Global Financial and Economic Risk, World Inflation Waves, Hiring Collapse, Ten Million Fewer Full-time Jobs and Youth Unemployment: Part II

 

Global Financial and Economic Risk, World Inflation Waves, Hiring Collapse, Ten Million Fewer Full-time Jobs and Youth Unemployment

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I World Inflation Waves

IA World Inflation Waves

IB United States Inflation

IB1 Long-term US Inflation

IB2 Current US Inflation

IB3 Import Export Prices

II Hiring Collapse

IIA Hiring Collapse

IIB Labor Underutilization

IIC Ten Million Fewer Full-time Jobs

IID Youth Unemployment

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

 

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 55.5 in Feb from 54.5 in Jan, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9282). 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 from Dec to Jan. New orders are expanding at a faster rate, increasing from 54.0 in Jan to 54.7 in Feb, suggesting further increase in business ahead. The HSBC Brazil Composite Output Index of the HSBC Brazil Services PMI^™, compiled by Markit, rose from 53.8 in Jan to 55.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9279). Andre Loes, Chief Economist of HSBC in Brazil, finds that the increase of the services HSBC PMI for Brazil from 55.0 in Jan to 57.1 in Feb, which is the highest level since Jul 2007, indicate that the economy may be expanding at a faster rate than anticipated (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9279).

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

Table USA, US Economic Indicators

Consumer Price Index	Feb 12 months NSA ∆%: 2.9; ex food and energy ∆%: 2.2 Jan month ∆%: 0.4; ex food and energy ∆%: 0.1 Blog 03/18/12
Producer Price Index	Feb 12 months NSA ∆%: 3.3; ex food and energy ∆% 3.0 Feb month SA ∆% = 0.4; ex food and energy ∆%: 0.2 Blog 03/18/12
PCE Inflation	Jan 12 months NSA ∆%: headline 2.4; ex food and energy ∆% 1.9 Blog 03/04/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 30.5 million NSA Establishment Survey: Feb Nonfarm Jobs +227,000; Private +233,000 jobs created  Jan 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.1% Blog 03/11/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring Jan 2012 3.668 million lower by 1.157 million than 4.825 million in Feb 2006 Blog 03/18/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 03/04/12
Personal Income and Consumption	Jan month ∆% SA Real Disposable Personal Income (RDPI) minus 0.1 Jan month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.0 12 months NSA ∆%: RDPI: 0.6; RPCE ∆%: 1.2 Blog 03/04/2012
Quarterly Services Report	IVQ11/IIIQ11 SA ∆%: Information 0.6 Professional 1.7 Administrative -1.1 Hospitals 3.5 Blog 03/11/12
Employment Cost Index	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
Industrial Production	Feb month SA ∆%: 0.0 Feb 12 months SA ∆%: 4.0 Manufacturing Feb SA ∆% 0.3 Feb 12 months SA ∆% 5.1, NSA 5.2 Capacity Utilization: 78.7 Blog 03/18/12
Productivity and Costs	Nonfarm Business Productivity IVQ2011∆% SAAE 0.9; IVQ2011/IVQ2010 ∆% 0.3; Unit Labor Costs IVQ2011 ∆% 2.8; IVQ2011/IVQ2010 ∆%: 3.1 Blog 03/11/2012
New York Fed Manufacturing Index	General Business Conditions From Feb 19.53 to Mar 20.21 New Orders: From Feb 9.73 to Mar 6.84 Blog 03/18/12
Philadelphia Fed Business Outlook Index	General Index from Feb 10.2 to Mar 12.5 New Orders from Feb 11.7 to Mar 3.3 Blog 03/18/12
Manufacturing Shipments and Orders	Jan New Orders SA ∆%: -1.0; ex transport ∆%: -0.3 Jan NSA 12-month ∆%: 8.1; ex transport ∆% 7.2 Blog 03/11/12
Durable Goods	Jan New Orders SA ∆%: minus 4.0; ex transport ∆%: minus 3.2 Jan 12-month NSA New Orders ∆%: 8.8; ex transport ∆% : 6.6 Blog 03/04/12
Sales of New Motor Vehicles	Feb 2012 2,062,683; Feb 2011 1,813,182. Feb SAAR 15.10 million, Dec SAAR 13.56, Feb 2011 SAAR 13.29 million Blog 03/04/12
Sales of Merchant Wholesalers	Jan 2012/Jan 2010 ∆%: Total 11.3; Durable Goods: 14.1; Nondurable Goods 9.1 Blog 03/11/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Jan 12/Jan 11 NSA ∆%: Sales Total Business 8.6; Manufacturers 8.4 Retailers 5.8; Merchant Wholesalers 11.3 Blog 03/18/12
Sales for Retail and Food Services	Feb 2012/Feb 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 8.0 Blog 03/18/12
Value of Construction Put in Place	Jan SAAR month SA ∆%: minus 0.1 Jan 12-month NSA: 8.0 Blog 03/04/12
Case-Shiller Home Prices	Dec 2011/Dec 2010 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 4.0 ∆% Dec SA: 10 Cities minus 0.5 ; 20 Cities: minus 0.5 Blog 03/04/12
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 Jan SA -$52,565 million versus Dec -$50,421 million Exports Jan SA ∆%: 1.4 Imports Dec SA ∆%: 2.1 Goods Exports Jan 2012/2011 NSA ∆%: 7.6 Goods Imports Jan 2011/2011 NSA ∆%: 8.4 Blog 03/11/12
Export and Import Prices	Feb 12 months NSA ∆%: Imports 4.5; Exports 1.5 Blog 03/18/12
Consumer Credit	Jan ∆% annual rate: 8.6 Blog 03/11/12
Net Foreign Purchases of Long-term Treasury Securities	Nov Net Foreign Purchases of Long-term Treasury Securities: $101.0 billion Jan versus Dec $19.1 billion Major Holders of Treasury Securities: China $1159 billion; Japan $1079 billion  Blog 03/18/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 2.8; Outlays -2.4; Individual Income Taxes 0.6 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Feb $580,830 million Blog 03/18/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 03/18/2012
Flow of Funds	IVQ2011 ∆ since 2007 Assets -$7315B Real estate -$5183B Financial -$2507 Net Worth -$6743 Blog 03/11/12
Current Account Balance of Payments	IVQ2011 -$124B %GDP 3.2 Blog 03/18/12

Links to blog comments in Table USA:

03/12/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

ndustrial production was flat in Feb and increased 4.0 percent in the 12 months ending in Feb, as shown in Table VA-1, with all data seasonally adjusted. In the six months ending in Jan, industrial production grew at the annual equivalent rate of 3.7 percent. Business equipment rose 0.6 percent in Feb and grew 10.8 percent in the 12 months ending in Feb and at the annual equivalent rate of 14.1 percent in the six months ending in Feb. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “The capacity utilization rate for total industry decreased to 78.7 percent, a rate 2.2 percentage points below its long-run (1972--2010) average.” Manufacturing contributed $1,229 billion to US national income of $12,643 billion without capital consumption adjustment in 2010, or 9 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm).

Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, % 

2011	Feb	Jan	Dec	Nov	Oct	Sep	Jan 12/ Feb 11
Total	0.0	0.4	0.9	0.0	0.4	0.1	4.0
Market Groups
Final Products	0.2	1.0	0.6	-0.3	0.5	0.0	4.0
Consumer Goods	0.0	0.5	0.5	-0.7	0.2	-0.2	1.5
Business Equipment	0.6	2.1	1.4	0.5	1.4	0.6	10.8
Non Industrial Supplies	0.5	0.1	1.5	-0.7	-0.3	0.4	3.9
Construction	1.	-0.1	3.0	0.2	-0.4	0.1	7.5
Materials	-0.3	-0.1	1.0	0.5	0.6	0.2	4.1
Industry Groups
Manufacturing	0.3	1.1	1.5	-0.2	0.5	0.4	5.1
Mining	-1.2	-1.6	0.8	0.8	1.3	0.0	6.1
Utilities	0.0	-2.2	-3.0	0.1	-1.2	-1.4	-5.6
Capacity	78.7	78.8	78.5	77.9	77.9	77.7	1.2

Sources: http://www.federalreserve.gov/releases/g17/current/

Manufacturing increased 0.3 percent in Feb and 5.2 percent in 12 months. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.

Table VA-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12 Months NSA ∆%
Feb 2012	0.3	5.2
Jan	1.1	4.7
Dec 2011	1.5	4.4
Nov	-0.2	4.1
Oct	0.5	4.4
Sep	0.4	4.2
Aug	0.3	3.7
Jul	0.8	3.8
Jun	0.1	3.6
May	0.2	3.6
Apr	-0.6	4.5
Mar	0.7	6.0
Feb	0.1	6.2
Jan	0.7	6.2
Dec 2010	1.0	6.2
Nov	0.2	5.3
Oct	0.2	6.2
Sep	0.2	5.9
Aug	0.1	6.6
Jul	0.8	7.6
Jun	-0.1	8.1
May	1.1	7.8
Apr	0.7	6.1
Mar	0.9	5.9
Feb	0.1	0.6
Jan	1.0	6.2
Dec 2009	0.2	-3.2
Nov	0.8	-5.9
Oct	-0.04	-8.9
Sep	0.8	-10.3
Aug	1.0	-13.3
Jul	1.3	-14.9
Jun	-0.3	-17.4
May	-1.2	-17.4
Apr	-0.8	-18.1
Mar	-2.0	-17.1
Feb	0.1	-16.0
Jan	-2.7	-16.5
Dec 2008	-3.1	-14.1
Nov	-2.4	-11.5
Oct	-0.6	-9.2
Sep	-3.4	-9.0
Aug	-1.4	-5.5
Jul	-1.1	-4.1
Jun	-0.6	-3.5
May	-0.6	-2.8
Apr	-1.2	-1.5
Mar	-0.4	-0.9
Feb	-0.5	0.6
Jan	-0.3	1.9
Dec 2007	0.3	1.8
Nov	0.3	3.2
Oct	-0.5	2.8
Sep	0.5	3.2
Aug	-0.5	2.9
Jul	0.3	3.8
Jun	0.3	3.3
May	-0.2	3.5
Apr	0.7	4.0
Mar	0.7	2.8
Feb	0.5	2.0
Jan	-0.3	1.8
Dec 2006		3.2
Dec 2005		1.4
Dec 2004		2.8
Dec 2003		1.7

Source: http://www.federalreserve.gov/releases/g17/current/table1.htm

Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart VA-1, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression. The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of computers and semiconductors has already surpassed the level before the global recession.

Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 5 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart VA-3, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

The index of general business conditions of the Federal Reserve Bank of New York Empire State Manufacturing Survey shows significant, continuing improvement from revised minus 7.43 in Sep to 20.21 in Mar, as shown in Table VA-3. The index had been registering negative changes in the five months from Jun to Oct. The new orders segment improved more mildly from minus 7.52 in Sep to 13.79, declining to 6.84 in Mar. There is positive reading in shipments from revised minus 8.28 in Sep to positive 22.79 in Feb, declining to 18.21 in Mar. The segment of number of employees fell back into contraction territory from minus 5.43 in Sep to minus 3.66 in Nov but recovered strongly to 13.58 in Mar together with number of weekly hours worked. Expectations for the next six months of the general business conditions index peaked at 54.87 in Jan, declining to a still strong 47.50 in Mar. Expectations of new orders also peaked at 53.85 in Jan, declining to a still strong 44.71 in Mar. There is a similar pattern of strong recovery in shipments, number of employees and hours worked.

