Recovery without Jobs, Twenty Eight Million Unemployed or Underemployed, Falling Real Wages, Stagnating Real Disposable Income and Global Financial and Economic Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Twenty Eight Million Unemployed or Underemployed and Falling Real Wages
IA Twenty Eight Million Unemployed or Underemployed
IA1 Summary of the Employment Situation
IA2 Number of People in Job Stress
IA3 Long-term and Cyclical Comparison of Employment
IA4 Creation of Jobs
IB Falling Real Wages
II Stagnating Real Disposable Income and Consumption
IIA Stagnating Real Disposable Income and Consumption
IIB Financial Repression
III World Financial Turbulence
IIIA Financial Risks
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendix I The Great Inflation
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.1 | 2.7 | 2.8 | 8.1 |
| Japan | -0.6 | 0.5 | 0.6 | 4.5 |
| China | 8.9 | 3.6 | -0.3 | |
| UK | 0.0 | 3.5* | 3.6* output | 8.3 |
| Euro Zone | 0.7 | 2.7 | 3.3 | 10.9 |
| Germany | 2.0 | 2.3 | 3.4 | 5.6 |
| France | 0.2 | 2.6 | 3.7 | 10.0 |
| Nether-lands | -0.7 | 2.9 | 3.6 | 5.0 |
| Finland | 1.2 | 2.9 | 2.7 | 7.5 |
| Belgium | 0.9 | 3.1 | 2.8 | 7.3 |
| Portugal | -2.7 | 3.1 | 3.5 | 15.3 |
| Ireland | NA | 2.2 | 3.1 | 14.5 |
| Italy | -0.5 | 3.8 | 2.7 | 9.8 |
| Greece | -7.0 | 1.4 | 6.7 | NA |
| Spain | 0.3 | 1.8 | 3.3 | 24.1 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/march-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.1 percent in IQ2012 relative to IQ2011 (Table 8, p 11 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp1q12_adv.pdf See Section I Mediocre Economic Growth at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html). Japan’s GDP fell 0.6 percent in IVQ2011 relative to IVQ2010 and contracted 1.7 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 7.1 percent in IIIQ2011 to decline at the SAAR of 0.7 percent in IVQ 2011 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html); the UK grew at 0.0 percent in IQ2012 relative to IQ2011 and GDP fell 0.2 percent in IQ2012 relative to IVQ2011 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html and http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/stb-q1-2012.html); and the Euro Zone grew at 0.7 percent in IVQ2011 relative to IVQ2010 but declined 0.3 percent in IVQ2011 relative to IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html and http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06032012-AP/EN/2-06032012-AP-EN.PDF). These are stagnating or “growth recession” rates, which are positive growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.1 percent in the US but 17.3 percent for unemployment/underemployment or job stress of 27.8 million (see Table I-4 in Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html), 4.5 percent for Japan (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html), 8.3 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH in http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html) and 10.9 percent in the Euro Zone (section VD and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 2.7 percent in the US, 0.5 percent for Japan, 3.6 percent for China, 2.7 percent for the Euro Zone and 3.5 percent for the UK (http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/march-2012/index.html). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III in this post and the earlier post http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see section I at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html and earlier http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html), weak hiring with the loss of 10 million full-time jobs (see section II in http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html and http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I Twenty Eight Million Unemployed or Underemployed and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see IV Budget/Debt Quagmire in 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/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
The statement of the FOMC at the conclusion of its meeting on Apr 25, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120425a.htm):
“Release Date: April 25, 2012
For immediate release
Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
There are several important issues in this statement.
1. Mandate. The FOMC 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”
2. Extending Average Maturity of Holdings of Securities. The statement of Apr 25, 2012, invokes the mandate that inflation is subdued but employment below maximum such that further accommodation is required. Accommodation consists of low interest rates. The new “Operation Twist” (http://cmpassocregulationblog.blogspot.com/2011_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html) or restructuring the portfolio of securities of the Fed by selling short-dated securities and buying long-term securities has the objective of reducing long-term interest rates. Lower interest rates would stimulate consumption and investment, or aggregate demand, increasing the rate of economic growth and thus reducing stress in job markets. Policy now focuses on improving conditions in real estate by attempting to reduce mortgage rates: “The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.”
