Brazil, finds that the increase of the services HSBC PMI for Brazil from 54.8 in Dec to 55.0 in Jan, which is the highest level since Mar 2010, strengthen the belief that the worst period of deceleration has already occurred (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156).

VA United States. Table USA provides the data table for the US.

Table USA, US Economic Indicators

Consumer Price Index	Jan 12 months NSA ∆%: 2.9; ex food and energy ∆%: 2.3 Jan month ∆%: 0.2; ex food and energy ∆%: 0.2 Blog 02/19/12
Producer Price Index	Jan 12 months NSA ∆%: 4.1; ex food and energy ∆% 3.0 Jan month SA ∆% = 0.1; ex food and energy ∆%: 0.4 Blog 02/19/12
PCE Inflation	Dec 12 months NSA ∆%: headline 2.4; ex food and energy ∆% 1.8 Blog 02/05/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 31.3 million NSA Establishment Survey: Nov Nonfarm Jobs 243,000; Private +257,000 jobs created  Dec 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 0.9% Blog 02/05/12
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Dec 2011 2.747 million lower by 0.955 million than 3.702 million in Dec 2006 Blog 02/12/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 2.8 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 01/29/12
Personal Income and Consumption	Dec month ∆% SA Real Disposable Personal Income (RDPI) 0.3 Dec month SA ∆% Real Personal Consumption Expenditures (RPCE): -0.1 12 months NSA ∆%: RDPI: -0.1; RPCE ∆%: 1.4 Blog 02/05/2011
Quarterly Services Report	IIIQ11/IIQII SA ∆%: Information 0.6 Professional 0.8 Administrative 1.7 Hospitals -0.9 Blog 12/11/11
Employment Cost Index	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
Industrial Production	Jan month SA ∆%: 0.0 Dec 12 months SA ∆%: 3.4 Capacity Utilization: 78.5 Blog 02/19/12
Productivity and Costs	Nonfarm Business Productivity IVQ2011∆% SAAE 0.7; IVQ2011/IVQ2010 ∆% 0.5; Unit Labor Costs IVQ2011 ∆% 1.2; IVQ2011/IVQ2010 ∆%: 1.3 Blog 02/05/2012
New York Fed Manufacturing Index	General Business Conditions From Jan 13.48 to Feb 19.53 New Orders: From Dec 13.70 to Jan 9.73 Blog 02/19/12
Philadelphia Fed Business Outlook Index	General Index from Jan 7.3 to Feb 10.2 New Orders from Jan 6.9 to Feb 11.7 Blog 02/19/12
Manufacturing Shipments and Orders	Dec New Orders SA ∆%: 1.1; ex transport ∆%: 0.6 2011 NSA ∆%: 12.1; ex transport ∆% 11.9 Blog 02/05/12
Durable Goods	Dec New Orders SA ∆%: 3.0; ex transport ∆%: 2.1 Jan-Dec months NSA New Orders ∆%: 10.0; ex transport ∆% : 8.7 Blog 01/29/12
Sales of New Motor Vehicles	Jan 2012 913,287; Jan 2011 819,795. Jan SAAR 14.18 million, Dec SAAR 13.56, Jan 2011 SAAR 12.69 million Blog 02/05/12
Sales of Merchant Wholesalers	Jan-Dec 2011/2010 ∆%: Total 13.9; Durable Goods: 12.1; Nondurable Goods 15.4 Blog 02/12/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Dec 11/Dec 10 NSA ∆%: Sales Total Business 7.2; Manufacturers 7.0 Retailers 5.6; Merchant Wholesalers 9.0 Blog 02/19/12
Sales for Retail and Food Services	Jan 2012/Jan 2011 ∆%: Retail and Food Services: 5.6; Retail ∆% 5/4 Blog 02/19/12
Value of Construction Put in Place	Dec SAAR month SA ∆%: 1.5 Dec 12 months NSA: 3.7 Blog 02/05/12
Case-Shiller Home Prices	Nov 2011/Nov 2010 ∆% NSA: 10 Cities minus 1.3; 20 Cities: minus 1.3 ∆% Nov SA: 10 Cities minus 0.7 ; 20 Cities: minus 0.7 Blog 02/05/12
FHFA House Price Index Purchases Only	Dec SA ∆% 0.7; 12 month ∆%: minus 0.7 Blog 02/26/12
New House Sales	Jan 2012 month SAAR ∆%: minus 0.9 Jan 2012/Jan 2011 NSA ∆%: 4.8 Blog 02/26/12
Housing Starts and Permits	Jan Starts month SA ∆%: 1.5; Permits ∆%: 0.7 Jan 2011/Jan 2010 NSA ∆% Starts 14.2; Permits  ∆% -3.5 Blog 2/19/12
Trade Balance	Balance Dec SA -$48,800 million versus Nov -$47,058 million Exports Dec SA ∆%: 0.7 Imports Dec SA ∆%: 1.0 Goods Exports Jan-Dec 2011/2010 NSA ∆%: 6.3 Good Imports Jan-Dec 2011/2010 NSA ∆%: 15.5 Blog 02/12/12
Export and Import Prices	Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6 Blog 02/19/12
Consumer Credit	Dec ∆% annual rate: 9.3 Blog 02/12/12
Net Foreign Purchases of Long-term Treasury Securities	Nov Net Foreign Purchases of Long-term Treasury Securities: $17.9 billion Dec versus Nov $61.3 billion Major Holders of Treasury Securities: China $1101 billion; Japan $1042 billion  Blog 02/19/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 4.1; Outlays -3.2; Individual Income Taxes 4.9 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Jan $418,756 million Blog 02/12/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 02/05/2012
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIIQ2011 -131B %GDP 2.9 Blog 12/18/11

Links to blog comments in Table USA:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

1/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or_08.html

12/18/2011 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/2011 II http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

VB. Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) improved for a second consecutive movement from 50.2 in Dec to 50.7 in Jan but still suggesting only marginal growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). New export business grew for the first time in eleven months with improvement in demand both internal and from abroad. Alex Hamilton, economist at Markit and author of the report finds a firmer beginning of the new quarter but with weak growth of new orders resulting from limited demand from China and Europe and valuation of the yen (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). Table JPY provides the country table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Jan ∆% -0.1 12 months ∆% 0.5 Blog 02/12/12
Consumer Price Index	Dec NSA ∆% minus 0.0 Dec 12 months NSA ∆% -0.2 Blog 01/29/12
Real GDP Growth	IVQ2011 ∆%: -0.6 on IIIQ2011;  IVQ2011 SAAR minus 2.3% ∆% from quarter a year earlier: -1.0 % Blog 2/19/12
Employment Report	Dec Unemployed 2.75 million Change in unemployed since last year: minus 240 thousand Unemployment rate: 4.6% Blog 02/05/12
All Industry Indices	Dec month SA ∆% 1.3 12 months NSA ∆% -0.5 Blog 02/26/12
Industrial Production	Dec SA month ∆%: 4.0 12 months NSA ∆% minus 4.1 Blog 02/05/12
Machine Orders	Total Dec ∆% minus 7.2 Private ∆%: minus 22.2 Dec ∆% Excluding Volatile Orders minus 7.1 Blog 02/12/12
Tertiary Index	Dec month SA ∆% 0.6 Dec 12 months NSA ∆% 1.4 Blog 02/19/12
Wholesale and Retail Sales	Dec 12 months: Total ∆%: minus 0.5 Wholesale ∆%: minus 1.6 Retail ∆%: +2.5 Blog 01/29/12
Family Income and Expenditure Survey	Dec 12 months ∆% total nominal consumption 0.3, real 0.5 Blog 02/05/12
Trade Balance	Exports Jan 12 months ∆%: minus 9.3 Imports Jan 12 months ∆% +9.8 Blog 02/26/12

Links to blog comments in Table JPY:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP fell 0.6 percent in IVQ2011, industry 0.4 percent and the tertiary increased 0.7 percent. The all industry index was flat in IVQ2011. Industry contributed minus 0.08 percentage points to growth of the all industry index and the tertiary index contributed 0.47 percentage points. Construction fell 1.1 percent in IVQ2011, with deduction of 0.05 percentage points and government fell 0.5 percent, deducting 0.06 percentage points. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 0.2 percent and decline of GDP of 0.1 percent when it was unexpectedly hit by the Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.2 percent in IIQ2011 relative to IQ2011 but recovery at 3.8 percent in IIIQ2011. Industrial production fell 4.0 percent from IQ2011 into IIQ2011 but grew 4.3 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.9 percent in IQ2011 caused by decline of industrial production by 2.0 percent and services by 1.4 percent with GDP falling 1.8 percent.