Table VA-3, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Mar 2012	20.21	6.84	18.21	13.58	18.52
Feb	19.53	9.73	22.79	11.76	7.06
Jan	13.48	13.70	21.69	12.09	6.59
Dec 2011	8.19	5.99	20.06	2.33	-2.33
Nov	0.80	-0.82	11.70	-3.66	2.44
Oct	-7.22	-0.26	2.89	3.37	-4.49
Sep	-7.43	-7.52	-8.28	-5.43	-2.17
Six Months
Mar 2012	47.50	41.98	43.21	32.10	20.99
Feb	50.38	44.71	49.41	29.41	18.82
Jan	54.87	53.85	52.75	28.57	17.58
Dec 2011	45.61	54.65	51.16	24.42	22.09
Nov	32.06	35.37	36.59	14.63	8.54
Oct	13.99	12.36	17.98	6.74	-2.25
Sep	22.93	13.04	13.04	0.0	-6.52

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct with the movement to 10.8 away from the contraction zone of minus 22.7 in Sep and recovered to 12.5 in Mar from the decline to 3.1 in Nov. New orders were signaling increasing future activity, rising from contraction at minus 5.5 in Sep to positive reading but registered only 3.3 in Mar. There is similar behavior in shipments as in new orders. Employment or number of employees fell to 1.1 in Feb, near the contraction border of zero, but rose to 6.8 in Mar. The average work week also fell from 10.1 in Feb to 2.7 in Mar. Most indexes of expectations for the next six months are showing sharp increases but interruptions in Feb and Mar for the general index, new orders and shipments. Employment and average work week increased from Jan into Feb and Mar 2012.

Table VA-4, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Mar 12	12.5	3.3	3.5	6.8	2.7
Feb	10.2	11.7	15.0	1.1	10.1
Jan	7.3	6.9	5.7	11.6	5.0
Dec 11	6.8	10.7	9.1	11.5	2.8
Nov	3.1	3.5	6.0	10.6	7.1
Oct	10.8	8.5	13.6	5.0	4.2
Sep	-12.7	-5.5	-16.6	7.3	-6.2
Aug	-22.7	-22.2	-8.9	-0.9	-11.2
Jul	6.2	0.5	8.2	9.5	-3.9
Future
Mar 12	32.9	36.4	31.3	21.8	11.2
Feb	33.3	32.5	29.0	22.5	10.8
Jan	49.0	49.7	48.2	19.1	9.2
Dec 11	40.0	44.1	36.4	10.8	4.5
Nov	37.7	36.9	35.5	25.2	4.0
Oct	28.8	28.1	29.0	15.5	8.4
Sep	25.2	24.6	27.1	14.0	6.8
Aug	6.3	20.6	18.4	11.2	-0.7
Jul	25.8	31.2	26.1	12.9	6.6

Source: http://www.philadelphiafed.org/index.cfm

Chart VA-4 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Mar 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully could be renewed strength from late 2011 into Jan 2012 but marginal weakness in Feb with mild recovery in Mar.

Chart VA-4, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VA-5 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct. The strength of the first quarter of 2011 has not been recovered.

Chart VA-5, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current New Orders Diffusion Index

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/charts/NOC.html

Growth rates and levels of sales in billions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-5. Total business sales rose 0.4 percent in Jan after 0.9 percent in Dec and were up by 8.6 percent in Jan 2012 relative to Jan 2011. Sales of manufacturers increased 0.9 percent in Jan after increasing 0.8 percent in Dec and rose 8.4 percent in the 12 months to Jan 2012. Retailers’ increased 0.4 percent in Jan after increasing 0.3 percent in Dec and 5.8 percent in 12 months ending in Jan. Sales of merchant wholesalers fell 0.1 percent in Jan after increasing 1.4 percent in Dec and grew 11.3 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.

Table VA-5, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Jan 12/   Dec 11 ∆% SA	Jan 2012 Billions of Dollars NSA	Dec 11/ Nov 11  ∆% SA	Jan 12/ Jan 11 ∆% NSA
Total Business	0.4	1,140.4	0.9	8.6
Manufacturers	0.9	426.3	0.8	8.4
Retailers	0.4	323.1	0.3	5.8
Merchant Wholesalers	-0.1	391.0	1.4	11.3

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 1.1 percent to inventories in Jan and 0.5 percent in Dec with growth of 4.6 percent in 12 months, as shown in Table VA-6. Total business increased inventories by 0.7 percent in Jan, 0.6 percent in Dec and 7.4 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.27 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.

Table VA-6, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Jan 12 Billions of Dollars NSA	Jan 12/ Dec   11 ∆% SA	Dec 11/  Nov 11 ∆% SA	Jan 12/ Jan 11 ∆% NSA
Total Business	1,559.3	0.7	0.6	7.4
Manufacturers	609.8	0.6	0.2	8.5
Retailers	469.7	1.1	0.5	4.6
Merchant Wholesalers	479.9	0.4	1.1	9.0
Inventory/ Sales Ratio NSA	Jan 12 Billions of Dollars NSA	Jan 2012 SA	Dec 2011 SA	Jan 2011 SA
Total Business	1,559.3	1.27	1.27	1.26
Manufacturers	609.8	1.33	1.33	1.31
Retailers	469.7	1.33	1.32	1.35
Merchant Wholesalers	479.9	1.15	1.15	1.14

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference' in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart VA-6 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels.

Chart VA-6, Total Business Inventories/Sales Ratios 2002 to 2011

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif

Sales of retail and food services increased 1.1 percent in Feb after 0.6 percent in Jan and increased 8.2 percent in the 12 months ending in Feb, as shown in Table VA-7. Excluding motor vehicles and parts, retail sales increased 0.9 percent in Feb after increasing 1.1 percent in Jan and growing 8.0 percent in the 12 months ending in Feb. Sales of motor vehicles and parts increased 1.6 percent in Feb after falling 1.6 percent in Jan. Gasoline station sales jumped 3.3 percent in Feb in fluctuating prices of gasoline, increasing 1.9 percent in Jan and 11.2 percent in the 12 months ending in Feb.

Table VA-7, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	Feb/Jan ∆% SA	Jan/Dec ∆% SA	Jan-Feb 2012 Billion Dollars NSA	12 Months Feb 2012 from Feb 2011 ∆% NSA
Retail and Food Services	1.1	0.6	742.5	8.2
Excluding Motor Vehicles and Parts	0.9	1.1	609.9	8.0
Motor Vehicles & Parts	1.6	-1.6	132.6	9.2
Retail	1.1	0.5	661.1	8.0
Building Materials	1.4	1.4	40.7	15.5
Food and Beverage	0.3	1.1	99.7	5.1
Grocery	0.3	1.1	90.3	5.0
Health & Personal Care Stores	0.1	-0.1	45.7	4.1
Clothing & Clothing Accessories Stores	1.8	0.7	31.9	8.5
Gasoline Stations	3.3	1.9	83.4	11.2
General Merchandise Stores	-0.1	0.8	95.9	5.2
Food Services & Drinking Places	0.8	1.4	81.3	9.9

Source: http://www.census.gov/retail/marts/www/marts_current.pdf

Chart VA-7 of the US Bureau of the Census shows percentage change of retails and food services sales. Sep was strong in multiple categories but the strength did not continue in Oct, Nov and Dec. Feb was stronger a jump in auto sales after the fall in Jan.

Chart VA-7, US, Percentage Change of Retail and Food Services Sales

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif

Twelve-month rates of growth of US sales of retail and food services in Feb from 2000 to 2011 are shown in Table VA-8. Nominal sales have been dynamic in 2011 and 2010 after decline of 12.7 percent in 2009 and increase of only 3.0 percent in 2007. It is difficult to separate price and quantity effects in these nominal data.

Table VA-8, US, Percentage Change in 12-Month Sales for Retail and Food Services, ∆% NSA

Feb	12 Months ∆%
2012	10.3
2011	9.2
2010	14.2
2009	-12.7
2008	6.4
2007	3.0
2006	6.4
2005	4.5
2004	9.1
2003	2.2
2002	2.3
2001	-1.2
2000	13.6

Source: http://www.census.gov/retail/

The US Treasury budget for fiscal year 2012 in the first five months of Dec, Nov and Oct 2011 and Jan and February 2012 is shown in Table VA-9. Receipts increased 2.8 percent in the first five months of fiscal year 2012 relative to the same five months in fiscal year 2011 or Oct-Dec 2010 and Jan and Feb 2011. Individual income taxes have grown 0.6 percent relative to the same period a year earlier in sharp decline of the rate of growth of 4.9 percent cumulatively in the first four months. Outlays were lower by 2.4 percent relative to a year earlier compared with decline of 3.2 percent in the first four months. The final two rows of Table VA-9 provide the projection of the Congressional Budget Office (CBO) of the deficit for fiscal year 2012 at $1.3 trillion not very different from that in fiscal year 2011. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.1 trillion in four years, which is the worst fiscal performance since World War II.

Table VA-9, US, Treasury Budget in Fiscal Year to Date Million Dollars

Fiscal Year 2012	Oct 2011 to Feb 2012	Oct 2010 to Feb 2011	∆%
Receipts	893,169	869,003	2.8
Outlays	1,473,999	1,510,266	-2.4
Deficit	-580,830	-641,264	NA
Individual Income Taxes	425,253	422,841	0.6
Social Insurance	220,318	233,977	-5.8
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
CBO Forecast Fiscal Year 2012	2,522	3,601	-1,079
Fiscal Year 2011	2,302	3,599	-1,296
Fiscal Year 2010	2,162	3,456	-1,294
Fiscal Year 2009	2,105	3,518	-1,413
Fiscal Year 2008	2,524	2,983	-459

Source: http://www.fms.treas.gov/mts/index.html

CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan.

Risk aversion channeled funds toward US long-term and short-term securities as shown in Table VA-10. Net foreign purchases of US long-term securities (row C in Table VA-10) rose from 19.1 in Dec 2011 to 101.0 in Jan 2012. Foreign (residents) purchases minus sales of US long-term securities (row A in Table VA-10) in Dec of minus $19.4 billion increased to $94.7 billion in Jan 2012. Net US (residents) purchases of long-term foreign securities (row B in Table VA-10) in Dec were $38.5 billion in Dec but fell to $6.3 billion in Jan. In Jan,

C = A + B = $94.7 billion + $6.3 billion = $101.0 billion

There is strengthening demand in Table VA-10 in Jan in A1 private purchases by residents overseas of US long-term securities of $60.8 billion of which increases in A11 Treasury securities $49.9 billion and A12 $9.8 billion agency securities and decrease of corporate bonds by $1.3 billion and increase of $2.4 billion in equities. Official purchases of Treasury securities in row A21 increased $33.1 billion. Row D shows sharp decrease in Jan in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills fell $28.8 billion (row D11) with foreign official holdings decreasing $8.0 billion and the category other increasing $2.7 billion. Risk aversion of losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.

Table VA-10, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Jan 2011 12 Months	Jan 2012 12 Months	Dec 2011	Jan 2012
A Foreign Purchases less Sales of US LT Securities	948.1	459.3	-19.4	94.7
A1 Private	782.1	284.2	-9.8	60.8
A11 Treasury	501.4	254.9	5.4	49.9
A12 Agency	149.5	65.3	16.4	9.8
A13 Corporate Bonds	10.8	-45.1	-19.3	-1.3
A14 Equities	120.3	9.2	-12.3	2.4
A2 Official	166.0	175.1	-9.5	34.0
A21 Treasury	189.7	159.0	-20.3	33.1
A22 Agency	-24.5	13.3	10.8	-0.2
A23 Corporate Bonds	0.0	-0.7	-1.4	0.0
A24 Equities	0.8	3.4	1.3	1.0
B Net US Purchases of LT Foreign Securities	-121.3	-90.6	38.5	6.3
B1 Foreign Bonds	-47.2	-33.0	28.2	11.1
B2 Foreign Equities	-74.1	-57.7	10.3	-4.8
C Net Foreign Purchases of US LT Securities	826.8	368.7	19.1	101.0
D Increase in Foreign Holdings of Dollar Denominated Short-term	-67.0	-106.7	-18.0	-34.1
D1 US Treasury Bills	-25.0	-69.7	-1.6	-36.9
D11 Private	38.1	22.9	19.8	-28.8
D12 Official	-63.0	-89.3	-21.4	-8.0
D2 Other	-42.0	-37.0	-16.5	2.7

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

Sources: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

Table VA-11 provides major foreign holders of US Treasury securities. China is the largest holder with $1159.5 billion in Jan 2012, decreasing 0.4 percent from $1154.7 billion in Jan 2011. Japan increased its holdings from $886.0 billion in Jan 2011 to $1079.0 billion in Jan 2012. The United Kingdom decreased its holdings to $142.3 billion in Jan 2012 relative to $277.6 billion in Jan 2011. Caribbean banking centers increased their holdings from $165.3 billion in Jan 2011 to $227.8 billion in Jan 2012. Total foreign holdings of Treasury securities rose from $4435.6 billion in Jan 2011 to $5048.0 billion in Jan 2011, or 13.8 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings.

Table VA-11, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Jan 2012	Dec 2011	Jan 2011
Total	5048.0	5001.9	4435.7
China	1159.5	1151.9	1154.7
Japan	1079.0	1058.2	886.0
Oil Exporters	258.8	258.7	215.5
United Kingdom	142.3	112.4	277.6
Caribbean Banking Centers	227.8	227.6	165.3
Brazil	229.1	226.9	191.2
Taiwan	177.9	177.3	157.3
Switzerland	145.4	142.5	106.1
Luxembourg	138.7	150.6	79.1
Russia	142.5	149.5	139.3
Hong Kong	130.3	121.7	127.6

Source:

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx#ussecs

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

The current account of the US balance of payments is provided in Table VA-13 for IVQ2010 and IVQ2011. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US declined from $123.4 billion in IIQ2010, or 3.3 percent of GDP to $107.6 billion in IIIQ2011, or 2.8 percent of GDP, but increased to $124.1 billion in IVQ2011, or 3.2 percent of GDP. In IVQ2010, as shown in Table VA-13, the deficit reached $112.2 billion or 3.3 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The current account deficit reached 6.1 percent of GDP in 2006. The Bureau of Economic Analysis of the US Department of Commerce explains that “most of the increase in the current account deficit [from IIIQ2011 to IVQ2011] was due to a decrease in the surplus on income and an increase in the deficit on goods and services” (http://www.bea.gov/newsreleases/international/transactions/2012/pdf/trans411.pdf 1).

Table VA-12, US Balance of Payments, Millions of Dollars NSA

	IVQ2010	IVQ2011	Difference
Goods Balance	-159,245	-186,345	-27,100
X Goods	342,659	380,377	11.0 ∆%
M Goods	-501,904	-566,722	12.9 ∆%
Services Balance	40,496	45,280	4,784
X Services	142,088	155,012	9.1 ∆%
M Services	-101,592	-109,732	8.0 ∆%
Balance Goods and Services	-118,749	-141,066	-22,317
Balance Income	39,930	50,250	10,320
Unilateral Transfers	-33,360	-33,290	-70
Current Account Balance	-112,179	-124,105	-11,926
% GDP	IIQ2011	IIIQ2011	IVQ2011
	3.3	2.8	3.2

X: exports; M: imports

Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers

Source: http://www.bea.gov/international/index.htm#bop

Chart VA-8 of the Bureau of Economic Analysis of the Department of Commerce shows on the lower negative panel the sharp increase in the deficit in goods and the deficits in goods and services from 1960 to 2011. The upper panel shows the increase in the surplus in services that was insufficient to contain the increase of the deficit in goods and services. The adjustment during the global recession has been in the form of contraction of economic activity that reduced demand for goods.

Chart VA-8, US, Balance of Goods, Balance on Services and Balance on Goods and Services, 1960-2010, Millions of Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_ita.cfm

Chart VA-9 of the Bureau of Economic Analysis shows exports and imports of goods and services from 1960 to 2011. Exports of goods and services in the upper positive panel have been quite dynamic but have not compensated for the sharp increase in imports of goods. The US economy apparently has become less competitive in goods than in services.

Chart VA-9, US, Exports and Imports of Goods and Services, 1960-2010, Millions of Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_ita.cfm

Chart VA-10 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2011. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.

Chart VA-10, US, Balance on Current Account, 1960-2010, Millions of Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_ita.cfm

Chart VA-11of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2011. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.

Chart VA-11, US, Real GDP, 1960-2010, Billions of Chained 2005 Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

VB. Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) was mostly unchanged from 51.1 in Jan to 51.2 in Feb but still suggesting only marginal growth in private sector economic activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9261). 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 continuing growth in manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9261). 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	Feb ∆% 0.2 12 months ∆% 0.6 Blog 03/18/12
Consumer Price Index	Jan NSA ∆% 0.2 Jan 12 months NSA ∆% 0.1 Blog 03/04/12
Real GDP Growth	IVQ2011 ∆%: -0.2 on IIIQ2011;  IVQ2011 SAAR minus 0.7% ∆% from quarter a year earlier: -0.6 % Blog 3/11/12
Employment Report	Jan Unemployed 2.91 million Change in unemployed since last year: minus 190 thousand Unemployment rate: 4.6% Blog 03/04/12
All Industry Indices	Dec month SA ∆% 1.3 12 months NSA ∆% -0.5 Blog 02/26/12
Industrial Production	Jan SA month ∆%: 1.9 12 months NSA ∆% minus 1.3 Blog 03/18/12
Machine Orders	Total Jan ∆% 21.6 Private ∆%: 4.6 Jan ∆% Excluding Volatile Orders 3.4 Blog 03/18/12
Tertiary Index	Jan month SA ∆% minus 1.7 Jan 12 months NSA ∆% 0.1 Blog 03/18/12
Wholesale and Retail Sales	Jan 12 months: Total ∆%: minus 2.1 Wholesale ∆%: minus 3.6 Retail ∆%: +1.9 Blog 03/04/12
Family Income and Expenditure Survey	Jan 12 months ∆% total nominal consumption minus 2.1, real minus 2.3 Blog 03/04/12
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:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

Japan’s industrial production increased during two consecutive months by 3.8 percent in Dec 2011 and revised 1.9 percent in Jan 2012, reducing the percentage decline in 12 months from minus 4.3 percent in Dec to minus 1.2 percent in Jan 2012, as shown in Table VIIB-1. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep but fell again in Nov. Industrial production was higher in 12 months for the first month in Aug by 0.4 percent and again in Oct by 0.1 percent but fell 4.2 percent in Nov and 4.3 percent in Dec 2011 relative to a year earlier. Industrial production fell 21.9 percent in 2009 after falling 3.4 percent in 2008 but recovered 16.4 percent in 2010. The annual average in calendar year 2011 fell 3.5 percent largely because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011.

Table VB-1, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Jan 2012	1.9	-1.3
Dec 2011	3.8	-4.3
Nov	-2.7	-4.2
Oct	2.2	0.1
Sep	-3.3	-3.3
Aug	0.6	0.4
Jul	0.4	-3.0
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2011		-3.5
2010		16.4
2009		-21.9
2008		-3.4

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a2001j.pdf

Japan’s machinery orders in Table VB-2 rose strongly in Jan after declining in Dec. Total orders grew 21.6 percent in Jan after falling 7.2 percent in Dec. Private-sector orders excluding volatile orders, which are closely watched, increased 3.4 percent in Jan 14.7 percent in Nov but fell 22.2 percent in Dec. Orders for manufacturing increased 4.7 in Jan after falling 7.1 percent in Dec but increasing 14.8 percent in Nov. Overseas orders jumped 20.1 percent in Jan. There is significant volatility in industrial orders in advanced economies.

Table VB-2, Japan, Machinery Orders, Month ∆%, SA 

2011-2012	Jan	Dec	Nov	Oct
Total	21.6	-7.2	14.7	3.2
Private Sector	4.6	-22.2	21.5	-9.2
Excluding Volatile Orders	3.4	-7.1	14.8	-6.9
Mfg	-1.8	-7.1	4.7	5.5
Non Mfg ex Volatile	2.3	-6.0	-6.2	-7.3
Government	-17.7	50.7	-5.3	1.9
From Overseas	20.1	5.6	20.3	1.6
Through Agencies	-2.5	3.0	0.6	4.0

Note: Mfg: manufacturing

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/en/stat/juchu/1201juchu-e.html

Total orders for machinery and total private-sector orders excluding volatile orders for Japan are shown in Chart VB-1 of Japan’s Economic and Social Research Institute at the Cabinet Office. The trend of private-sector orders excluding volatile orders was increasing smoothly but may be flattening or even declining now even after the jump in Nov and increase in Jan. There could be reversal of the trend of increase in total orders. Fluctuations still prevent detecting longer term trends.

Chart VB-1, Japan, Machinery Orders

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/en/stat/juchu/1201juchu-e.html

Table VB-3 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 2,023,741 million are divided between JPY 1,102,168 overseas orders, or 54.5 percent of the total, and domestic orders of JPY 843,646, or 41.7 percent of the total, with orders through agencies of JPY 77,927 million, or 3.9 percent. Orders through agencies are not shown in the table because of the minor value. Twelve-month percentages changes in Jan 2012 were strong: 9.8 percent for total orders, 18.3 percent for overseas orders, 0.5 percent for domestic orders and 5.7 percent for private orders excluding volatile items. There is sharp reversal of 12-month percentage changes in Nov with increase of 11.0 percent in total orders, 8.0 percent in overseas orders, 13.5 percent in domestic orders and 12.5 percent in private orders excluding volatile items. The pace of increase declined in Dec with growth in 12 months of 0.8 percent for total orders, 12.6 percent for overseas orders, decline of 8.5 percent for domestic orders and growth of private orders excluding volatile items of 6.3 percent. There was strong impact from the global recession with total orders falling 23.3 percent in 2008, overseas orders dropping 29.4 percent and domestic orders decreasing 17.4 percent. Recovery was vigorous in 2010 with increase of total orders by 9.4 percent, overseas orders by 3.5 percent and domestic orders by 14.1 percent. The heavy impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 also affected machinery orders.

Table VB-3, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series  

	Total	Overseas	Domestic	Private ex Volatile
Value Jan 2012	2,023,741	1,102,168	843,646	591,468
% Total	100.0	54.5	41.7	29.2
Value Jan 2011	1,842,807	931,632	839,129	559,691
% Total	100.0	50.6	45.5	30.3
12-month ∆%
Jan 2012	9.8	18.3	0.5	5.7
Dec 2011	0.8	12.6	-8.5	6.3
Nov 2011	11.0	8.0	13.5	12.5
Oct 2011	-6.8	-15.6	-1.0	1.5
Dec 2010	9.4	3.5	14.1	-0.6
Dec 2009	1.8	0.4	3.6	-1.9
Dec 2008	-23.3	-29.4	-17.4	-24.7
Dec 2007	1.3	9.8	-4.3	-6.4
Dec 2006	0.8	0.9	-0.1	0.1

Note: Total machinery orders = overseas + domestic demand + orders through agencies. Orders through agencies in Oct 2011 were JPY 88,919 million, or 5.4 percent of the total, and are not shown in the table. The data are the original numbers without any adjustments and differ from the seasonally-adjusted data.

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/en/stat/juchu/1201juchu-e.html

The tertiary activity index of Japan decreased 1.7 percent in Jan and increased 0.1 percent in the 12 months ending in Jan, as shown in Table VB-4. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.9 percent in Mar and 3.1 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep was weak: decline of 0.2 percent in Jul, increase of 0.1 percent in Aug and decline of 0.4 percent in Sep, after increasing 1.9 percent in Jun. The index has gained 5.3 percent in the ten months from Apr to Jan, almost erasing the loss in Mar of 5.9 percent or at the annual equivalent rate of 6.4 percent. Most of the growth occurred in the quarter from Apr to Jun with gain of 5.6 percent or at annual equivalent rate of 24.3 percent.