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2011
IVQ	-1.1	-0.4	0.7	-0.5	0.0	-0.6
Cont to IVQ % Change	-0.05	-0.08	0.47	-0.06
IIIQ	3.8	4.3	1.2	-0.4	2.0	1.7
IIQ	-7.2	-4.0	0.0	0.7	-0.4	-0.4
IQ	2.7	-2.0	-1.4	0.2	-1.9	-1.8
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	-0.1

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html

There are more details in Table VB-2. The all industry activity index increased 1.3 percent in Dec relative to Nov with increase of the tertiary or services sector by 1.4 percent and increase of industry of 3.9 percent while construction fell 1.9 percent and government fell 0.4 percent. Industry added 0.66 percentage points to growth in Dec and the tertiary sector added 0.94 percentage points with negative contribution of 0.08 percentage points by construction and negative contribution of 0.05 percentage points by government. Weakness in Sep and Aug had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Dec 2011	-1.9	3.8	1.4	-0.4	1.3
Cont to Dec % Change	-0.08	0.66	0.94	-0.05
Nov	1.9	-2.7	-0.6	0.0	-1.0
Oct	-3.8	2.2	0.8	0.3	0.9
Sep	2.3	-3.3	-0.4	-1.0	-0.8
Aug	1.8	0.6	0.1	0.0	-0.3
Jul	0.8	0.4	-0.2	-0.6	0.4
Jun	-0.3	3.8	1.9	0.3	2.2
May	3.7	6.2	0.9	1.0	2.0
Apr	-5.7	1.6	2.7	-0.1	1.7
Mar	-8.6	-15.5	-5.9	-0.1	-6.4
Feb	6.3	1.8	0.8	0.2	0.9
Jan	2.3	0.0	-0.1	0.0	-0.5
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html

Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.8 percent in 2011, almost equal to the decline of 0.9 percent in GDP. Industry fell 3.5 percent, deducting 0.64 percentage points, while the tertiary sector was flat. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2011	-2.0	-3.5	0.0	0.2	-0.8	-0.9
Cont to 2011 % Change	-0.09	-0.64	0.00	0.02
2010	-7.0	16.4	1.3	-0.7	3.1	4.4
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2011
IVQ	-2.4	-2.8	0.2	0.2	-0.5	-1.0
Cont to IVQ % Change	-0.12	-0.51	0.13	0.02
IIIQ	-2.9	-2.1	0.1	0.2	-0.4	-0.5
IIQ	-4.8	-6.8	-0.5	0.5	-1.7	-1.7
IQ	1.6	-2.5	-0.1	-0.4	-0.5	-0.3
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	3.1
III Q	-3.2	14.0	1.8	-0.6	3.2	5.4
IIQ	-11.3	21.3	1.4	-0.7	3.5	3.1
IQ	-12.4	28.0	0.8	-0.5	3.9	5.6

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index fell 0.5 percent in Dec 2011 relative to Dec 2010. Industry fell 4.3 percent in Nov 2011 relative to a year earlier, subtracting 0.77 percentage points from growth of the all industry activity index. The tertiary sector increased 0.6 percent, adding 0.38 percentage points. Construction reduced the index by 0.11 percentage points while government increased it by 0.05 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Dec 2011	-2.2	-4.3	0.6	0.4	-0.5
Cont to Dec % Change	-0.11	-0.77	0.38	0.05
Nov	-1.0	-4.2	-0.5	0.3	-1.1
Oct	-3.9	0.1	0.7	-0.1	0.2
Sep	-0.1	-3.3	0.0	0.5	-0.7
Aug	-4.2	0.4	0.6	-0.3	0.2
Jul	-4.5	-3.0	-0.2	1.2	-0.8
Jun	-4.5	-1.7	0.9	1.1	0.2
May	-6.0	-5.5	-0.2	0.1	-1.3
Apr	-3.8	-13.6	-2.3	0.4	-4.0
Mar	-1.1	-13.1	-3.1	-0.3	-4.5
Feb	4.4	2.9	2.0	-0.3	2.0
Jan	1.3	4.6	1.1	-0.5	1.4
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html

The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 34.7 percent of Japan’s imports and increased 23.6 percent in the 12 months ending in Jan. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 12.8 percent of Japan’s exports with decline of 10.9 percent in the 12 months ending in Jan. Machinery contributes 19.8 percent of Japan’s exports with decline of 8.7 percent in the 12 months ending in Jan. Electrical machinery contributes 16.8 percent of Japan’s exports with decline of 10.2 percent in the 12 months ending in Jan. The best outcome is transport equipment with share of 25.7 percent in total exports but now also declining 1.4 percent in the 12 months ending in Jan. The breakdown of transport equipment in Table VB-5 shows increase of the major categories of motor vehicles of 2.2 percent: cars decline by 0.1 percent with strong growth in the minor category of 20.5 percent for buses and trucks but decline of 4.9 percent for parts of motor vehicles, fall of 4.9 percent for motorcycles and decline of 8.4 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

Table VB-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Jan 2012	Value JPY Millions	% of Total	12 Months∆%	Contribution Degree %
Exports	4,510,220	100.0	-9.3	-9.3
Foodstuffs	21,840	0.5	-26.7	-0.2
Raw Materials	69,023	1.5	-1.1	-0.0
Mineral Fuels	69,208	1.5	-33.5	-0.7
Chemicals	456.445	10.1	-17.4	-1.9
Manufactured Goods	575,613	12.8	-10.9	-1.4
Machinery	891,175	19.8	-8.7	-1.7
Electrical Machinery	759,935	16.8	-10.2	-1.7
Transport Equipment	1,159,445	25.7	-1.4	-0.3
Motor Vehicles	669,892	14.9	2.2	03
Cars	570,594	12.7	-0.1	-0.0
Buses & Trucks	93.252	2.1	20.5	0.3
Parts of Motor Vehicles	202,855	4.5	-4.9	-0.2
Motorcycles	23,455	0.5	-4.9	0.0
Ships	227,374	5.0	-8.4	-0.4
Other	507,534	11.3	-10.9	-1.3
Imports	5,985,225	100.0	9.8	9.8
Foodstuffs	479,865	8.0	13.3	1.0
Raw Materials	428,894	7.2	-0.3	-0.0
Mineral Fuels	2,075,990	34.7	23.6	7.3
Chemicals	498,659	8.3	3.7	0.3
Manufactured Goods	483,473	8.1	0.8	0.1
Machinery	409,496	6.8	-5.7	-0.5
Electrical Machinery	684,028	11.4	-2.6	-0.3
Transport Equipment	186,514	3.1	42.3	1.0
Other	738,307	12.3	7.2	0.9

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2012/2012014e.pdf

Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year in the years from 1979 to 2010. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980. The monthly trade deficit in Jan 2012 is the highest in history.

Table VB-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,555	68,048	-2,493

Source: http://www.customs.go.jp/toukei/suii/html/time_e.htm

The geographical breakdown of exports by imports with selected regions and countries is provided in Table VB-7 for Jan 2012. The share of Asia in Japan’s trade is more than one half, 52.2 percent of exports and 45.3 percent of imports. Within Asia, exports to China are 16.4 percent of total exports and imports from China 22.2 percent of total imports. The largest export market for Japan in Jan 2012 is the US with share of 16.8 percent of total exports and share of imports from the US of 8.2 percent in total imports.

Table VB-7, Japan, Value and 12 Months Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Jan 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	4,510,220	-9.3	5,985,225	9.8
Asia	2,356,363	-13.7	2,713,414	9.6
China	741,264	-20.1	1,329,119	7.5
USA	757,452	0.6	492,110	5.7
Canada	62,262	5.4	86,132	16.2
Brazil	35,208	3.9	89,213	21.2
Mexico	52,359	4.9	27,474	6.2
Western Europe	555,661	-11.2	579,872	2.3
Germany	121,661	-12.5	164,226	10.4
France	44,521	-5.5	79,335	-0.8
UK	97,584	11.6	44,002	3.8
Middle East	158,692	13.5	1,146,461	13.5
Australia	107,147	12.2	405,033	17.8

Source: http://www.customs.go.jp/toukei/info/index_e.htm

The geographical distribution of Japan’s trade balance is provided in Table VB-8. The trade surpluses with the US, UK, Mexico and Western Europe are largely erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East. China also contributes a sizeable trade deficit of Japan.

Table VB-8, Japan, Trade Balance, Millions of Yen

Jan 2012	Millions of Yen
Total	-1,475,005
Asia	-357,051
China	-587,855
USA	265,342
Canada	-23,870
Brazil	-54,005
Mexico	24,885
Western Europe	24,211
Germany	-42,565
France	-34,814
UK	53,582
Middle East	-987,769
Australia	-297,886

Source: http://www.customs.go.jp/toukei/info/index_e.htm

VC. China. The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing nearly remained flat from 48.7 in Dec to 48.8 in Jan, suggesting marginal deterioration, which now extends over three consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). New orders fell marginally for a third consecutive month with moderate growth of new export business. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, find need of policy stimulus to ensure soft landing that could occur in the form of growth at the rate of 8 percent in IQ2012 relative to IQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 50.8 in Dec to 49.7 in Jan, suggesting stagnation of private-sector business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9153). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy measures are required to steer the economy toward higher growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9153). The HSBC Flash China Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing nearly remained rose from 48.8 in Jan to 49.7 in Feb, suggesting marginal deterioration, which is the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9181). Manufacturing output rose to a four-month high at 50.1 New export orders changed direction to contraction. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that the index confirms slowdown and that the marginal improvement originates in higher production during the Chinese New Year. Easing monetary policy under softer infaltion would be advisable (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9181).

Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jan 12 months ∆%: 0.7 Jan month ∆%: -0.1 Blog 02/12/12
Consumer Price Index	Jan month ∆%: 1.5 Jan 12 month ∆%: 4.5 Blog 02/12/12
Value Added of Industry	Dec 12 month ∆%: 12.8 Jan-Dec 2011/Jan-Dec 2010 ∆%: 13.9 Blog 1/22/12
GDP Growth Rate	Year IVQ2011 ∆%: 8.9 Quarter IIQ2011 ∆%: 2.0 Blog 1/22/12
Investment in Fixed Assets	Total Jan-Dec ∆%: 23.8 Jan-Dec ∆% real estate development: 27.9 Blog 01/22/11
Retail Sales	Dec month ∆%: 1.41 Dec 12 month ∆%: 18.1 Jan-Nov ∆%: 17.1 Blog 1/22/12
Trade Balance	Jan balance $27.28 billion Exports ∆% -0.5 Imports ∆% -15.3 Cumulative Jan: $27.28 billion Blog 02/12/12

Links to blog comments in Table CNY:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

VC Euro Area. The Markit Eurozone PMI^® Composite Output Index rose from 48.3 in Dec to 50.4 in Jan, which is the first reading above the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). Chris Williamson, Chief Economist at Markit, finds that the improvement in Jan suggests stabilization after weak activity in the final four months of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). The Markit Eurozone Manufacturing PMI^® rose to a five-month high at 48.8 in Jan from 46.9 in Dec, still suggesting weakening business environment but at lower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). There is significant divergence in private-sector manufacturing in the euro zone with Austria and Germany above 50 while many countries are in the contraction zone below 50. Manufacturing output in the euro zone increased in Jan, which is the first increase since Jul. Declining euro zone trade affected growth of new export orders. Chris Williamson, Chief Economist at Markit, finds encouraging performance of manufacturing that could help in preventing recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). The Markit Flash Eurozone PMI^® Composite Output Index that is highly associated with euro zone GDP fell slightly from 50.4 in Jan to 49.7 in Feb, which even in the contraction region is the second highest reading in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9184). Services fell below 50 but still stood at the highest level in six months while manufacturing output remained at 50.4. Chris Williamson, Chief Economist at Markit, finds improvement relative to performance in late 2011 but continuing risk of recession such that stronger demand is required for reasonable economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9184). Table EUR provides the country economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 02/019/12
Unemployment	Dec 2011: 10.4% unemployment rate Dec 2011: 16.469 million unemployed Blog 02/05/12
HICP	Dec month ∆%: 0.3 12 months Dec ∆%: 2.7 Blog 01/22/12
Producer Prices	Euro Zone industrial producer prices Dec ∆%: -0.2 Dec 12 months ∆%: 4.3 Blog 02/05/12
Industrial Production	Dec month ∆%: -1.1 Nov 12 months ∆%: -2.0 Blog 02/19/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 02/26/12
Construction Output	Dec month ∆%: 0.3 Dec 12 months ∆%: 7.8 Blog 02/19/12
Retail Sales	Dec month ∆%: minus 0.4 Dec 12 months ∆%: minus 1.6 Blog 02/05/12
Confidence and Economic Sentiment Indicator	Sentiment 93.4 Jan 2012 down from 107 in Dec 2010 Confidence minus 20.7 Jan 2012 down from minus 11 in Dec 2010 Blog 02/05/12
Trade	Jan-Dec 2011/2010 Exports ∆%: 12.7 Imports ∆%: 12.2 Blog 02/19/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 02/05/12

Links to blog comments in Table EUR:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

Table VD-1 provides the monthly rates of change of new orders by components. Total new orders fell 7.9 percent in Sep but rebounded 1.6 percent in Oct. New orders fell 1.1 percent in Nov and rose 1.9 percent in Dec. There is high volatility even when excluding heavy transport and equipment, which increased 2.5 percent in Dec after falling in three consecutive months from Sep to Oct. Orders for capital goods have been somewhat stronger and nondurable goods more moderate.

Table VD-1, Euro Zone, Industrial New Orders Month ∆%

2011	Dec	Nov	Oct	Sep	Aug	Jul	Jun
Total	1.9	-1.1	1.6	-7.9	1.7	-1.9	-0.9
Interm.	1.5	-1.1	-0.5	-3.4	0.6	1.6	-4.2
Capital Goods	4.2	-1.8	-1.7	-8.2	3.3	-7.8	4.6
Durable	-2.7	1.1	-3.0	-0.6	-0.8	2.8	-4.2
Non- durable	0.1	2.6	-0.5	-2.1	0.3	0.7	-3.5
Total Ex Heavy T&E	2.5	-0.5	-0.6	-5.6	0.8	1.3	-2.9

Note: Interm: Intermediate; T&E: Transport & Equipment

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-22022012-AP/EN/4-22022012-AP-EN.PDF

Table VD-6 provides 12-month percentage changes of industrial new orders by components in the euro zone. Total new orders fell 1.7 percent in Dec relative to a year earlier from growth of 10.3 percent in Jun relative to a year earlier. Capital goods new orders have fallen from growth of 17.0 percent in the 12 months ending in Jun to minus 2.5 percent in the 12 months ending in Dec.

Table VD-2, Euro Zone, Industrial New Orders 12-Month ∆%

2011	Dec	Nov	Oct	Sep	Aug	Jul	Jun
Total	-1.7	-2.5	1.4	1.5	5.9	8.9	10.3
Interm.	-1.5	-2.6	0.9	2.8	5.9	7.6	5.6
Capital Goods	-2.5	-3.4	2.8	0.9	7.7	11.9	17.0
Durable	-5.2	-4.0	-5.7	2.0	-3.7	2.1	-5.0
Non- durable	1.6	2.9	-0.9	0.7	2.8	3.2	2.3
Total Ex Heavy T&E	-0.8	-2.5	1.7	2.4	4.6	8.3	7.3

Note: Interm: Intermediate; T&E: Transport & Equipment

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-22022012-AP/EN/4-22022012-AP-EN.PDF

VE Germany. The Markit Germany Services Business Activity Index of the Markit Germany Services PMI^® rose from 52.4 in Dec to 53.7 in Jan, for a fourth consecutive month of expansion above 50, such that the Markit Germany Composite Output Index rose from 51.3 in Dec to 53.9 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9128), indicating expansion at a faster rate in Germany’s private-sector activity. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved significantly from 48.4 in Dec to the expansion territory at 51.0 in Jan, which is the first reading above 50 since Sep 2011 (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). While the index is at the highest level in six month, improvement in manufacturing business is still moderate. The rate of contraction of new orders moderated in Jan but export business contracted sharply for a seventh consecutive month. Tim Moore, Senior Economist at Markit and author of the report finds improvement in manufacturing but that the decline in foreign orders influenced general decline in new orders (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). The Markit Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, which is highly associated with German GDP, fell to 52.9 in Feb from 53.9 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9183). Growth originated in the services sector with significant decline of new export orders for manufacturing. Tim Moore, Senior Economist at Markit, finds that German GDP is recovering moderately from the decline in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9183). Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 02/26/12
Consumer Price Index	Jan month SA ∆%: -0.4 Jan 12 months ∆%: 2.1 Blog 02/12/12
Producer Price Index	Jan month ∆%: 0.6 12-month NSA ∆%: 3.4 Blog 02/19/12
Industrial Production	Mfg Dec month SA ∆%: minus 2.7 12 months NSA: 0.7 Blog 02/12/12
Machine Orders	Dec month ∆%: 1.7 Dec 12 months ∆%: 0.0 Blog 02/12/12
Retail Sales	Dec Month ∆% minus 0.9 12 Months ∆% minus 1.4 Blog 02/05/12
Employment Report	Unemployment Rate 7.3% of Labor Force Blog 02/05/12
Trade Balance	Exports Dec 12 months NSA ∆%: 5.0 Imports Nov 12 months NSA ∆%: 5.4 Exports Dec month SA ∆%: minus 4.3; Imports Dec month SA minus 3.9 Blog 02/12/12

Links to blog comments in Table DE:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

Table VE-1 provides percentage change of Germany’s GDP in one quarter relative to the prior quarter from 2003 to 2011. Germany’s GDP contracted during four consecutive quarters from IIQ2008 to IQ2009. The deepest contraction was 4.0 percent in IQ2009. Growth was quite strong from IIIQ2009 to IQ2011 for cumulative growth of 6.7 percent in seven quarters or at the average rate of 0.9 percent per quarter, which is equivalent to 3.8 percent per year. Economic growth decelerated in IIQ2006 to 0.3 percent but rebounded to 0.6 percent in IIIQ2011. The economy contracted mildly by 0.2 percent in IVQ2011.

Table VE-1, Germany Quarter GDP ∆% Relative to Prior Quarter

	IQ	IIQ	IIIQ	IV
2011	1.3	0.3	0.6	-0.2
2010	0.5	1.9	0.8	0.5
2009	-4.0	0.3	0.8	0.7
2008	1.1	-0.4	-0.4	-2.2
2007	0.7	0.6	0.9	0.3
2006	1.2	1.5	1.0	1.2
2005	-0.1	0.7	0.8	0.3
2004	0.0	0.3	-0.2	0.0
2003	-0.8	-0.1	0.5	0.4

Seasonal and calendar adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/GrossDomesticProduct/liste__bip,templateId=renderPrint.psml

Table VE-2 provides percentage changes of German’s GDP in a quarter relative to the same quarter a year earlier. Growth was weak in the recovery from the recession of 2001 through 2005, as in most of the euro area (see Pelaez and Pelaez, The Global Recession Risk (2007), 116-46). Germany’s economy then grew robustly in 2006 and 2007 until the global recession after 2007. Germany recovered with strong growth in 2010 and vigorous 5.0 percent in IQ2011. The economy decelerated in the final three quarter of 2011.

Table VE-2, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA 

	IQ	IIQ	IIIQ	IV
2011	5.0	3.0	2.6	1.5
2010	2.6	4.4	4.0	3.8
2009	-6.5	-7.4	-5.0	-1.6
2008	2.1	3.1	1.1	-1.9
2007	4.3	3.4	3.3	2.2
2006	4.3	2.4	3.5	4.6
2005	-0.8	1.2	1.2	1.0
2004	1.5	1.6	0.6	0.9
2003	0.0	-1.1	-0.5	0.1

Calendar and price adjusted NSA

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/GrossDomesticProduct/liste__bip,templateId=renderPrint.psml

The Federal Statistical Office of Germany, Statistiche Bundesamt Deutschland, has released a second estimate of GDP with more details. Table VE-3 provides percentage point contributions of use of GDP on growth in 2011 relative to 2010 as well as percentage changes. GDP increased 3.0 percent in 2011 relative to 2010. Export increased 8.2 percent while imports increased 7.4 percent for positive contribution of 0.8 percentage points by net exports. There was strong internal demand in Germany with increase of household consumption by 1.5 percent, providing 0.8 percentage points to GDP growth. Gross fixed capital formation (GFCF) increased 6.4 percent, providing 1.1 percentage points to GDP growth. GDP per person in employment rose 1.6 percent.

Table VE-3, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Year earlier, Price Adjusted  

	2011 PP Contribution	∆%
Consumption Total	1.1	1.4
Households Consumption	0.8	1.5
Government Consumption	0.3	1.4
Gross Capital Formation	1.1	6.2
Gross Fixed Capital Formation (GFCF)	1.1	6.4
CFCF including Machinery & Equipment	0.5	7.6
CFCF including Construction	0.5	5.8
Change in Inventories	0.0
Domestic Uses	2.2	2.3
Net Exports	0.8
Exports		8.2
Imports		7.4
GDP		3.0
GDP per Person in Employment		1.6
GDP per Hour Worked		1.3

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

The Statistiche Bundesamt Deutschland provides the analysis of percentage point contributions to GDP on growth from the same quarter a year earlier, shown in Table VE-4. The original data are adjusted for price but not for seasonality. There is strong internal demand, or consumption and investment, which is uncommon in advanced economies. Consumption provided 0.7 percentage points to growth in IVQ2011 and grew 0.9 percent from the same quarter a year earlier. Growth of fixed capital formation (GFCF) provided 0.8 percentage points to growth of GDP in IVQ2011 and grew 4.4 percent from the same quarter a year earlier. Domestic uses contributed 1.4 percentage points in IVQ2011 and grew 1.5 percent from the same quarter a year earlier. Net exports contributed 0.2 percentage points in IIIQ2011, declining from 1.0 percentage points in IIQ2011 and 1.6 percentage points in IQ2011. The rates of growth of exports and imports fell from over 10 percent to single digits in IIQ2011 and IIIQ2011 with 5.3 percent growth of exports and 5.7 percent growth of imports in IVQ2011. GDP per person in employment grew 3.6 percent in IQ2011 relative to IQ2010 but only 1.6 percent, IIQ2011, 1.3 percent in IIIQ2011 and 0.1 percent in IVQ2011.

Table VE-4, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Same Quarter Year earlier, Price Adjusted  

	IQ 11 PP	∆% IQ 11	IIQ 11 PP	∆% IIQ 11	IIIQ 11  PP	∆% IIIQ 11	IVQ11 PP	∆% IVQ 11
Consumption Total	1.3	1.6	1.2	1.6	1.3	1.7	0.7	0.9
Households Consumption	1.2	2.1	0.9	1.5	1.0	1.7	0.4	0.7
Government Consumption	0.1	0.5	0.4	1.8	0.3	1.6	0.3	1.6
Gross Capital Formation	2.1	11.8	0.8	4.5	0.9	4.7	0.7	4.1
Gross Fixed Capital Formation (GFCF)	2.0	13.5	1.0	5.4	0.7	4.0	0.8	4.4
CFCF including Machinery & Equipment	0.9	15.3	0.6	9.1	0.4	6.1	0.2	2.1
CFCF in Construction	1.0	13.4	0.3	3.0	0.3	2.4	0.6	6.5
Change in Inventories	0.1		-0.2		0.2		-0.1
Domestic Uses	3.3	3.5	2.0	2.1	2.1	2.3	1.4	1.5
Net Exports	1.6		1.0		0.4		0.2
Exports		12.7		7.6		7.9		5.3
Imports		10.3		6.3		7.7		5.7
GDP		5.0		3.0		2.6		1.5
GDP per Person in Employment		3.6		1.6		1.3		0.1
GDP per Hour Worked		2.0		1.0		1.1		1.0

Source:  http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table VE-5. The two rows of industry ex construction and industry including manufacturing reveal sharp reductions in yearly growth rates from IQ2011 to IIQ2011, IIIQ2011 and IVQ2011. Finance and insurance rebounded from decline of 0.3 percent in IIQ2011 to 2.5 percent in IIIQ2011 and 1.1 percent in IVQ2011. Business services also grew at relatively higher rates that declined from 4.9 percent in IQ2011 and 4.6 percent in IIQ2011 to 3.8 percent in IIIQ2011 and 3.6 percent in IVQ2011.

Table VE-5, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA

	2011	IQ     11	IIQ   11	IIIQ 11	IVQ   11
Agriculture	3.1	3.6	4.5	2.3	2.1
Industry ex Construction	5.9	10.7	6.8	6.0	0.7
Industry including Mfg	8.2	13.8	9.3	8.2	2.3
Construction	3.5	9.6	0.2	0.0	5.6
Trade, Transport	3.7	6.1	3.7	3.1	2.3
Information & Communications.	1.8	1.3	1.6	2.3	2.2
Finance & Insurance	0.9	0.3	-0.3	2.5	1.1
Real Estate	0.6	-0.1	0.6	0.5	1.3
Business Services	4.2	4.9	4.6	3.8	3.6
Public Services, Education & Health	0.8	0.8	0.7	0.7	1.1
Other Services	-1.1	-0.6	-1.4	-1.6	-0.6
Total Gross Value Added	2.9	4.5	3.0	2.7	1.6

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

Growth of components of the distribution of national income from a year earlier is shown in Table VE-6. Gross national income grew at 5.1 percent in IQ2011 relative to a year earlier but the rate fell to 2.3 percent in IVQ2011. Employee compensation has maintained a high rate of growth above 4.0 percent, declining slightly to 3.9 percent in IVQ2011. In contrast with the US and many advanced economies, household disposable income continues to grow in excess of 3 percent per year with slight decline to growth of 2.8 percent in IVQ2011.

Table VE-6, Germany, Growth of Components of the Distribution of National Income from Year Earlier ∆%

	2011	IQ 11	IIQ 11	IIIQ 11	IVQ 11
Gross National Income	3.6	5.1	3.4	3.6	2.3
Net National Income Factor Costs	3.4	4.7	3.3	3.7	2.1
Employee Compensation	4.4	4.5	5.0	4.3	3.9
Property and Entrepreneurial Income	1.5	5.2	-0.2	2.6	-2.2
Gross Employee Wages & Salaries	4.7	4.9	5.4	4.4	4.1
Net Employee Wages & Salaries	3.7	3.8	3.9	3.4	3.6
Household Disposable Income	3.2	3.4	3.3	3.5	2.8

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

The Federal Statistical Office of Germany, Statistiche Bundesamt Deutschland, provides in its publication Germany Economy 2011 (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Publikationen/SpecializedPublications/Nationalaccounts/DeutscheWirtschaft,property=file.pdf), highly useful information. Table VE-7 provides average yearly growth rates of aggregate indicators of the economy of Germany using the publication of the Statistiche Bundesamt Deutschland. In the twenty years 1991-2011, Germany’s GDP grew at the rate of 2.6 percent per year, Gross National Income at 2.7 per cent per year and Net National Income at Factor Costs at 2.4 percent per year. GDP per inhabitant grew at 2.5 percent and GDP per person in employment at 2.3 per year. These were years of territorial unification, integration into the European Monetary Union (EMU) and restructuring the economy toward higher productivity and competitiveness in world markets.