Table VB-4, Japan, Tertiary Activity Index, ∆%

	Month ∆% SA	12 Months ∆% NSA
Jan 2012	-1.7	0.1
Dec 2011	1.8	1.0
Nov	-0.6	-0.5
Oct	0.8	0.7
Sep	-0.4	0.0
Aug	0.1	0.6
Jul	-0.2	-0.2
Jun	1.9	0.9
May	0.9	-0.2
Apr	2.7	-2.3
Mar	-5.9	-3.1
Feb	0.8	2.0
Jan	-0.1	1.1
Dec 2010	-0.2	1.8
Nov	0.6	2.5
Oct	0.2	0.5
Sep	-0.4	1.3
Aug	0.1	2.3
Jul	0.7	1.6
Jun	0.1	1.0
May	-0.3	1.2
Dec 2009		-2.7
Dec 2008		-3.3
Dec 2007		-0.3
Dec 2006		0.6
Dec 2005		2.6
Dec 2004		1.6
Calendar Year
2011		-3.4
2010		5.1
2009		5.8

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201201j.pdf

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

Month and 12-month rates of growth of the tertiary activity index of Japan and components in Jan are provided in Table VB-5. Electricity, gas, heat supply and water increased 1.3 percent in Jan but fell 3.1 percent in the 12 months ending in Jan. Wholesale and retail trade decreased 1.5 percent in the month of Jan and fell 1.2 percent in 12 months. Information and communications fell 1.5 percent in Dec but grew 0.8 percent in 12 months.

Table VB-5, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%

Dec 2011	Weight	Month ∆% SA	12 Months ∆% NSA
Tertiary Index	10,000.0	-1.7	0.1
Electricity, Gas, Heat Supply & Water	372.9	1.3	-3.1
Information & Communications	951.2	-1.2	0.8
Wholesale & Retail Trade	2,641.2	-1.5	-1.2
Finance & Insurance	971.1	-6.8	-0.2
Real Estate & Goods Rental & Leasing	903.4	-0.6	-0.9
Scientific Research, Professional & Technical Services	551.3	-1.8	0.6
Accommodations, Eating, Drinking	496.0	-2.0	0.7
Living-Related, Personal, Amusement Services	552.7	-1.2	1.2
Learning Support	116.9	0.7	0.2
Medical, Health Care, Welfare	921,1	-0.8	2.0
Miscellaneous ex Government	626.7	0.2	3.0

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201201j.pdf

http://www.esri.cao.go.jp/en/sna/sokuhou/qe/main_1e.pdf

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

VC. China. The HSBC Composite Output Index for China, compiled by Markit, registered an increase from 49.7 in Jan to 51.8 in Feb, suggesting improving private-sector business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9262). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that increases in new orders drove the increase in services but that the combination with manufacturing deceleration because of weak external orders can result in growth of only 8 percent in IQ2012 GDP until further easing permeates throughout the economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9262). Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Feb 12 months ∆%: 0.0 Feb month ∆%: 0.1 Blog 03/18/12
Consumer Price Index	Feb month ∆%: -0.1 Feb 12 month ∆%: 3.2 Blog 03/11/12
Value Added of Industry	Feb month ∆%: 0.98 Jan-Feb 2012/Jan-Feb 2011 ∆%: 11.4 Blog 3/18/12
GDP Growth Rate	Year IVQ2011 ∆%: 8.9 Quarter IIQ2011 ∆%: 2.0 Blog 1/22/12
Investment in Fixed Assets	Total Jan-Feb 2012 ∆%: 21.5 Jan-Dec ∆% real estate development: 27.8 Blog 03/18/12
Retail Sales	Jan month ∆%: 1.6 Dec 12 month ∆%: 18.1 Jan-Feb ∆%: 14.7 Blog 3/18/12
Trade Balance	Feb balance minus $31.48 billion Exports ∆% 18.4 Imports ∆% 39.6 Cumulative Feb: $4.2 billion Blog 03/18/12

Links to blog comments in Table CNY:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

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

Cumulative and 12-months rates of value added of industry in China are provided in Table VC-1. Value added in total industry in 2011 increased 13.9 percent relative to a year earlier and 12.8 percent in the 12 months ending in Dec. In Jan-Feb 2012, industry increased 11.4 percent relative to Jan-Feb 2011. Heavy industry is the driver of growth with a cumulative rate of 12.7 percent relative to a year earlier. Growth has decelerated from cumulative 14.1 percent in Jan-Feb 2011.

Table VC-1, China, Growth Rate of Value Added of Industry ∆%

	Industry	Light Industry	Heavy Industry	State Owned	Private
2012
Jan-Feb	11.4	12.7	10.9	7.3	13.9
12 M Dec	12.8	12.6	13.0	9.2	14.7
Jan-Dec	13.9	13.0	14.3	9.9	15.8
12 M Nov	12.4	12.4	12.4	7.8	14.4
Jan-Nov	14.0	13.0	14.4	9.9	16.0
12 M Oct	13.2	12.1	13.7	8.9	15.1
Jan-Oct	14.1	13.0	14.5	10.1	9.1
12 M Sep	13.8	12.8	14.3	9.9	16.0
Jan-Sep	14.2	13.1	14.6	10.4	16.1
12 M Aug	13.5	13.4	13.5	9.4	15.5
Jan-Aug	14.2	13.1	14.6	10.4	16.1
12 M Jul	14.0	12.8	14.5	9.5
Jan-Jul	14.3
12 M Jun	15.1	13.9	15.6	10.7	20.8
Jan-Jun	14.3	13.1	14.7	10.7	19.7
12 M May	13.3	12.9	13.5	8.9	18.7
Jan-May	14.0	12.9	14.4	10.7	19.3
12 M Apr	13.4	11.9	14.0	10.4	18.0
Jan-Apr	14.2	12.9	14.7	11.2	19.5
12 M Mar	14.8	12.8	15.6	12.9	19.2
Jan-Mar	14.4	13.1	14.9	11.4	19.8
12 M Feb	14.9	13.1	15.6	10.5	21.7
Jan-Feb	14.1	13.3	14.4	10.6	20.3

Source: http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htmhttp://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Chart VC-1 provides cumulative growth rates of value added of industry in 2011 and Jan-Feb 2012. Growth rates of value added of industry in the first five months of 2010 were higher than in 2011 as would be expected in an earlier phase of recovery from the global recession. Growth rates have converged in the second half of 2011 to lower percentages.

Chart VC-1, China, Growth Rate of Total Value Added of Industry, Cumulative Year-on-Year ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htm

Yearly rates of growth for the past 12 months and cumulative relative to the earlier year of various segments of industrial production in China are provided in Table VC-2. Rates for Jan-Dec 2011 relative to the same period a year earlier fluctuated but remained above 10 percent with the exception of motor vehicles and crude oil. There is deceleration in Dec of the 12-month rates of change with only nonferrous metals at 13.2 percent exceeding 10 percent. Further deceleration is evident in Jan-Feb with all rates below 10 percent.

Table VC-2, China, Industrial Production Operation ∆%

	Elec- tricity	Pig Iron	Cement	Crude Oil	Non- ferrous Metals	Motor Vehicles
2012
Jan-Feb	7.1	4.6	4.8	4.0	8.4	-1.8
2011
12 M Dec	9.7	3.7	7.0	4.0	13.2	-6.5
Jan-Dec	12.0	8.4	16.1	4.9	10.6	3.0
12 M Nov	8.5	7.8	11.2	3.2	8.2	-1.3
Jan-Nov	12.0	13.1	17.2	5.3	10.2	3.9
12 M Oct	9.3	13.4	16.5	-0.9	3.7	1.3
Jan-Oct	12.3	13.7	18.0	5.4	10.4	5.2
12 M Sep	11.5	18.8	15.7	1.5	13.9	2.5
Jan-Sep	12.7	13.9	18.1	6.0	11.2	5.5
12 M Aug	10.0	12.9	12.8	4.5	15.6	9.5
Jan-Aug	13.0	13.1	18.4	6.6		4.7
12 M Jul	13.2	14.9	16.8	5.9	9.8	-1.3
Jan-Jul	13.3	13.0	19.2	6.9	9.9	4.0
12 M Jun	16.2	14.8	19.9	-0.7	9.8	3.6
12 M May	12.1	10.6	19.2	6.0	14.2	-1.9
12 M Apr	11.7	8.3	22.4	6.8	6.1	-1.6
12 M Mar	14.8	13.7	29.8	8.0	11.6	9.9
12 M Feb	11.7	14.5	9.1	10.9	14.4	10.3
12 M Jan	5.1	3.5	16.4	12.2	1.4	23.9
12 M Dec 2010	5.6	4.6	17.3	10.3	-1.9	27.6

M: month

Source: http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htmhttp://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htmhttp://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

Monthly growth rates of industrial production in China are provided in Table VC-6. Monthly rates have fluctuated around 1 percent. Jan and Feb 2012 are somewhat weaker.

Table VC-3, China, Industrial Production Operation, Month ∆%

2011	Month ∆%
Feb	0.98
Mar	1.08
Apr	0.87
May	0.88
Jun	1.25
Jul	0.71
Aug	0.79
Sep	0.96
Oct	0.70
Nov	0.69
Dec	0.94
Jan 2012	0.38
Feb	0.70

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htm

Table VC-4 provides cumulative growth of investment in fixed assets in China in 2011 relative to 2010 and in Jan-Feb 2012 relative to a year earlier. Total fixed investment has grown at a high rate fluctuating around 25 percent and fixed investment in real estate development has grown at rates in excess of 30 percent. In Jan-Dec investment in fixed assets in China grew 23.8 percent relative to a year earlier and 27.9 percent in real estate development. There was slight deceleration in the final two months of 2011 that continued into Jan-Feb 2012.

Table VC-4, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

	Total	State	Real Estate Development
Jan-Feb 2012	21.5	8.8	27.9
Jan-Dec 2011	23.8	11.1	27.9
Jan-Nov	24.5	11.7	29.9
Jan-Oct	24.9	12.4	31.1
Jan-Sep	24.9	12.7	32.0
Jan-Aug	25.0	12.1	33.2
Jan-Jul	25.4	13.6	33.6
Jan-Jun	25.6	14.6	32.9
Jan-May	25.8	14.9	34.6
Jan-Apr	25.4	16.6	34.3
Jan-Mar	25.0	17.0	34.1
Jan-Feb	24.9	15.6	35.2

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120312_402791525.htm

Chart VC-2 provides cumulative fixed asset investment in China relative to a year earlier. Growth rose to 25.8 percent in Jan-May and then fell back to 24.9 percent in Sep and Oct, declining further to 24.5 percent in Nov and 23.8 percent in Dec with deeper drop in Jan-Feb to 21.5 percent.

Chart VC-2, China, Investment in Fixed Assets, ∆% Cumulative over Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120312_402791525.htm

Monetary policy has been used in China in the form of increases in interest rates and required reserves of banks to moderate real estate investment. These policies have been reversed because of lower inflation and weakening economic growth. Chart VC-3 shows decline of fluctuating cumulative growth rates of investment in real estate development relative to a year earlier from 35.2 percent in Jan-Feb to 31.1 percent in Jan-Oct, 29.9 percent in Jan Nov, and 27.9 percent in both Jan-Dec 2011 and Jan-Feb 2012.

Chart VC-3, China, Investment in Real Estate Development, ∆% Cumulative over Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120313_402792043.htm

Table VC-5 provides monthly growth rates of investment in fixed assets in China from Feb 2011 to Feb 2012. Growth rates have moderated from Nov 2011 to Feb 2012.

Table VC-5, China, Investment in Fixed Assets, Month ∆%

	Month ∆%
Feb 2011	0.58
Mar	1.96
Apr	1.87
May	1.83
Jun	1.39
Jul	1.66
Aug	1.40
Sep	2.02
Oct	1.86
Nov	1.04
Dec	1.17
Jan 2012	1.08
Feb 2012	1.61

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120312_402791525.htm

Growth rates of retail sales in China monthly, 12 months and cumulative relative to a year earlier are in Table VC-6. There is still insufficient data to assess if the decline of growth rates to cumulative 14.7 percent in Feb 2012 constitutes the beginning of a downward trend

Table VC-6, China, Total Retail Sales of Consumer Goods ∆%

	Month ∆%	12 Months ∆%	Cumulative ∆%/ Cumulative Year Earlier
2012
Feb	1.6		14.7
Jan	1.0
2011
Dec	1.41	18.1	17.1
Nov	1.28	17.3	17.0
Oct	1.30	17.2	17.0
Sep	1.35	17.7	17.0
Aug	1.29	17.0	16.9
Jul	1.30	17.2	16.8
Jun	1.40	17.7	16.8
May	1.31	16.9	16.6
Apr	1.33	17.1	16.5
Mar	1.35	17.4	17.4
Feb	1.30	11.6	15.8
Jan		19.9	19.9

Note: there are slight revisions of month relative to earlier month data but not of the month on the same month year earlier or cumulative relative to cumulative year earlier in the databank

Source: http://www.stats.gov.cn/english/pressrelease/t20120313_402792035.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111209_402771402.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765083.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746163.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Chart VC-4 of the National Bureau of Statistics of China provides 12-month rates of growth of retail sales in 2011. There is again a drop into 2012 with the lowest percentage in Chart VC-4.

Chart VC-4, China, Total Retail Sales of Consumer Goods 12 Months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120313_402792035.htm

Table VC-7 provides monthly percentage changes of retail sales in China. Although the rate of 1.02 percent in Jan is the lowest in Table VC-7, the rate of 1.56 percent in Feb is the highest. Seasonal effects of the New Year have been affecting China’s data.

Table VC-7, Retail Sales, Month ∆%

2011	Month ∆%
Feb	1.35
Mar	1.35
Apr	1.33
May	1.29
Jun	1.43
Jul	1.28
Aug	1.34
Sep	1.37
Oct	1.34
Nov	1.29
Dec	1.45
2012
Jan	1.02
Feb	1.56

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120313_402792035.htm

Table VC-8 provides China’s exports, imports, trade balance and percentage changes from Dec 2010 to Feb 2012. Exports fell 0.5 percent in the 12 months ending in Jan while imports fell 15.3 percent for a still sizeable trade surplus of $27.28 billion. In Feb, exports increased 18.4 percent while imports jumped 39.6 percent for a sizeable deficit of $31.48 billion. There are distortions from the New Year holidays.

Table VC-8, China, Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Feb 2012	114.47	18.4	145.96	39.6	-31.48
Jan 2012	149.94	-0.5	122.66	-15.3	27.28
Dec 2011	174.72	13.4	158.20	11.8	16.52
Nov	174.46	13.8	159.94	22.1	14.53
Oct	157.49	15.9	140.46	28.7	17.03
Sep	169.67	17.1	155.16	20.9	14.51
Aug	173.32	24.5	155.56	30.2	17.76
Jul	175.13	20.4	143.64	22.9	31.48
Jun	161.98	17.9	139.71	19.3	22.27
May	157.16	19.4	144.11	28.4	13.05
Apr	155.69	29.9	144.26	21.8	11.42
Mar	152.20	35.8	152.06	27.3	0.14
Feb	96.74	2.4	104.04	19.4	-7.31
Jan	150.73	37.7	144.27	51.0	6.46
Dec 2010	154.15	17.9	141.07	25.6	13.08

Source:

http://english.customs.gov.cn/publish/portal191/

http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

Table VC-9 provides cumulative exports, imports and the trade balance of China together with percentage growth of exports and imports. The trade balance in 2011 of $155.14 billion is lower than those from 2008 to 2010. There is a rare cumulative deficit of $4.2 billion in Feb 2012. More observations are required to detect trends of Chinese trade.

Table VC-9, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Feb 2012	264.41	6.8	268.22	8.0	-4.2
Jan	149.94	-0.5	122.66	-15.3	27.28
Dec 2011	1,898.60	20.3	1,743.46	24.9	155.14
Nov	1,724.01	21.1	1585.61	26.4	138.40
Oct	1,549.71	22.0	1,425.68	26.9	124.03
Sep	1,392.27	22.7	1,285.17	26.7	107.10
Aug	1,222.63	23.6	1,129.90	27.5	92.73
Jul	1,049.38	23.4	973.17	26.9	76.21
Jun	874.3	24.0	829.37	27.6	44.93
May	712.37	25.5	689.41	29.4	22.96
Apr	555.30	27.4	545.02	29.6	10.28
Mar	399.64	26.5	400.66	32.6	-1.02
Feb	247.47	21.3	248.36	36.0	-0.89
Jan	150.7	37.7	144.27	51.0	6.46
Dec 2010	1577.93	31.3	1394.83	38.7	183.10

Source:

http://english.customs.gov.cn/publish/portal191/

http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

VC Euro Area. The Markit Eurozone PMI^® Composite Output Index declined to 49.3 in Feb from 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=9242). The index suggests decline of business activity during four month, expansion in Jan and then contraction in Feb. Chris Williamson, Chief Economist at Markit, finds that economic activity could have contracted 0.1 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9242). 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 03/11/12
Unemployment	Jan 2012: 10.7% unemployment rate Jan 2012: 16.925 million unemployed Blog 03/04/12
HICP	Feb month ∆%: 0.5 12 months Feb ∆%: 2.7 Blog 03/18/12
Producer Prices	Euro Zone industrial producer prices Jan ∆%: 0.7 Jan 12 months ∆%: 3.7 Blog 3/04/12
Industrial Production	Jan month ∆%: 0.2 Jan 12 months ∆%: -1.2 Blog 3/18/12
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	Jan month ∆%: 0.3 Jan 12 months ∆%: 0.0 Blog 03/11/12
Confidence and Economic Sentiment Indicator	Sentiment 93.9 Feb 2012 down from 107 in Dec 2010 Confidence minus 20.1 Jan 2012 down from minus 11 in Dec 2010 Blog 03/04/12
Trade	Jan-Dec 2011/2010 Exports ∆%: 12.7 Imports ∆%: 12.3 Jan 2012 12-month Exports ∆% 10.9 Imports ∆% 3.6 Blog 3/18/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 3/18/12

Links to blog comments in Table EUR:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

Industrial production in the euro area declined in three of five months from Sep 2011 to Jan 2012, as shown in Table VD-1 with revised estimates by EUROSTAT. Production fell cumulatively 3.8 percent in Sep-Jan or at the annual equivalent rate of decline of 8.8 percent. All segments of industrial production fell in Dec but all increased in Jan with exception of nondurable goods. Production of capital goods fell 3.7 percent in Sep, increasing in all subsequent months with exception of decline of 1.2 percent in Dec but fell cumulatively 3.1 percent in Sep to Jan or at the annual equivalent rate of 7.4 percent. Industrial production is highly volatile in larger economies in the euro zone.

Table VD-1, Euro Zone, Industrial Production Month ∆%

	Total	INT	ENE	CG	DUR	NDUR
Jan 2012	0.2	0.2	1.4	0.7	0.1	-0.7
Dec 2011	-1.1	-1.1	-2.6	-1.2	-0.1	-0.1
Nov	-0.4	0.0	-0.1	0.2	0.2	-1.6
Oct	0.1	-0.6	-0.9	0.9	-1.1	0.7
Sep	-2.6	-1.9	-1.9	-3.7	-3.8	-1.4
Aug	1.1	0.7	1.2	1.4	-2.3	1.4

Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14032012-AP/EN/4-14032012-AP-EN.PDF

Table VD-2 provides 12-month percentage changes of industrial production and major industrial categories in the euro zone. Industrial production decreased 1.2 percent in the 12 months ending in Jan. There is only positive 12-month growth of 3.1 percent for capital goods.

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

2012	Jan Month ∆%	Jan 12-Month ∆%
Total	0.2	-1.2
Intermediate Goods	0.2	-1.3
Energy	1.4	-6.2
Capital Goods	0.7	3.1
Durable Consumer Goods	0.1	-2.2
Nondurable Consumer Goods	-0.7	-1.8

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14032012-AP/EN/4-14032012-AP-EN.PDF

There has been significant decline in percentage changes of industrial production and major categories in 12-month rates throughout 2011 as shown in Table VD-3. The 12-month rate of growth in Aug of 5.9 percent has fallen to minus 1.2 percent in Jan. Trend is difficult to identify because of significant volatility. Capital goods were growing at 13.0 percent in the 12 months ending in Aug and only at 3.1 percent in the 12 months ending in Jan.

Table VD-3, Euro Zone, Industrial Production 12-Month ∆%

	Total	INT	ENE	CG	DUR	NDUR
Jan 2012	-1.2	-1.3	-6.2	3.1	-2.2	-1.8
Dec 2011	-1.8	0.0	-13.0	2.0	-3.3	-0.5
Nov	0.2	-0.1	-6.4	4.9	-3.1	-1.3
Oct	1.0	0.3	-5.0	4.9	-3.1	0.8
Sep	2.2	2.2	-3.4	6.0	-0.9	0.3
Aug	5.9	5.3	-2.2	13.0	3.0	2.8

Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14032012-AP/EN/4-14032012-AP-EN.PDF

Blanchard (2011WEOSep) analyzes the difficulty of fiscal consolidation efforts during periods of weak economic growth. Table VD-4 provides monthly and 12-month percentage changes of industrial production in the euro zone for various members and the UK, which is not a member. There is improvement in month and 12-month percentage changes in Jan 2012 with 0.2 percent for the euro zone as a whole but decline of 1.2 percent in 12 months. Germany’s industrial production increased 1.5 percent in Jan and France’s industrial production increased 0.4 percent. There is mixed performance across members.

Table VD-4, Euro Zone, Industrial Production, Month and 12-Month ∆%

	Month ∆% Jan 2012	Month ∆% Dec 2011	12 Months ∆% Jan 2012	12 Months ∆% Dec 2011
Euro Zone	0.2	-1.1	-1.2	-1.8
Germany	1.5	-2.2	1.6	-0.3
France	0.4	-1.3	-2.2	-2.1
Netherlands	NA	NA	NA	NA
Finland	2.0	1.1	-6.0	1.6
Belgium	NA	-2.9	NA	1.5
Portugal	1.2	-1.1	-9.0	-4.0
Ireland	0.7	2.6	-0.4	-3.9
Italy	-2.5	1.2	-5.0	-1.8
Greece	2.3	-2.1	-13.5	-5.2
Spain	-0.2	1.0	-4.2	-3.5
UK	-0.4	0.4	-4.4	-2.3

Source: Eurostat http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14032012-AP/EN/4-14032012-AP-EN.PDF

Euro zone trade growth continues to be strong as shown in Table VD-5. Exports grew at 12.7 percent and imports at 12.2 percent in Jan-Dec 2011 relative to Jan-Dec 2010. The 12-month rates of growth of exports were 10.9 percent in Jan 2012 while imports increased 3.6 percent. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.

Table VD-5, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA

	Exports	Imports
Jan-Dec 2011	1732.6	1742.4
Jan-Dec 2010	1537.3	1552.0
∆%	12.7	12.3
Jan 2012	138.4	146.0
Jan 2011	124.8	140.9
∆%	10.9	3.6
Dec 2011	146.9	137.8
Dec 2010	134.9	136.6
∆%	8.9	0.9
Trade Balance	Jan 2012	Jan 2011
€ Billions	-16.1	-7.6

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16032012-AP/EN/6-16032012-AP-EN.PDF

The structure of trade of the euro zone in Jan-Dec 2011 is provided in Table VD-6. Data are still not available for trade structure for Jan 2012. Manufactured exports grew 11.4 percent in Jan-Dec 2011 relative to Jan-Dec 2010 while imports grew 8.6 percent. The trade surplus in manufactured products was lower than the trade deficit in primary products in both Jan-Dec 2011 and Jan-Dec 2010.