Table VE-7, Germany, Economic Growth

	Average ∆% per Year 1991-2011
GDP	2.6
Gross National Income	2.7
Net National Income at Factor Costs	2.4
GDP per Inhabitant	2.5
GDP per Person in Employment	2.3

Source:

Statistiche Bundesamt Deutschland, German Economy 2011

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Publikationen/SpecializedPublications/Nationalaccounts/DeutscheWirtschaft,property=file.pdf

Table VE-8 provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):

“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”

Table VE-8, Germany, GDP Year ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistiche Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/01/PE12__010__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Fachveroeffentlichungen/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/NationalAccountsQuarterlyResults6480120113225,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

Chart VE-1 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides GDP at current prices from 2003 to 2011. The German economy is productive with significant dynamism over the long term.

Chart VE-1, Germany, GDP, Current Prices, Billion Euro

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/GrossDomesticProduct/liste__bip,templateId=renderPrint.psml

Chart VE-2 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides the index of price-adjusted chain-linked GDP of Germany from 2007 to 2011. Germany was growing rapidly before the global contraction and rebounded with significant strength along a strong upward trend.

Chart VE-2, Germany, Index of Price-Adjusted Chain-Linked GDP, 2000=100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/NationalAccounts/Content100/kvgr111graf0.psml

Table VE-6 provides Germany’s GDP of €2,570 billion in 2011 and its uses. Private consumption is 57.4 percent of GDP and GFCF 18.2 percent with government consumption of 19.6 percent and net exports 5.1 percent.

Table VE-9, Germany, GDP and Uses, Euro Billions and %

GDP Euro Billions 2011	2,570.8
Percent Distribution of Uses
Gross Fixed Capital Formation	18.2
Private Consumption	57.4
Balance of Exports and Imports	5.1
Government Consumption	19.6

Source: Statistiche Bundesamt Deutschland, German Economy 2011

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Publikationen/SpecializedPublications/Nationalaccounts/DeutscheWirtschaft,property=file.pdf http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__063__811,templateId=renderPrint.psml

VF France. The Markit France Services Activity Index of the Markit France Services PMI^® rose from 50.3 in Dec to 52.3 in Jan such that the Markit France Composite Output Index increased from stability at 50 in Dec to growth at 51.2 in Jan, which is a high in five months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9154). The pace of deterioration of manufacturing business slowed with the Markit Purchasing Managers’ Index^® (PMI^®)) fell slightly from 48.9 in Dec to 48.5 in Jan, suggesting modest deterioration of business conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). There were additional declines in new orders and output in Jan. There was only marginal decline in foreign new orders. Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds challenging conditions with special weakness in domestic demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). The Flash France Composite Output Index of the Markit Flash France PMI^®, which is highly associated with French GDP, fell from 51.2 in Jan to 50.6 in Feb while the Markit Flash France Manufacturing PMI^® rose to a seven-month high and the manufacturing output index to an eight-month high (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9182). There was an increase in foreign orders for the first time in seven months. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^®, finds that the French economy is in expanding impulse with a more promising IQ2012 than expected at the end of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9182). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Jan month ∆% minus 0.4 12 months ∆%: 2.4 02/26/12
PPI	Dec month ∆%: -0.1 Dec 12 months ∆%: 4.7 Blog 02/05/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.4 Blog 02/19/12
Industrial Production	Dec/Nov SA ∆%: Industrial Production minus 1.4; Manufacturing minus 1.4 Dec YOY NSA ∆%: Industrial Production 0.6; Manufacturing 2.1 Blog 02/12/12
Industrial New Orders	Mfg Dec ∆% minus 0.1 YOY ∆% 0.8 Blog 02/26/12
Consumer Spending	Dec Manufactured Goods ∆%: minus 0.7 Dec 12 Months Manufactured Goods ∆%: minus 2.4 Blog 02/05/12
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/04/11
Trade Balance	Dec Exports ∆%: month minus 2.7, 12 months 7.2 Dec Imports ∆%: month minus 0.4, 12 months 5.3 Blog 02/12/12
Confidence Indicators	Historical averages 100 Feb: France 91 Mfg Business Climate 92 Retail Trade 89 Services 95 Building 99 Household 82 Blog 02/26/12

Links to blog comments in Table FR:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

France’s industrial new orders are provided in Table VF-1. Manufacturing new orders excluding heavy transport orders fell 0.1 percent in Dec, increasing 0.8 percent relative to a year earlier. Nondomestic manufacturing new orders increased 2.5 percent in Dec and 2.4 percent relative to a year earlier. Motor vehicles new orders increased 8.9 percent in Dec and are 11.6 percent below a year earlier.

Table VF-1, France, Industrial New Orders, ∆%

2011	Weight	Dec/  Nov	Nov/  Oct	Quarter on Quarter	Year on Year*
Mfg ex Heavy Transport	931	-0.1	1.1	-1.1	0.8
Mfg Non-Domestic	477	2.5	1.3	-0.3	2.4
Electric and Electronic	212	-1.2	2.1	-0.9	0.9
Motor Vehicles	240	8.9	-1.6	-0.7	-11.6
Other Mfg	479	-2.4	1.7	-1.1	5.3

Notes: Mfg: Manufacturing; * Last three months/same three months last year

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=91&date=20120220

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds unchanged conditions in Feb. Table VF-2 shows the INSEE business climate indicator. The headline synthetic index has fallen to 94 in Dec, which is below the average of 100 since 1976, but stabilized at 92 in Jan and Feb. The final row shows general production expectations falling to -27 in Feb, well below the average of -8 since 1976. The indicator of demand and export order levels has fallen to -33 in Feb, well below the average of -12 since 1976.

Table VF-2, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011-2012	Average since 1976	Oct	Nov	Dec	Jan	Feb
Synthetic Index	100	97	96	94	92	92
Recent Changes in Output	5	4	4	-5	-6	-9
Finished- Goods Inventory Level	13	14	18	15	16	15
Demand and Total Order Levels	-17	-19	-17	-26	-28	-26
Demand and Export Order Levels	-12	-19	-25	-20	-26	-33
Personal Production Expectations	5	3	-5	-1	-5	-2
General Production Expectations	-8	-30	-35	-36	-36	-27

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120220

Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011.

Chart VF-1, France, INSEE Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120220

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb.

Chart VF-2, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120220

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan with slight reversal in Feb.

Chart VF-3, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120220

The Business Climate Indicator for France of the business tendency surveys of Institut National de la Statistique et des Études Économiques (INSEE) in Table VF-3 deteriorates slightly in Dec to 92 and to 91 in Jan and also 91 in Feb but is more than 10 points below its level of 105 in Jul. Retail trade has fallen from 102 in Jul to 89 in Jan and 89 in Feb. Services has fallen from 102 in Jul to 91 in Dec and 92 in Jan but rose to 95 in Feb.

Table VF-3, France, Confidence Indicators

2011-2012	Average	Oct	Nov	Dec	Jan	Feb
France	100	95	93	92	91	91
Business Climate Mfg	100 since 1976	97	96	94	92	92
Household Confidence	100 between Jan 1987 and Dec 2010	84	81	80	81	82
Wholesale trade Business Climate	100 since 1979	NA	96	NA	94	NA
Retail Trade	100	95	93	93	89	89
Services	100	94	92	91	92	95
Building	100	100	99	99	100	99

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20120220

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120220

http://www.insee.fr/en/themes/info-rapide.asp?id=20&date=20120224

VG Italy. The Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® increased from 44.5 in Dec to 44.8 in Jan, indicating sharp contraction in services output in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9146). Italy’s Markit/ADACI Purchasing Managers’ Index^® (PMI^®)) improved further from 44.3 in Dec to 46.8 in Jan but still showing significant deterioration of business conditions for Italian manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Improvement originated in slower rhythm of decline of new orders and manufacturing product but new orders have declined during eight months. An important finding in the survey is that the declining euro relative to the dollar resulted in success of Italian entities in obtaining new business in the US. Phil Smith, Economist at Markit and author of the report, finds improvement of Italian manufacturing in moving away from contraction but with still weakening new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jan month ∆%: 0.3 Jan 12 months ∆%: 3.2 Blog 02/26/12
Producer Price Index	Dec month ∆%: 0.1 Dec 12 months ∆%: 4.0 Blog 02/05/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.5 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 02/19/12
Labor Report	Dec 2011 Participation rate 62.5% Employment ratio 56.9% Unemployment rate 8.9% Blog 02/05/12
Industrial Production	Dec month ∆%: 1.4 12 months ∆%: minus 1.7 Blog 02/12/12
Retail Sales	Dec month ∆%: minus 1.1 Dec 12 months ∆%: minus 3.7 Blog 02/26/12
Business Confidence	Mfg Jan 92.1, Sep 94.4 Construction Jan 82.2, Sep 79.0 Blog 02/05/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
Trade Balance	Balance Dec SA €613 million versus Nov -€948 Exports Dec month SA ∆%: +4.2; Imports Dec month SA ∆%: -0.8 Exports 12 months NSA ∆%: +5.7 Imports 12 months NSA ∆%: -8.4 Blog 02/12/12

Links to blog comments in Table IT:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

An important part of the analysis of Blanchard (2011WEOSep) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales fell 1.1 percent in Dec relative to Nov and declined 1.3 percent in Jan-Dec 2011 relative to Jan-Dec 2010. All percentage changes in Table VG-1 are negative with the exception of zero growth in food sales in Jan-Dec 2011 relative to Jan-Dec 2010.

Table VG-1, Italy, Retail Sales ∆%

	Dec 2011/  Nov 2011 SA	Oct-Dec 11/   Jul-Sep 11 SA	Dec 2011/ Dec 2010 NSA	Jan-Dec 2011/ Jan-Dec 2010
Total	-1.1	-1.0	-3.7	-1.3
Food	-1.0	-0.3	-1.7	0.0
Non-food	-1.2	-1.4	-4.4	-1.8

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/54875

Chart VG-1 provides 12-month percentage changes of retail sales in Italy. There are only positive changes in Dec 2010 and Apr 2011. Retail sales fell relative to a year earlier in most months of 2011.

Chart VG-2, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage in 2011 and yearly rates from 2008 to 2011 in Table VIG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but only two monthly increases of 0.1 percent in Oct and 0.2 percent in Apr and negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr and zero percent in Feb.

Table VG-2, Italy, Retail Sales 12 Months ∆%

	12-Month ∆% NSA	Month ∆% SA
Dec 2011	-3.7	-1.1
Nov	-1.8	-0.7
Oct	-1.4	0.1
Sep	-1.6	-0.4
Aug	-0.3	-0.2
July	-2.3	-0.3
Jun	-1.1	-0.4
May	-0.4	-0.3
Apr	2.2	0.2
Mar	-2.1	-0.3
Feb	0.0	0.0
Jan	-1.1	-0.8
Dec 2010	0.6	0.8
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: http://www.istat.it/it/archivio/54875

VH United Kingdom. The Markit/CIPS UK Services PMI^® rose from 54.0 in Dec to 56.0 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Chris Williamson, Chief Economist at Markit, finds strength in services, manufacturing and construction, constituting significant improvement over IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Jan month ∆%: -0.5 Dec 12-month ∆%: 3.6 Blog 02/19/12
Output/Input Prices	Output Prices: Jan 12 months NSA ∆%: 4.1; excluding food, petroleum ∆%: 2.4 Input Prices: Jan 12 months NSA ∆%: 7.0 Excluding ∆%: 5.4 Blog 02/12/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.7 Blog 02/26/12
Industrial Production	Dec 2011/Dec 2010 NSA ∆%: Industrial Production minus 3.3; Manufacturing 0.8 Blog 02/12/12
Retail Sales	Jan month SA ∆%: +0.9 Dec 12 months ∆%: +2.0 Blog 02/19/12
Labor Market	Oct-Dec Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 2.0% Blog 02/12/19
Trade Balance	Balance Dec minus ₤1109 million Exports Dec ∆%: 0.5 Oct/Dec ∆%: 7.8 Imports Dec ∆%: 0.9 Oct/Dec ∆%: 4.1 Blog 02/12/12

Links to blog comments in Table UK:

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

Revised annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of 4.4 percent in 2009 after dropping 1.1 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was 0.8 percent in 2011.

Table VH-1, UK, Gross Value Added at Chained Volume Measures Basic Prices, ∆%

	∆% on Prior Year
1998	4.1
1999	3.8
2000	4.6
2001	2.9
2002	2.4
2003	3.6
2004	2.8
2005	2.3
2006	2.5
2007	3.5
2008	-1.1
2009	-4.4
2010	2.1
2011	0.8

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data and additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 2000. Growth in IIQ2011 was reduced to 0.0 percent. The third estimate for IIIQ2011 is higher at 0.6 percent. The second estimate for IVQ2011 is contraction of 0.2 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table VH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	0.4	0.0	0.6	-0.2
2010	0.4	1.1	0.7	-0.5
2009	-1.6	-0.2	0.2	0.7
2008	0.0	-1.3	-2.0	-2.3
2007	1.1	1.2	1.2	0.6
2006	0.8	0.4	0.2	0.7
2005	0.3	0.8	0.8	0.8
2004	0.8	0.4	0.1	0.5
2003	0.7	1.2	1.0	1.2
2002	0.8	0.7	0.8	0.7
2001	1.4	0.4	0.7	0.4
2000	1.4	1.1	0.4	0.7

Source:  UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009 and 5.8 percent in IIQ2008. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 2.9 percent in IIIQ2010 and 1.8 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.8 percent in IVQ2010 to 1.7 percent in IQ2011, 0.6 percent in IIQ2011, 0.5 percent in IIIQ2011 and 0.7 percent in IVQ2011 but contraction of 0.2 percent in IVQ2011 relative to IIIQ2011. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

Table VH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	1.7	0.6	0.5	0.7
2010	1.2	2.5	2.9	1.8
2009	-6.9	-5.8	-3.7	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

Contributions to growth of GDP and components in a quarter from the preceding quarter are provided in Table VH-4. The first line of the table provides the weights of components. Growth of 0.6 percent in IIIQ2011 originated almost entirely in the contribution by services of 0.8 percentage points with virtually nil contributions by other components with exception of 0.3 percentage points contributed by construction. Growth in 2011 has mostly originated in services. GDP contracted 0.2 percent in IVQ2011. All contributions are negative in IV2011 and the contribution of services is zero.

Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter 

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	154	102	76	763
IVQ11	-0.2	-1.4	-0.8	-0.5	0.0
IIIQ11	0.6	0.0	-0.1	0.3	0.8
IIQ11	0.0	-1.4	0.0	2.8	0.1
IQ11	0.4	-0.5	0.8	-1.7	0.9
IVQ10	-0.5	0.2	0.7	-1.4	-0.3
IIIQ10	0.7	0.2	1.3	3.1	0.6
IIQ10	1.1	1.2	1.6	8.1	0.5
IQ10	0.4	1.3	1.2	0.9	0.0
IV09	0.7	0.3	1.2	0.3	0.8
III09	0.2	-1.3	-0.9	0.6	0.4
II09	-0.2	-0.3	-0.2	-2.5	-0.2
I09	-1.6	-3.9	-4.5	-6.4	-0.8
IV08	-2.3	-4.7	-5.0	-5.1	-1.5
III08	-2.0	-1.4	-1.6	-3.7	-1.6
II08	-1.3	-1.4	-1.9	-2.0	-0.9

Note: CONS: construction; * Weights may not add to total because of rounding

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 1.4 percent IVQ2011 with manufacturing declining 0.8 percent. Services were flat in IVQ2011, reducing the support of economic activity in prior quarters. Business services & finance increased only 0.1 percent.

Table VH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter

Component	2010 Q4	2011 Q1	2011 Q2	2011Q3	2011Q4
Agriculture	-10.0	8.0	-0.7	-0.6	-1.5
Total Production	0.2	-0.5	-1.4	0.0	-1.4
Mining & quarrying	-5.0	-5.2	-7.6	-0.4	-2.0
Manufacturing	0.7	0.8	0.0	-0.1	-0.8
Utilities	6.0	-6.0	-1.7	1.7	-5.1
Water supply	-0.8	5.2	-2.1	-0.4	-1.3
Construction	-1.4	-1.7	2.8	0.3	-0.5
Total Services	-0.3	0.9	0.1	0.8	0.0
Distribution, hotels & restaurants	-1.1	1.3	0.1	0.4	-0.6
Transport, storage & communication	0.7	-0.1	0.2	0.6	-0.1
Business services & finance	-0.1	0.8	0.0	1.3	0.1
Government & other	-0.5	1.3	0.1	0.5	0.3

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government. In IVQ2011, there were no contributions to growth by business services and finance while government and other contributed 0.1 percentage points.

Table VH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %

Component	2010 Q4	2011 Q1	2011 Q2	2011Q3	2011Q4
Agriculture	-0.1	0.1	0.0	0.0	0.0
Total Production	0.0	-0.1	-0.2	0.0	-0.2
Mining & quarrying	-0.1	-0.1	-0.2	0.0	0.0
Manufacturing	0.1	0.1	0.0	0.0	-0.1
Utilities	0.1	-0.1	0.0	0.0	-0.1
Water supply	0.0	0.1	0.0	0.0	0.0
Construction	-0.1	-0.1	0.2	0.0	0.0
Total Services	-0.2	0.7	0.1	0.6	0.0
Distribution, hotels & restaurants	-0.2	0.2	0.0	0.0	-0.1
Transport, storage & communication	0.1	0.0	0.0	0.1	0.0
Business services & finance	0.0	0.2	0.0	0.4	0.0
Government & other	-0.1	0.3	0.0	0.1	0.1

Note: components may not add to total because of rounding

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

Table VIH-7 provides UK year-on-year growth of value added by components. There was significant deceleration in growth of total production from 1.9 percent in 2010 to minus 1.3 percent in 2011. Manufacturing growth fell from 3.7 percent in 2010 to 2.1 percent in 2011. Construction growth fell from 8.2 percent in 2010 to 2.7 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.4 percent in 2007 to decline 0.5 percent in 2008 and 2.6 percent in 2009. Growth in 2010 and 2011 has been more moderate at 1.4 percent and 1.6 percent, respectively.