Table VD-6, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, ∆%

	Primary	Manufactured	Other	Total
Exports
Jan-Dec 2011 € B	260.9	1422.5	49.1	1732.6
Jan-Dec 2010 € B	215.2	1276.9	45.2	1537.3
∆%	21.2	11.4	8.6	12.7
Imports
Jan-Dec 2011 € B	617.7	1095.3	29.4	1742.4
Jan-Dec 2010  € B	501.2	1021.8	29.0	1552.0
∆%	23.2	7.2	1.4	12.3
Trade Balance € B
Jan-Dec 2011	-356.7	327.2	19.7	-9.8
Jan-Dec  2010	-285.9	255.1	16.2	-14.7

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16032012-AP/EN/6-16032012-AP-EN.PDF

VE Germany. The Markit Flash Germany Composite Output Index of the Germany PMI^®, which is highly associated with German GDP, fell marginally to 53.2 in Feb from 53.9 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9278). The index has remained above 50 during three consecutive months, indicating improving activity in both manufacturing and services. Tim Moore, Senior Economist at Markit, finds that German GDP is not likely to contract again in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9278). 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	Feb month SA ∆%: +0.7 Feb 12-month ∆%: 2.3 Blog 03/11/12
Producer Price Index	Jan month ∆%: 0.6 12-month NSA ∆%: 3.4 Blog 02/19/12
Industrial Production	Mfg Jan month SA ∆%: 1.5 12 months NSA: 6.5 Blog 03/11/12
Machine Orders	Jan month ∆%: -2.7 Jan 12 months ∆%: -2.1 Blog 03/11/12
Retail Sales	Jan Month ∆% minus 1.6 12-Month ∆% 1.6 Blog 03/04/12
Employment Report	Unemployment Rate Feb 7.4% of Labor Force Blog 03/04/12
Trade Balance	Exports Jan 12 months NSA ∆%: 9.3 Imports Dec 12 months NSA ∆%: 6.3 Exports Jan month SA ∆%: 2.3; Imports Jan month SA 2.4 Blog 03/11/12

Links to blog comments in Table DE:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

VF France. The Markit France Services Activity Index of the Markit France Services PMI^® fell from 52.3 in Jan to 50.0 in Feb such that the Markit France Composite Output Index fell from 51.2 in Jan to 50.2 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9277). Higher activity in manufacturing was mostly compensated by flat activity in services. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^®, finds encouragement in increasing orders for services even with stagnating output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9277). Table FR provides the country data table for France. Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Feb month ∆% 0.4 12 months ∆%: 2.3 03/18/12
PPI	Jan month ∆%: 0.6 Jan 12 months ∆%: 4.2 Blog 03/04/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.4 Blog 02/19/12
Industrial Production	Jan/Dec SA ∆%: Industrial Production 0.3; Manufacturing 0.2 Dec YOY NSA ∆%: Industrial Production -0.6; Manufacturing 0.6 Blog 03/11/12
Industrial New Orders	Mfg Dec ∆% minus 0.1 YOY ∆% 0.8 Blog 02/26/12
Consumer Spending	Jan Manufactured Goods ∆%: minus 0.8 Jan 12-Month Manufactured Goods ∆%: minus 2.4 Blog 03/04/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 03/04/12
Trade Balance	Jan Exports ∆%: month 1.5, 12 months 7.3 Jan Imports ∆%: month 1.9, 12 months 3.4 Blog 03/11/12
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:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

VG Italy. The Markit/ADACI Purchasing Managers’ Index^® (PMI^®) rose from 46.8 in Jan to 47.8 in Feb, which is the highest level in five months for the seventh consecutive month of deterioration in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9224). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^® find slower rates of decline of new export orders and employment (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9224). The Markit/ADACI Business Activity Index experienced the fastest contraction since Oct, declining to 44.1 in Feb from 44.8 in Jan for the ninth consecutive monthly decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9266). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that low expectations on the future reflect impediments to growth such as cost pressures and unavailability of credit. Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Feb month ∆%: 0.4 Feb 12 months ∆%: 3.3 Blog 03/18/12
Producer Price Index	Jan month ∆%: 0.7 Jan 12-month ∆%: 3.4 Blog 03/11/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.4 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 3/18/12
Labor Report	Jan 2012 Participation rate 62.7% Employment ratio 57.0% Unemployment rate 9.2% Blog 03/04/12
Industrial Production	Jan month ∆%: -2.5 12 months ∆%: minus 5.0 Blog 03/11/12
Retail Sales	Dec month ∆%: minus 1.1 Dec 12 months ∆%: minus 3.7 Blog 02/26/12
Business Confidence	Mfg Feb 91.5, Oct 93.8 Construction Feb 82.5, Oct 80.7 Blog 03/04/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
Trade Balance	Balance Jan SA -€199 million versus Dec €466 Exports Jan month SA ∆%: -2.5; Imports Jan month SA ∆%: -0.5 Exports 12 months NSA ∆%: +4/3 Imports 12 months NSA ∆%: -2/6 Blog 3/18/12

Links to blog comments in Table IT:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

Table VG-1 provides revised percentage changes of GDP in Italy of quarter on prior quarter and quarter on same quarter a year earlier. Italy’s GDP fell 0.7 in IVQ2011 and 0.4 percent relative to IVQ2010. GDP had been growing during six consecutive quarters but at very low rates. Growth in IVQ2010 has been revised to 0.2 percent and growth in IIIQ2011 is estimated at 0.4 percent. The yearly rate has fallen from 2.2 percent in IVQ2010 to minus 0.4 percent in IVQ2011. The fiscal adjustment of Italy is significantly more difficult with the economy not growing especially on the prospects of increasing government revenue. The strategy is for reforms to improve productivity so as to facilitate future fiscal consolidation.

Table VG-1, Italy, GDP ∆%

	Quarter ∆% Relative to Preceding Quarter	Quarter ∆% Relative to Same Quarter Year Earlier
IVQ2011	-0.7	-0.4
IIIQ2011	-0.2	0.4
IIQ2011	0.3	1.0
IQ2011	0.1	1.2
IVQ2010	0.2	2.2
IIIQ2010	0.4	1.9
IIQ2010	0.5	1.8
IQ2010	1.1	1.1
IVQ2009	-0.2	-3.5
IIIQ2009	0.4	-5.1
IIQ2009	-0.2	-6.5
IQ2009	-3.5	-6.9
IVQ2008	-1.8	-3.0
IIIQ2008	-1.1	-1.8
IIQ2008	-0.6	-0.3
IQ2008	0.5	0.4
IV2007	-0.4	0.1
IIIQ2007	0.3	1.7
IIQ2007	0.2	2.0
IQ2007	0.0	2.4

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/56329

Chart VG-1 of the Italian National Institute of Statistics (ISTAT) provides growth of GDP of Italy at market prices. The year on year rate of growth pulled strongly out of the contraction. There is an evident trend of deceleration with marginal contraction. 

Chart VG-1, Italy, GDP at Market Prices, ∆% on Same Quarter Year Earlier

Source: Istituto Nazionale di Statistica

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

Table VG-2 provides percentage changes in IVQ2011 relative to IIIQ2011 and relative to IVQ2010. All percentages are negative except for quarterly increase of 0.1 percent in construction and quarterly 0.0 percent in exports but increase of 3.0 percent relative to IVQ2010.

Table VG-2, Italy, GDP ∆%

	IVQ2011/ IIIQ2011 ∆%	IVQ2011/ IVQ2010 ∆%
GDP	-0.7	-0.4
Imports	-2.5	-7.2
Final Consumption	-0.7	-1.2
Households	-0.7	-1.2
NPISH and Government	-0.6	-1.4
Gross Fixed Capital Formation	-2.4	-3.1
Equipment	-4.9	-4.6
Transport Equipment	-4.6	-3.4
Construction	0.1	-1.8
Change in Inventories	-	-
Exports	0.0	3.0

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/56329

Exports and imports of Italy and monthly growth rates SA are provided in Table VG-3. There have been significant fluctuations. Seasonally-adjusted exports fell 2.5 percent in Jan 2012 while imports fell 0.5 percent. The SA trade balance fell from surplus of €466 million in Dec to deficit of €199 million in Jan 2012.

Table VG-3, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Jan 2012	32,014	-2.5	32,313	-0.5	-199
Dec 2011	32,848	3.9	32,382	-1.5	466
Nov	31,605	1.6	32,873	0.7	-1,268
Oct	31,092	-2.7	32,639	-1.7	-1,547
Sep	31,960	0.1	33,198	3.7	-1,238
Aug	31,915	1.0	34,481	2.6	-2,566
Jul	31,596	1.1	33,619	2.8	-2,023
Jun	31,253	-2.4	32,690	-5.9	-1,437
May	32,016	1.8	34,735	1.2	-2,719
Apr	31,439	1.3	34,338	-0.8	-2,899
Mar	31,021	2.1	34,600	4.3	-3,579
Feb	30,394	-2.4	33,165	-2.0	-2,771
Jan	31,126	4.8	33,839	1.2	-2,713
Dec 2010	29,691	1.5	33,432	2.8	-3,741

Source: http://www.istat.it/it/archivio/57081

Italy’s trade not seasonally adjusted is provided in Table VG-4. Values are different because the data are original and not adjusted. Exports grew 4.3 percent in the 12 months ending in Jan 2012 while imports fell 2.6 percent. Twelve-month rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.4 percent. In Nov, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. The actual or not seasonally adjusted trade balance fell from €2905 million in Aug to surplus of €1150 million in Dec but turned into deficit of €4350 in Jan 2012. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table VG-4, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Jan 2012	27,270	4.3	31,260	-2.6	-4,350
Dec 2011	31,551	6.2	34,401	-7.1	1,150
Nov	32,428	6.5	34,011	0.5	-1,583
Oct	32,131	4.5	33,186	-0.4	-1,055
Sep	32,997	10.2	34,878	3.6	-1,881
Aug	24,177	14.9	27,082	12.1	-2,905
Jul	35,264	5.8	33,743	6.1	1,521
Jun	32,605	7.9	34,309	1.6	-1,704
May	33,491	19.8	35,722	18.4	-2,231
Apr	31,045	12.5	33,869	18.0	-2,824
Mar	34,418	14.0	38,203	19.8	-3,785
Feb	29,595	17.7	32,621	16.2	-3,026
Jan	26,146	24.6	32,455	28.4	-6,309
Dec 2010	29,714	20.2	32,732	31.7	-3,018
Year
2011	375,850	11.4	400,480	9.0	-24,630
2010	337,346	15.6	367,390	23.4	-30,044
2009	291,733	-20.9	297,609	-22.1	-5,876
2008	369,016	1.2	382,050	2.3	-13,034

Source: http://www.istat.it/it/archivio/57081

Growth rates of Italy’s trade and major products are provided in Table VG-5 for the period Jan 2012 relative to Jan 2011. Growth rates are high for the total and all segments with the exception of decline of durable goods imports of 4.5 percent and decline of exports of 0.2 percent. Capital goods exports decreased 0.3 percent relative to a year earlier but imports of capital goods fell 6.6 percent and exports of intermediate products rose 4.2 percent.

Table VG-5, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan 2012/ Jan 2011	Imports Share %	Imports ∆% Jan 2012/ Jan 2011
Consumer Goods	28.9	5.6	25.0	0.8
Durable	5.9	-0.2	3.0	-4.5
Non Durable	23.0	6.9	22.0	1.6
Capital Goods	32.2	-0.3	20.8	-6.6
Inter- mediate Goods	34.3	4.2	34.5	-11.9
Energy	4.7	23.2	19.7	11.8
Total ex Energy	95.3	3.2	80.3	-6.6
Total	100.0	4.3	100.0	-2.6

Source: http://www.istat.it/it/archivio/57081

Table VG-6 provides Italy’s trade balance by product categories in Jan 2012. Italy’s trade balance excluding energy generated surplus of €1781 million in Jan 2012 but the energy trade balance is a deficit of €6132 million. Italy has significant competitiveness in contrast with some other countries with debt difficulties.