Table VH7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2006	2007	2008	2009	2010	2011
Agriculture	-3.1	-3.7	16.2	-15.2	-1.5	-2.1
Total Production	0.0	0.5	-2.8	-9.0	1.9	-1.3
Mining & quarrying	-7.6	-2.5	-6.5	-9.0	-4.9	-15.5
Manufacturing	1.7	0.8	-2.6	-9.6	3.7	2.1
Utilities	-0.3	0.8	0.5	-4.8	3.5	-5.7
Water supply	-2.7	3.0	-1.8	-8.1	-1.6	3.1
Construction	0.7	2.1	-2.8	-13.5	8.2	2.7
Total Services	3.3	4.4	-0.5	-2.6	1.4	1.6
Distribution, hotels & restaurants	3.7	4.8	-2.8	-4.6	1.5	1.0
Transport, storage & communication	2.1	5.7	-0.2	-5.7	3.0	1.2
Business services & finance	5.6	6.2	-0.3	-4.3	1.3	2.0
Government & other	0.7	0.9	0.3	2.3	0.7	1.6

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

Total production subtracted 0.2 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-8. Total services added 1.1 percentage points in 2010 and 1.3 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.2 percent in the final quarter of 2011.

Table VH-8, UK, Contribution to Growth on Prior Year of Value Added by Components, %

Component	2006	2007	2008	2009	2010	2011
Agriculture	0.0	0.0	0.1	-0.1	0.0	0.0
Total Production	0.0	0.1	-0.4	-1.4	0.3	-0.2
Mining & quarrying	-0.2	-0.1	-0.2	-0.2	-0.1	-0.3
Manufacturing	0.2	0.1	-0.3	-1.0	0.4	0.2
Utilities	0.0	0.0	0.0	-0.1	0.0	-0.1
Water supply	0.0	0.0	0.0	-0.1	0.0	0.0
Construction	0.1	0.2	-0.2	-1.0	0.6	0.2
Total Services	2.5	3.3	-0.4	-2.0	1.0	1.3
Distribution, hotels & restaurants	0.5	0.7	-0.4	-0.6	0.2	0.1
Transport, storage & communication	0.2	0.6	0.0	-0.6	0.3	0.1
Business services & finance	1.6	1.7	-0.1	-1.3	0.4	0.6

Note: components may not add to total because of rounding

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q4-2011/index.html

VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability 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). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html 

Table VI-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar of 12.8 percent by Fri Feb 24, 2012. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table VI-1, 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	02/24 /2012
Rate	1.1423	1.5914	1.192	1.3449
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/24/ 2012
Rate	8.2798	8.2765	6.8211	6.2986
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://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

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 VI-2 extracts four rows of Table VI-I 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 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VIII-4 below, the dollar has devalued again to USD 1.3449/EUR or by 12.8 percent {[(1.3449/1.192)-1]100}. 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 subsequently revaluing 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 6.2986/USD on Fri Feb 24, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-2 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. Financial markets were closed in China during the week of Jan 27. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. In the week of Feb 10 China revalued by an additional 0.1 percent. There was marginal devaluation of 0.1 percent in the week of Feb 17. The rate remained virtually unchanged at CNY 6.2986 in the week of Feb 24. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table VI-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	12/26/03	7/14/08	6/07/10	02/24 /2012
Rate	1.1423	1.5914	1.192	1.3449
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/24/ 2012
Rate	8.2798	8.2765	6.8211	6.2986
Weekly Rates	02/03/ 2012	02/10/  2012	02/17/  2012	02/24/  2012
CNY/USD	6.303	6.2944	6.2982	6.2986
∆% from Earlier Week*	0.5	0.1	-0.1	0.0

*Negative sign is depreciation, positive sign is appreciation

Source: Table VI-1 and same table in earlier blog posts.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table VI-3. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

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

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/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 VI-1 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of 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, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill. 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 driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table VI-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 02/24/12,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. After the surge in the week of Dec 2, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the weeks of Jan 20, Jan 27 and Feb 3 followed by weakness in the week of Feb 10 but strength in the weeks of Feb 17 and 24, all financial values show positive change in valuation in column “∆% Trough to 02/24/12.” Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 34.1 percent and S&P 500 33.6 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached 13,055.15 in intraday trading on Feb 24, which is the highest in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 02/24/12” had double digit gains relative to the trough around Jul 2, 2010 but now only four valuations show increases of less than 10 percent: NYSE Financial is 8.7 percent above the trough; STOXX 50 Europe is 8.3 percent above the trough; Japan’s Nikkei Average is 9.3 percent above the trough; and China’s Shanghai Composite is 2.4 percent above the trough. DJ UBS Commodities is 20.5 percent above the trough; Dow Global is 17.5 percent above the trough; and DAX is 21.1 percent above the trough. Japan’s Nikkei Average is 9.3 percent above the trough on Aug 31, 2010 and 15.3 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9647.38 on Fri Feb 24, 2012, which is 5.9 percent lower than 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 12.8 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 02/24/12” in Table VI-4 shows positive performance of risk financial assets in the week of Feb 24, 2012 with the exception of decline of 0.2 percent for the NYSE Financial. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 02/24/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Feb 24, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 02/17/12” but also relative to the peak in column “∆% Peak to 02/24/12.” There are now only four equity indexes above the peak in Table VI-4: DJIA 15.9 percent, S&P 500 12.2 percent, Dax 8.4 percent and Dow Asia Pacific 0.1 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 13.4 percent, Nikkei Average by 22.5 percent, Shanghai Composite by 24.7 percent, STOXX 50 by 8.3 percent and Dow Global by 4.1 percent. DJ UBS Commodities Index is now 3.0 percent above the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.

Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 02/24 /12	∆% Week 02/24/ 12	∆% Trough to 02/24 12
DJIA	4/26/ 10	7/2/10	-13.6	15.9	0.3	34.1
S&P 500	4/23/ 10	7/20/ 10	-16.0	12.2	0.3	33.6
NYSE Finance	4/15/ 10	7/2/10	-20.3	-13.4	-0.2	8.7
Dow Global	4/15/ 10	7/2/10	-18.4	-4.1	0.6	17.5
Asia Pacific	4/15/ 10	7/2/10	-12.5	0.1	0.8	14.4
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-15.3	2.8	9.3
China Shang.	4/15/ 10	7/02 /10	-24.7	-22.9	3.5	2.4
STOXX 50	4/15/10	7/2/10	-15.3	-8.3	0.7	8.3
DAX	4/26/ 10	5/25/ 10	-10.5	8.4	0.2	21.1
Dollar Euro	11/25 2009	6/7 2010	21.2	11.1	2.4	-12.8
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	3.0	2.5	20.5
10-Year T Note	4/5/ 10	4/6/10	3.986	1.977

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://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 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. The last row of Table VI-5 for Feb 24, 2012, shows that the S&P 500 is now 12.7 percent above the Apr 26, 2010 level and the DJIA is 15.9 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from  prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior 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
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6
Feb 3	1.6	14.8	2.2	11.0
Feb 10	-0.5	14.2	-0.2	10.8
Feb 17	1.2	15.6	1.4	12.3
Feb 24	0.3	15.9	0.3	12.7

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table VI-6, updated with every blog comment, 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, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 4.8 percent to ZAR 7.584/USD on Feb 24, 2012, which is still 34.5 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 6.9 percent stronger at SGD 1.255/USD on Feb 24 relative to the trough of depreciation but still stronger by 19.2 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing appreciation of 1.6 percent relative to the trough to BRL 1.7095/USD on Feb 17, 2012 but still stronger by 29.7 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Copom reduces the Selic rate to 11.00 percent

30/11/2011 7:47:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.