Table VG-6, Italy, Trade Balance by Product Categories, € Millions

	Jan 2012	Cumulative Jan 2012
Consumer Goods	161	161
Durable	471	471
Nondurable	-310	-310
Capital Goods	1,997	1,997
Intermediate Goods	-376	-376
Energy	-6,132	-6,132
Total ex Energy	1,781	1,781
Total	-4,350	-4,350

Source: http://www.istat.it/it/archivio/57081

Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common currency prevents Italy from devaluation to parity or the exchange rate that would permit export growth to promote internal economic activity that generates fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table VG-7 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 42.6 percent of the total. Exports to the non-European Union area are growing at 4.8 percent in Jan 2012 relative to Jan 2011 while those to EMU are growing at 2.9 percent.

Table VG-7, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

	Exports % Share	∆% Jan 2012/ Jan 2011	Imports % Share	Imports ∆% Jan 2012/ Jan 2011
EU	56.0	3.9	53.3	-5.4
EMU 17	42.6	2.9	43.2	-5.2
France	11.6	4.2	8.3	-3.7
Germany	13.1	7.6	15.6	-4.9
Spain	5.3	-3.6	4.5	-6.2
UK	4.7	9.1	2.7	-12.5
Non EU	44.0	4.8	46.7	0.2
Europe non EU	13.3	21.9	11.1	-2.8
USA	6.1	-19.1	3.3	15.2
China	2.7	-11.8	7.3	-15.8
OPEC	4.7	15.4	8.6	13.6
Total	100.0	4.3	100.0	-2.6

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/57081

Table VG-8 provides Italy’s trade balance by regions and countries. Italy has a trade deficit of €44 million with the 17 countries of the euro zone (EMU 17). Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €98 million with Europe non European Union and of €256 million with the US. There is significant rigidity in the trade deficits of €1732 million with China and €2581 million with oil exporting countries (OPEC).

Table VG-8, Italy, Trade Balance by Regions and Countries, Millions of Euro 

Regions and Countries	Trade Balance Jan 2012 Millions of Euro	Trade Balance Cumulative Jan 2012 Millions of Euro
EU	756	756
EMU 17	-44	-44
France	831	831
Germany	-399	-399
Spain	326	326
UK	636	636
Non EU	-5,106	-5,106
Europe non EU	98	98
USA	256	256
China	-1,732	-1,732
OPEC	-2,581	-2,581
Total	-4,350	-4,350

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/57081

VH United Kingdom. The Markit/CIPS UK Services PMI^® from from 56.0 in Dec to 53.8 in Feb because of inability to drive sales by discounting (http://www.supplymanagement.com/resources/pmi-reports/uk-services-activity-grows-but-rate-slows/). Chris Williamson, Chief Economist at Markit, finds that IQ2012 activity is the best since the spring of 2010, indicating that the UK economy will avoid another recession (http://www.supplymanagement.com/resources/pmi-reports/uk-services-activity-grows-but-rate-slows/). 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: Feb 12 months NSA ∆%: 4.1; excluding food, petroleum ∆%: 3.0 Input Prices: Jan 12 months NSA ∆%: 7.3 Excluding ∆%: 5.4 Blog 03/11/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.7 Blog 02/26/12
Industrial Production	Jan 2011/Dec 2010 NSA ∆%: Production Industries minus 3.8; Manufacturing 0.3 Blog 03/11/12
Retail Sales	Jan month SA ∆%: +0.9 Dec 12 months ∆%: +2.0 Blog 02/19/12
Labor Market	Nov-Jan Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.4% Blog 3/18/12
Trade Balance	Balance Jan minus ₤1762 million Exports Jan ∆%: 0.2 Nov-Jan ∆%: 4.7 Imports Jan ∆%: 1.5 Nov/Jan ∆%: 4.7 Blog 3/18/12

Links to blog comments in Table UK:

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

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

Labor market statistics of the UK for the quarter Oct-Dec 2011 are provided in Table VH-1. The unemployment rate rose to 8.4 percent and the number unemployed increased 28,000 in Nov-Jan, reaching 2.666 million. There are 855,000 unemployed over one year, down 8,000 on the quarter relative to Oct-Dec, and 405,000 unemployed over two years, down 25,000 on the quarter. The employment rate is 70.3 percent. Earnings growth including bonuses was 1.7 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 5.0 percent, unchanged in the quarter.  There are 7.68 million people working part time in Nov-Jan. The number of employees and self-employed part-time because they could not find full-time employment increased 110,000 to 1.38 million, which is the highest since 1992 when records begin. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992 but other data show higher numbers in the mid 1980s.

Table VH-1, UK, Labor Market Statistics

	Quarter Nov 2011-Jan 2012
Unemployment Rate	8.4% +0.1 % points on quarter and +0.4 from year earlier, highest since 8.6% in Sep-Nov 1995
Number Unemployed	(1) +28,000 from Aug-Oct +148,000 from year earlier to reach 2.666 million (2) Unemployment rate 16 to 24 years of age +0.4 % points from Aug-Oct to 22.5% of that age group; number unemployed 16 to 24 years up 22,000 from Jul-Aug to 1.038 million; unemployment rate and number for 16-24 years highest since 1992 when records begin but other data show higher unemployment ages 16 to 24 in mid 1980s (3) Unemployed 16 to 24 years excluding those in full-time education 731,000 (311,000 in full-time education), up 1,000 from Oct-Dec; unemployment rate 20.8%, up 0.2 % points from Aug-Oct
Number Unemployed > one and two years	(1) Number unemployed over one year: 855,000 Nov-Jan, down 12,000 on quarter Aug-Oct   (2) Number unemployed over two years: 405,000 Nov-Jan, down 25,000 on Aug-Oct
Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks)	(1) 23.1%, down 0.1 % points on quarter and from year earlier              (2) Economically inactive 16-64 years down 27,000 on quarter and 30,000 on year to 9.299 million in Nov-Jan
Employment Rate	70.3% Nov-Jan, unchanged on quarter, down 0.2 % points on year earlier
Number Employed	(1) Up 9,000 on quarter, down 44,000 on year to 29.115 million                               (2) Number of employees down 109,000 on quarter to 24.79 million, fastest decline since 1992 (when records begin)                                      (3) Self-employed +101,000 on quarter to 4.12 million, largest number since 1992            (5) Number in other job categories +26,000 to 210,000
Earnings Growth Rates Year on Year	(1) Total +1.4% (including bonuses) over year earlier, down 0.5 on Oct-Dec; private sector rose 1.7 on year earlier, public sector rose 1.7% on year earlier, lowest since 2001 when comparable records begin                                   (2) Regular private +1.9% (excluding bonuses) over year earlier; regular public 1.3% on year earlier
Full-time and Part-time	(1) Number full-time 21.23 million, down 50,000 on quarter                               (2) Number part-time 7.68 million in Nov-Jan, up 59,000 on quarter Oct-Dec (3) Number employees and self-employed working part-time because they could not find full-time employment up 110,000 to 1.38 million, highest since 1992 when records begin
	Dec 2011
Claimant Count (Jobseeker’s Allowance, JSA)	(1) Latest estimate: 1.612 million in Feb 2012; +7,200 on Jan and +162,100 on year earlier (2) Number claiming JSA for up to six month 928,200 down 16,500 Nov to Dec 129,000 from prior year (rate: 5.0%, highest since 5.1% in Aug 1997, unchanged in quarter but +0.5 percentage points from year earlier)
Labor Productivity	(1) Output per worker rose 1.2% from IIQ2011 to IIIQ2011 (2) Unit labor costs increased 0.5% from IIQ2011 to IIIQ2011

Source: http://www.ons.gov.uk/ons/dcp171778_257901.pdf

Table VH-2 UK provides indicators of the labor force survey of the UK for Nov 2011 to Jan 2012 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.7 percent in Feb-Apr 2011 to 8.4 percent in Nov 2011 to Jan 2012.

Table VH-2, UK, Labor Force Survey Indicators

	LFHP	EMP	PART	UNE	RATE
Nov-Jan 2012	40,186	29,115	70.3	2,666	8.4
Aug-Oct 2011	40,181	29,107	70.3	2,638	8.3
May-Jul 11	40,176	29,169	70.5	2,510	7.9
Feb-Apr 11	40,133	29,239	70.6	2,430	7.7
Nov-Jan 11	40,088	29,159	70.5	2,518	7.9
Nov-Jan 10	39,889	28,842	70.4	2,435	7.8

Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 to 64 in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed in thousands ; Rate: Number Unemployed as % of Employed plus Unemployed

Source: http://www.ons.gov.uk/ons/dcp171778_257901.pdf

The UK trade account is shown in Table VH-3. In Jan 2012, the UK ran a deficit in trade of goods and services (total trade) of ₤1762 million. The deficit in trade of goods was ₤7532 million and ₤6958 million in goods excluding oil. A surplus in services of ₤5786 million contributed to the smaller overall deficit in goods and services (-₤7532 million plus ₤5786 equal to -₤1762 with minor error). Services have contributed to lower trade account deficits and also softened the impact of the global recession on the UK economy. Exports of goods and services increased 0.2 percent in Jan 2012 and rose 4.7 percent in the quarter Nov-Jan 2011 relative to the same quarter a year earlier with imports increasing 1.5 percent in Jan and rising 2.5 percent in Nov-Jan relative to the quarter a year earlier. Excluding oil, UK exports of goods increased 1.0 percent in Jan and increased 6.1 percent in Nov-Jan relative to a year earlier while imports increased 1.6 percent in Jan and increased 0.7 percent in Nov-Jan relative to a year earlier. The great advantage of the UK similar to the US is the substantial surplus in services. Services exports fell 2.7 percent in Jan and rose 0.4 percent in Nov-Jan relative to a year earlier and imports decreased 2.7 percent in Jan and were flat in Nov-Jan relative to a year earlier.

Table VH-3, Value of UK Trade in Goods and Services, Balance of Payments Basis, ₤ Million  and ∆%

	₤ Million SA Jan 2012	Month ∆%    Jan 2012	Nov 2011 to Jan 2012 ∆% Nov 2010 to Jan 2011
Total Trade
Exports	41,305	0.2	4.7
Imports	43,067	1.5	2.5
Balance	-1,762
Trade in Goods
Exports	26,063	2.0	7.5
Imports	33,595	2.6	3.3
Balance	-7,532
Trade in Goods Excluding Oil
Exports	22,140	1.0	6.1
Imports	29,098	1.6	0.7
Balance	-6,958
Trade in Services
Exports	15,238	-2.7	0.4
Imports	9,452	-2.7	0.0
Balance	5,786

Source: http://www.ons.gov.uk/ons/dcp171778_258179.pdf

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 10.6 percent by Fri Mar 16, 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	03/16 /2012
Rate	1.1423	1.5914	1.192	1.318
CNY/USD	01/03 2000	07/21 2005	7/15 2008	03/16/ 2012
Rate	8.2798	8.2765	6.8211	6.3226
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

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 VI-4 below, the dollar has devalued again to USD 1.318/EUR or by 10.6 percent {[(1.318/1.192)-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 6.3105/USD on Fri Mar 9, 2012, or by an additional 7.3 percent, for cumulative revaluation of 23.6 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. There was virtually no change to the rate of 6.2992 on Mar 2. The rate of CNY 6.3105/USD fixed on Mar 9 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. The rate of CNY 6.3226/USD on Mar 16, 2012 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. In two weeks, the CNY has depreciated by 0.4 percent. 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	03/16 /2012
Rate	1.1423	1.5914	1.192	1.318
CNY/USD	01/03 2000	07/21 2005	7/15 2008	03/16/ 2012
Rate	8.2798	8.2765	6.8211	6.3226
Weekly Rates	02/24/12	03/02/  2012	03/09/  2012	03/16/  2012
CNY/USD	6.2986	6.2992	6.3105	6.3226
∆% from Earlier Week*	0.0	0.0	-0.2	-0.2

*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

The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks.