The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table VI-6, Exchange Rates

	Peak	Trough	∆% P/T	Feb 24, 2012	∆T Feb 24, 2012	∆P Feb 24, 2012
EUR USD	7/15 2008	6/7 2010		02/24 2012
Rate	1.59	1.192		1.3449
∆%			-33.4		11.4	-18.2
JPY USD	8/18 2008	9/15 2010		02/24 2012
Rate	110.19	83.07		81.199
∆%			24.6		2.3	26.3
CHF USD	11/21 2008	12/8 2009		02/24 2012
Rate	1.225	1.025		0.895
∆%			16.3		12.7	26.9
USD GBP	7/15 2008	1/2/ 2009		02/24 2012
Rate	2.006	1.388		1.587
∆%			-44.5		12.5	-26.4
USD AUD	7/15 2008	10/27 2008		02/24 2012
Rate	1.0215	1.6639		1.069
∆%			-62.9		43.8	8.4
ZAR USD	10/22 2008	8/15 2010		02/24 2012
Rate	11.578	7.238		7.584
∆%			37.5		-4.8	34.5
SGD USD	3/3 2009	8/9 2010		02/24 2012
Rate	1.553	1.348		1.255
∆%			13.2		6.9	19.2
HKD USD	8/15 2008	12/14 2009		02/24 2012
Rate	7.813	7.752		7.754
∆%			0.8		0.0	0.8
BRL USD	12/5 2008	4/30 2010		02/24 2012
Rate	2.43	1.737		1.7095
∆%			28.5		1.6	29.7
CZK USD	2/13 2009	8/6 2010		02/24 2012
Rate	22.19	18.693		18.58
∆%			15.7		0.6	16.3
SEK USD	3/4 2009	8/9 2010		02/24 2012
Rate	9.313	7.108		6.6561
∆%			23.7		6.4	28.5
CNY USD	7/20 2005	7/15 2008		02/24 2012
Rate	8.2765	6.8211		6.2986
∆%			17.6		7.7	23.9

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://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

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

Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

Chart VI-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=122e3bcb627e8e53f1bf72a1a09cfb81&lastObs=260&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/JRXWTFB_N.B,H10/H10/JRXWTFN_N.B,H10/H10/JRXWTFO_N.B%7d

Table VI-7, 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 new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. 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. Monetary policy 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, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.977 percent at the close of market on Fri Feb 24, 2012 would be equivalent to price of 105.8535 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.5 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. 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 Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On Feb 22, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2915 billion, or $2.9 trillion, with portfolio of long-term securities of $2583 billion, or $2.6 trillion, consisting of $1560 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $853 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1620 billion or $1.6 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. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. 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 VI-7, 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
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1
12/30/11	1.871	106.8476	5.5
01/06/12	1.957	106.0403	4.7
01/13/12	1.869	106.8664	5.5
01/20/12	2.026	105.3976	4.1
01/27/12	1.893	106.6404	5.3
02/03/12	1.923	106.3586	5.0
02/10/12	1.974	105.8815	4.6
02/17/12	2.000	105.6392	4.3
02/24/12	1.977	105.8535	4.5

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://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

VII Economic Indicators. Crude oil input in refineries increased 1.0 percent to 14,556 thousand barrels per day on average in the four weeks ending on Feb 17, 2012 from 14,410 thousand barrels per day in the four weeks ending on Feb 10, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 83.5 percent on Feb 17, 2012, which is higher than 82.4 percent on Feb 18, 2011 and 82.7 percent on Feb 10, 2012. Imports of crude oil increased 0.7 percent from 8,689 thousand barrels per day on average in the four weeks ending on Feb 10 to 8,748 thousand barrels per day in the week of Feb 17. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 9.1 million barrels per day last week [Feb 17]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight increase in utilization in refineries with increasing imports at the margin in the prior week resulted in marginal increase of commercial crude oil stocks by 1.6 million barrels from 339.1 million barrels on Feb 10 to 340.7 million barrels on Feb 17. Motor gasoline production increased 1.3 percent to 8,738 thousand barrels per day in the week of Feb 17 from 8,629 thousand barrels per day on average in the week of Feb 10. Gasoline stocks decreased 0.7 million barrels and stocks of fuel oil decreased 0.2 million barrels. Supply of gasoline fell from 8,746 thousand barrels per day on Feb 18, 2011, to 8,213 thousand barrels per day on Feb 17, 2012, or by 6.1 percent, while fuel oil supply fell 5.9 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VII-1 also shows increase in the WTI price of crude oil by 21.5 percent from Feb 18, 2011 to Feb 17, 2012. Gasoline prices rose 12.6 percent from Feb 21, 2011 to Feb 20, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices are increasing to the highest levels at this time of the year.

Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	02/17/12	02/10/12	02/18/11
Crude Oil Refineries Input	14,556 Week       ∆%: 1.0	14,410	14,011
Refinery Capacity Utilization %	83.5	82.7	82.4
Motor Gasoline Production	8,738 Week      ∆%: 1.3	8,629	9,054
Distillate Fuel Oil Production	4,425 Week     ∆%: -0.5	4,447	4,109
Crude Oil Imports	8,748 Week        ∆%: +0.7	8,689	8,541
Motor Gasoline Supplied	8,213 ∆% 2011/2010= -6.1%	8,081	8,746
Distillate Fuel Oil Supplied	3,577 ∆% 2011/2010 = -5.9%	3,717	3,802
	02/17/12	02/10/12	02/18/11
Crude Oil Stocks Million B	340.7         ∆= +1.6 MB	339.1	346.7
Motor Gasoline Million B	231.5    ∆= -0.7 MB	232.2	238.3
Distillate Fuel Oil Million B	143.5 ∆= -0.2 MB	143.7	159.9
WTI Crude Oil Price $/B	103.27 ∆% 2012/2011 21.5	98.68	85.03
	02/20/12	2/13/12	2/21/11
Regular Motor Gasoline $/G	3.591 ∆% 2012/2011 12.6	3.523	3.189

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

Chart VII-1 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations.

Chart VII-1, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Chart VII-2 of the US Energy Information Administration provides closer view of US crude oil stocks since Jun 2010. Crude oil stocks rose in a clear trend in 2011 but began to drop on a downward trend after May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower. The final part of the chart shows the increase in oil stocks in the weeks of Nov 25 and Dec 2 and the declines in the weeks of Dec 9 and Dec 16 with increases in the weeks of Dec 23, Dec 30 and Jan 6, 2012. The last change in Chart VII-2 is the decrease in stocks in the week of Jan 13, moderating with the increase by 3.6 million barrels in the week of Jan 20 and an extra 4.1 million barrels in the week of Jan 27 and 0.3 million barrels in the week of Feb 3. Stocks declined marginally in the week of Feb 10 but increased in the week of Feb 17.

Chart VII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims were unchanged at revised 351,000 on Feb 11, 2012 and also 351,000 on Feb 18. Claims not adjusted for seasonality decreased 19,888 from 365,104 on Feb 11 to 345,216 on Feb 18. Strong seasonality is preventing clear analysis of labor markets.

Table VII-2, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Feb 18, 12	351,000	345,216	359,000
Feb 11, 12	351,000	365,104	366,000
Change	0	-19,888	-7,000
Feb 4, 12	361,000	401,365	367,000
Prior Year	384,000	380,985	407,750

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 619,951 on Feb 14, 2009 to 380,985 on Feb 19, 2011, and now to 345,216 on Feb 18, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (Section I Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html and http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Feb 17, 2001	345,841	358,000
Feb 16, 2002	376,573	397,000
Feb 15, 2003	398,291	420,000
Feb 14, 2004	341,634	356,000
Feb 19, 2005	303,814	318,000
Feb 18, 2006	269,571	283,000
Feb 24, 2007	299,000	318,000
Feb 16, 2008	325,886	339,000
Feb 14, 2009	619,951	635,000
Feb 20, 2010	458,160	485,000
Feb 19, 2011	380,985	384,000
Feb 18, 2012	345,216	351,000

Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the quarter Nov 2011 to Jan 2012, CPI inflation for all items seasonally adjusted was 1.2 percent in annual equivalent, that is, compounding inflation in Nov-Jan and assuming it would be repeated for a full year. In the 12 months ending in Jan, CPI inflation of all items not seasonally adjusted was 2.9 percent. Inflation in Jan 2012 not seasonally adjusted was 0.4 percent relative to Dec 2011 (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.09 percent for three months, 0.13 percent for six months, 0.16 percent for 12 months, 0.30 percent for two years, 0.43 percent for three years, 0.89 percent for five years, 1.40 percent for seven years, 1.98 percent for ten years and 3.10 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.

Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Jan 2012/Jan 2012 NSA	∆% Annual Equivalent Nov 2011-Jan 2012 SA
CPI All Items	2.9	1.2
CPI ex Food and Energy	2.3	2.0

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

IX Conclusion. The US economy is in growth standstill at an annual equivalent rate in the four quarters of 2011 of 1.6 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 30 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. Unconventional monetary policy of zero interest rates and large-scale purchases of assets using the central bank’s balance sheet is designed to increase aggregate demand by stimulating consumption and investment. In practice, there is no control of how cheap money will be used. An alternative allocation of cheap money is through the carry trade from zero interest rates and short dollar positions to exposures in risk financial assets such as equities, commodities and so on. After a decade of unconventional monetary policy it may be prudent to return to normalcy so as to avoid adverse side effects of financial turbulence and inflation waves. Normal monetary policy would also encourage financial intermediation required for financing sound long-term projects that can stimulate economic growth and full utilization of resources. (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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Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

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© Carlos M. Pelaez, 2010, 2011, 2012

Appendix I. The Great Inflation

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy.  This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Chart I1, Brazil, Phillips Circuit 1963-1987

©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

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/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html 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). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding 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 I1, 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 of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 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 I2 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 monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). 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 policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, 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

© Carlos M. Pelaez, 2010, 2011, 2012