Economic risks include the following:

1. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the target will be lowered to 7.5 percent enhance the quality and level of development of China over the long term

2. The US economy grew at 1.6 percent in 2011 (http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening.html). The labor market continues fractured with 30.5 million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or.html ). There are over 10 million fewer full-time jobs and hiring has collapsed (section I in this blog comment and earlier at http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html)

3. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier. The euro zone’s GDP fell 0.3 percent in IVQ2011; Germany’s GDP fell 0.2 percent in IVQ2011; and the UK’s GDP fell 0.2 percent in IVQ2011. There is still high unemployment in advanced economies

4. Inflation continues in repetitive waves globally (see Section I Inflation Waves and earlier http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html)

A list of financial uncertainties includes:

1. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk

2. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation

3. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 36.6 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 37.3 percent

4. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1

5. Commodity prices driven by zero interest rates have resumed their increasing path

It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. 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 03/16/12,” 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 followed by uncertainty on financial counterparty risk in the weeks of Mar 2 and Mar 9, all financial values show positive change in valuation in column “∆% Trough to 03/16/12” after surge in the week of Apr 16 on favorable news of Greece’s bailout. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 36.6 percent and S&P 500 37.3 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached in intraday trading 13,331.77 on Mar 16, which is the highest level 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 03/16/12” had double digit gains relative to the trough around Jul 2, 2010 but now only one valuation show increase of less than 10 percent: China’s Shanghai Composite is only 0.9 percent above the trough. DJ UBS Commodities is 17.9 percent above the trough; Dow Global is 19.4 percent above the trough; and DAX is 26/2 percent above the trough. Japan’s Nikkei Average is 14.8 percent above the trough on Aug 31, 2010 and 11.1 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 10,129.83 on Fri Mar 16, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 1.2 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 10.6 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 03/16/12” in Table VI-4 shows positive performance of risk financial assets in the week of Mar 16, 2012 with the exception of decrease of 1.4 percent of China Shanghai Composite. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth tradeoffs. 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 03/16/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Mar 16, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 03/16/12” but also relative to the peak in column “∆% Peak to 03/16/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 18.1 percent, S&P 500 15.4 percent and Dax 13.0 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 6.0 percent, Nikkei Average by 11.1 percent, Shanghai Composite by 24.0 percent, STOXX 50 by 8.2 percent and Dow Global by 2.6 percent. DJ UBS Commodities Index is now 0.6 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 03/16 /12	∆% Week 03/16/ 12	∆% Trough to 03/16 12
DJIA	4/26/ 10	7/2/10	-13.6	18.1	2.4	36.6
S&P 500	4/23/ 10	7/20/ 10	-16.0	15.4	2.4	37.3
NYSE Finance	4/15/ 10	7/2/10	-20.3	-9.2	4.7	13.9
Dow Global	4/15/ 10	7/2/10	-18.4	-2.6	2.7	19.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	0.0	0.6	14.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-11.1	2.0	14.8
China Shang.	4/15/ 10	7/02 /10	-24.7	-24.0	-1.4	0.9
STOXX 50	4/15/10	7/2/10	-15.3	-6.0	2.4	11.0
DAX	4/26/ 10	5/25/ 10	-10.5	13.0	4.0	26.2
Dollar Euro	11/25 2009	6/7 2010	21.2	12.9	-0.5	-10.6
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	0.8	0.6	17.9
10-Year T Note	4/5/ 10	4/6/10	3.986	2.294

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 Mar 16, 2012, shows that the S&P 500 is now 15.9 percent above the Apr 26, 2010 level and the DJIA is 18.1 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
Mar 2	0.0	15.8	0.3	13.0
Mar 9	-0.4	15.3	0.1	13.1
Mar 16	2.4	18.1	2.4	15.9

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 4.5 percent to ZAR 7.5607/USD on Mar 16, 2012, which is still 34.7 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 6.7 percent stronger at SGD 1.2576/USD on Mar 16 relative to the trough of depreciation but still stronger by 19.0 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 depreciation of 3.7 percent relative to the trough to BRL 1.8013/USD on Mar 16, 2012 but still stronger by 25.9 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 fourth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3440&IDPAI=NEWS):

“Copom reduces the Selic rate to 9.75 percent

07/03/2012 7:00:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom decided to reduce the Selic rate to 9.75 percent, without bias, with five votes for the monetary policy action and two votes in favor of reducing the Selic rate by 50 basis points.”

Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. 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	Mar 16, 2012	∆T Mar 16, 2012	∆P Mar 16, 2012
EUR USD	7/15 2008	6/7 2010		03/16 2012
Rate	1.59	1.192		1.3175
∆%			-33.4		9.5	-20.7
JPY USD	8/18 2008	9/15 2010		03/16 2012
Rate	110.19	83.07		83.43
∆%			24.6		-0.4	24.3
CHF USD	11/21 2008	12/8 2009		03/16 2012
Rate	1.225	1.025		0.9157
∆%			16.3		10.7	25.2
USD GBP	7/15 2008	1/2/ 2009		03/16 2012
Rate	2.006	1.388		1.5843
∆%			-44.5		12.4	-26.6
USD AUD	7/15 2008	10/27 2008		03/16 2012
Rate	1.0215	1.6639		1.0591
∆%			-62.9		42.3	7.6
ZAR USD	10/22 2008	8/15 2010		03/16 2012
Rate	11.578	7.238		7.5607
∆%			37.5		-4.5	34.7
SGD USD	3/3 2009	8/9 2010		03/16 2012
Rate	1.553	1.348		1.2576
∆%			13.2		6.7	19.0
HKD USD	8/15 2008	12/14 2009		03/16 2012
Rate	7.813	7.752		7.7631
∆%			0.8		-0.1	0.6
BRL USD	12/5 2008	4/30 2010		03/16 2012
Rate	2.43	1.737		1.8013
∆%			28.5		-3.7	25.9
CZK USD	2/13 2009	8/6 2010		03/16 2012
Rate	22.19	18.693		18.598
∆%			15.7		0.5	16.2
SEK USD	3/4 2009	8/9 2010		03/16 2012
Rate	9.313	7.108		6.7455
∆%			23.7		5.1	27.6
CNY USD	7/20 2005	7/15 2008		03/16 2012
Rate	8.2765	6.8211		6.3226
∆%			17.6		7.3	23.6

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 2012. 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

Chart VI-2 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.

Chart VI-2, US Dollars per Euro, 2009-2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/RXI$US_N.B.EU%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 2.294 percent at the close of market on Fri Mar 16, 2012 would be equivalent to price of 102.9428 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 1.7 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 first to the last row of Table VI-7. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. 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 Mar 7, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2876 billion, or $2.9 trillion, with portfolio of long-term securities of $2587 billion, or $2.6 trillion, consisting of $1565 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $100 billion Federal agency debt securities and $854 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1564 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
03/02/12	1.977	105.8535	4.5
03/09/12	2.031	105.3512	4.0
03/16/12	2.294	102.9428	1.7

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 decreased 0.4 percent to 14,637 thousand barrels per day on average in the four weeks ending on Mar 9, 2012 from 14,701 thousand barrels per day in the four weeks ending on Mar, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 83.9 percent on Mar 9, 2012, which is higher than 81.4 percent on Mar 11, 2011 and slightly lower than 84.2 percent on Mar 2, 2012. Imports of crude oil decreased 0.1 percent from 8,900 thousand barrels per day on average in the four weeks ending on Mar 2 to 8,890 thousand barrels per day in the week of Mar 9. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.7 million barrels per day last week, down by 4 thousand barrels per day from the previous week [Mar 9]” (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 stable imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 1.8 million barrels from 345.7 million barrels on Mar 2 to 347.5 million barrels on Mar 9. Motor gasoline production decreased 0.1 percent to 8,809 thousand barrels per day in the week of Mar 9 from 8,800 thousand barrels per day on average in the week of Mar 2. Gasoline stocks decreased 1.4 million barrels and stocks of fuel oil decreased 4.7 million barrels. Supply of gasoline fell from 9,071 thousand barrels per day on Mar 11, 2011, to 8,417 thousand barrels per day on Mar 9, 2012, or by 7.2 percent, while fuel oil supply fell 7.1 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 6.2 percent from Mar 11, 2011 to Mar 9, 2012. Gasoline prices rose 7.3 percent from Mar 14, 2011 to Mar 12, 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	03/09/12	03/02/12	03/11/11
Crude Oil Refineries Input	14,637 Week       ∆%: -0.4	14,701	13,865
Refinery Capacity Utilization %	83.9	84.2	81.4
Motor Gasoline Production	8,809 Week      ∆%: +0.1	8,800	9,035
Distillate Fuel Oil Production	4,237 Week     ∆%: -1.4	4,298	4,068
Crude Oil Imports	8,890 Week        ∆%: -0.1	8,900	8,241
Motor Gasoline Supplied	8,417 ∆% 2012/2011= -7.2%	8,335	9,071
Distillate Fuel Oil Supplied	3,594 ∆% 2012/2011 = -7.1%	3,588	3,867
	03/09/12	03/02/12	03/11/11
Crude Oil Stocks Million B	347.5     ∆= +1.8 MB	345.7	350.6
Motor Gasoline Million B	228.1    ∆= -1.4 MB	229.5	225.0
Distillate Fuel Oil Million B	134.8 ∆= -4.7 MB	139.5	152.6
WTI Crude Oil Price $/B	107.4 ∆% 2012/2011 6.2	106.68	101.14
	03/12/12	03/05/12	3/14/11
Regular Motor Gasoline $/G	3.829 ∆% 2012/2011 +7.3	3.793	3.567

B: barrels; G: gallon

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

Chart VII-1 of the US Energy Information Administration shows 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 distillate oil stocks since Jun 2010. Distillate fuel 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. Distillate fuel oil stocks have been in a clear downward trend for some weeks.

Chart VII-2, US, Distillate Fuel 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 IIC-13, 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 fell by 14,000 from 365,000 on Mar 3 to 351,000 on Mar 10. Claims not adjusted for seasonality fell 30,719 from 368,432 on Mar 3 to 337,313 on Mar 10. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Mar 10, 12	351,000	337,313	355,750
Mar 3, 12	365,000	368,432	355,750
Change	-14,000	-30,719	0
Feb 25, 12	354,000	334,241	354,750
Prior Year	390,000	371,721	388,500

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 652,635 on Mar 7, 2009 to 371,721 on Mar 12, 2011, and now to 337,313 on Mar 10, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (Section I Hiring Collapse and 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
Mar 10, 2001	377,210	393,000
Mar 9, 2002	386,992	399,000
Mar 8, 2003	414,568	424,000
Mar 6, 2004	339,007	344,000
Mar 12, 2005	307,061	324,000
Mar 11, 2006	294,764	307,000
Mar 10, 2007	398,927	308,000
Mar 8, 2008	341,364	347,000
Mar 7, 2009	652,635	655,000
Mar 13, 2010	439,061	464,000
Mar 12, 2011	371,721	390,000
Mar 10, 2012	337,313	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 Dec 2011 to Feb 2012, CPI inflation for all items seasonally adjusted was 2.4 percent in annual equivalent, that is, compounding inflation in Dec-Feb and assuming it would be repeated for a full year. In the 12 months ending in Feb, CPI inflation of all items not seasonally adjusted was 2.9 percent. Inflation in Feb 2012 not seasonally adjusted was 0.4 percent relative to Jan 2011 (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 1.6 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 0.08 percent for three months, 0.14 percent for six months, 0.20 percent for 12 months, 0.36 percent for two years, 0.57 percent for three years, 1.12 percent for five years, 1.69 percent for seven years, 2.31 percent for ten years and 3.42 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 Feb 2012/Feb 2011 NSA	∆% Annual Equivalent Dec 2011-Feb 2012 SA
CPI All Items	2.9	2.4
CPI ex Food and Energy	2.2	1.6

Source: http://www.bls.gov/cpi/

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 stagnates in 12 months and declines at the margin. 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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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