3. Target of Fed Funds Rate. The FOMC continues to maintain the target of fed funds rate at 0 to ¼ percent.
4. Advance Guidance. The FOMC increases transparency by advising on the expectation of the future path of fed funds rate. This guidance is the view that conditions such as “low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
5. Monitoring and Policy Focus. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
These policy statements are carefully crafted to express the intentions of the FOMC. The main objective of the statements is to communicate as clearly and firmly as possible the intentions of the FOMC to fulfill its dual mandate. During periods of low inflation and high unemployment and underemployment such as currently the FOMC may be more biased toward measures that stimulate the economy to reduce underutilization of workers and other productive resources. The FOMC also is vigilant about inflation and ready to change policy in the effort to attain its dual mandate.
The FOMC also released the economic projections of governors of the Board of Governors of the Federal Reserve and Federal Reserve Banks presidents shown in Table IV-2. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IQ2012 is analyzed in the current post of this blog in section I. The Bureau of Economic Analysis (BEA) provides the GDP report with the second estimate for IQ2012 to be released on May 31 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/national/index.htm#personal), which is analyzed in this blog as soon as available. The next report will be released at 8:30 AM on Apr 30. PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for Apr will be released on May 4, 2012 (http://www.bls.gov/cps/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf).
It is instructive to focus on 2012, as 2013, 2014 and longer term are too far away, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jan 25 and the second row “Nov PR” the projection of the Nov meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun to 2.5 to 2.9 percent in Nov and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun to 8.5 to 8.7 percent in Nov but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.2 to 8.0 percent at the Apr 25, 2012 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun to virtually the same of 1.4 to 2.0 percent in Nov but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun of 1.4 to 2.0 percent and the Nov projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.5 to 1.8 percent at the Apr 25, 2012 meeting.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, January 2012 and April 2012
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 | 2.4 to 2.9 | 7.2 to 8.0 | 1.9 to 2.0 | 1.8 to 2.0 |
| 2013 | 2.7 to 3.1 | 7.3 to 7.7 | 1.6 to 2.0 | 1.7 to 2.0 |
| 2014 | 3.1 to 3.6 | 6.7 to 7.4 | 1.7 to 2.0 | 1.8 to 2.0 |
| Longer Run Jan PR | 2.3 to 2.6 | 5.2 to 6.0 | 2.0 | |
| Range | ||||
| 2012 | 2.1 to 3.0 | 7.2 to 8.2 | 1.8 to 2.3 | 1.7 to 2.0 |
| 2013 | 2.4 to 3.8 | 7.0 to 8.1 | 1.5 to 2.1 | 1.6 to 2.1 |
| 2014 | 2.9 to 4.3 | 6.3 to 7.7 | 1.5 to 2.2 | 1.7 to 2.2 |
| Longer Run Jan PR | 2.2 to 3.0 | 4.9 to 6.0 | 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; 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). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. The table is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf). There are 14 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only three to be higher. Not much change is expected in 2013 either with 11 participants anticipating the rate at the current target of 0 to ¼ percent and only six expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for four participants with three expecting the rate to be in the range of 0.5 to 1 percent and three participants expecting rates from 1 to 2.0 percent but only 7 with rates exceeding 2.5 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, April 25, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 2.75 | 3.5 to 4.5 | |
| 2012 | 14 | 1 | 2 | |||
| 2013 | 11 | 1 | 3 | 2 | ||
| 2014 | 4 | 3 | 3 | 7 | ||
| Longer Run | 17 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Apr 25, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 3 |
| 2013 | 3 |
| 2014 | 7 |
| 2015 | 4 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf
There are five waves of inflation of personal consumption expenditures (PCE) in 2011 shown in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr when headline PCE inflation grew at the average annual equivalent rate of 4.6 percent and PCE inflation excluding food and energy at 2.1 percent. The drivers of inflation were increases in food prices at the annual equivalent rate of 8.7 percent and of energy prices at 41.7 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May and Jun when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices rose 0.6 percent in annual equivalent and 3.0 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep of headline PCE inflation of 3.7 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 27.3 percent. In the fourth wave in Oct-Dec, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.6 percent in Oct-Dec while PCEE of prices of energy fell at the annual equivalent rate of 13.5 percent. In the fifth wave in Jan-Mar, headline PCE in annual equivalent was 2.8 percent and 2.0 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 20.9 percent because of the jump of 3.5 percent in Feb followed by 1.0 percent in Mar.
Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%
| PCE | PCEG | PCEG | PCES | PCEX | PCEF | PCEE | |
| 2012 | |||||||
| Mar | 0.2 | 0.3 | -0.1 | 0.2 | 0.2 | 0.1 | 1.0 |
| Feb | 0.3 | 0.6 | -0.1 | 0.2 | 0.1 | 0.0 | 3.5 |
| Jan | 0.2 | 0.3 | 0.1 | 0.2 | 0.2 | 0.1 | 0.3 |
| ∆% AE Jan- Mar | 2.8 | 4.9 | -0.4 | 2.4 | 2.0 | 0.8 | 20.9 |
| 2011 | |||||||
| Dec | 0.1 | -0.2 | -0.2 | 0.2 | 0.2 | 0.2 | -1.4 |
| Nov | 0.1 | -0.1 | -0.3 | 0.2 | 0.1 | 0.0 | -0.5 |
| Oct | 0.0 | -0.2 | -0.1 | 0.1 | 0.1 | 0.2 | -1.7 |
| ∆% AE Oct- Dec | 0.8 | -2.0 | -2.4 | 2.0 | 1.6 | 1.6 | -13.5 |
| Sep | 0.2 | 0.3 | -0.4 | 0.1 | 0.0 | 0.5 | 2.1 |
| Aug | 0.3 | 0.4 | -0.1 | 0.2 | 0.2 | 0.6 | 1.2 |
| Jul | 0.4 | 0.7 | -0.1 | 0.2 | 0.2 | 0.4 | 2.8 |
| ∆% AE Jul-Sep | 3.7 | 5.7 | -2.4 | 2.0 | 1.6 | 6.2 | 27.3 |
| Jun | -0.1 | -0.5 | 0.2 | 0.1 | 0.2 | 0.1 | -4.5 |
| May | 0.2 | 0.0 | 0.1 | 0.3 | 0.3 | 0.3 | -1.2 |
| ∆% AE May-Jun | 0.6 | -3.0 | 1.8 | 2.4 | 3.0 | 2.4 | -29.4 |
| Apr | 0.3 | 0.6 | 0.2 | 0.2 | 0.2 | 0.4 | 2.3 |
| Mar | 0.4 | 0.8 | 0.0 | 0.2 | 0.1 | 0.9 | 3.7 |
| Feb | 0.4 | 0.8 | 0.2 | 0.2 | 0.2 | 0.8 | 3.5 |
| Jan | 0.4 | 0.8 | 0.1 | 0.2 | 0.2 | 0.7 | 2.3 |
| ∆% AE Jan-Apr | 4.6 | 9.4 | 1.5 | 2.4 | 2.1 | 8.7 | 41.7 |
| 2010 | |||||||
| Dec | 0.3 | 0.6 | -0.4 | 0.1 | 0.0 | 0.1 | 4.1 |
| Nov | 0.1 | 0.0 | -0.2 | 0.1 | 0.1 | 0.0 | 0.1 |
| Oct | 0.2 | 0.4 | -0.2 | 0.1 | 0.1 | 0.1 | 2.8 |
| Sep | 0.1 | 0.2 | -0.2 | 0.1 | 0.0 | 0.3 | 1.2 |
| Aug | 0.2 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 1.7 |
| Jul | 0.2 | 0.5 | -0.3 | 0.1 | 0.0 | 0.1 | 3.4 |
| Jun | -0.2 | -0.6 | -0.3 | 0.1 | 0.1 | -0.2 | -3.6 |
| May | -0.1 | -0.6 | -0.2 | 0.2 | 0.1 | 0.0 | -2.9 |
| Apr | 0.0 | -0.2 | -0.2 | 0.2 | 0.1 | 0.2 | -0.5 |
| Mar | 0.2 | -0.1 | 0.0 | 0.3 | 0.2 | 0.2 | -0.4 |
| Feb | 0.1 | -0.1 | -0.3 | 0.2 | 0.1 | 0.2 | -0.2 |
| Jan | 0.2 | 0.5 | -0.2 | 0.1 | 0.1 | 0.2 | 2.7 |
Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services
Source: http://www.bea.gov/iTable/index_nipa.cfm
The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2012 around 0.2 percent per month.
Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart IV-2. The exclusion of commodity components does not eliminate negative changes. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding a few outliers.
Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
As with all commodity prices, oscillations of the PCE price index of food in Chart IV-3 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010.
Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes.
Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IV-6 provides 12-month rates of PCE inflation. While headline PCE inflation has increased from 1.5 percent in Jan 2011 to 2.9 percent in Sep and Aug, declining to 2.1 percent in Mar 2012, PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.0 percent in Jan 2011 to 1.9 percent in Dec 2011 and Jan and Feb 2012 with 2.0 percent in Mar 2012, which is still below or at the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.
Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%
| PCE | PCEG | PCEG | PCES | PCEX | PCEF | PCEE | |
| 2012 | |||||||
| Mar | 2.1 | 2.2 | -0.7 | 2.1 | 2.0 | 3.1 | 3.7 |
| Feb | 2.3 | 2.7 | -0.7 | 2.1 | 1.9 | 3.9 | 6.5 |
| Jan | 2.4 | 2.9 | -0.4 | 2.2 | 1.9 | 4.7 | 6.5 |
| 2011 | |||||||
| Dec | 2.5 | 3.4 | -0.4 | 2.1 | 1.9 | 5.3 | 8.6 |
| Nov | 2.7 | 4.2 | -0.6 | 2.0 | 1.8 | 5.1 | 14.6 |
| Oct | 2.7 | 4.3 | -0.5 | 1.9 | 1.7 | 5.2 | 15.4 |
| Sep | 2.9 | 4.9 | -0.7 | 2.0 | 1.6 | 5.1 | 20.7 |
| Aug | 2.9 | 4.8 | -0.5 | 1.9 | 1.7 | 4.8 | 19.6 |
| Jul | 2.8 | 4.7 | -0.2 | 1.8 | 1.6 | 4.3 | 20.2 |
| Jun | 2.6 | 4.5 | -0.5 | 1.7 | 1.4 | 3.9 | 20.8 |
| May | 2.6 | 4.4 | -1.0 | 1.7 | 1.3 | 3.6 | 21.9 |
| Apr | 2.4 | 3.9 | -1.4 | 1.6 | 1.2 | 3.3 | 19.8 |
| Mar | 2.0 | 3.0 | -1.8 | 1.5 | 1.0 | 3.1 | 16.5 |
| Feb | 1.8 | 2.1 | -1.8 | 1.6 | 1.1 | 2.4 | 11.9 |
| Jan | 1.5 | 1.2 | -2.3 | 1.6 | 1.0 | 1.8 | 7.9 |
| 2010 | |||||||
| Dec | 1.4 | 1.0 | -2.5 | 1.5 | 0.9 | 1.3 | 8.3 |
| Nov | 1.2 | 0.4 | -2.4 | 1.5 | 1.0 | 1.3 | 4.1 |
| Oct | 1.3 | 0.6 | -2.1 | 1.6 | 1.0 | 1.3 | 6.3 |
| Sep | 1.4 | 0.4 | -1.7 | 1.9 | 1.2 | 1.3 | 4.1 |
| Aug | 1.5 | 0.4 | -1.4 | 1.9 | 1.4 | 0.7 | 3.8 |
Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services
Source:
http://www.bea.gov/iTable/index_nipa.cfm
The headline PCE index is shown in Chart IV-5 from 1999 to 2012. There is an evident upward trend with the bump of the global recession after IVQ2008.
Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2012
Source: http://www.bea.gov/iTable/index_nipa.cfm
The headline consumer price index is shown in Chart IV-6. There is also an upward trend but with fluctuations and the 2008 bump.
Chart IV-6, US, Consumer Price Index, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The PCE price index excluding food and energy is shown in Chart IV-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.
Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2012
Source: http://www.bea.gov/iTable/index_nipa.cfm
The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.
Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.
Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2012
Source: http://www.bea.gov/iTable/index_nipa.cfm
There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and beginning of 2012.
Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.
Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2012
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012.
Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. Prices collapsed in the flight to government obligations. Risk appetite with zero interest rates resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.
Chart IV-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
The producer price index of the euro zone increased 0.5 percent in Mar after increasing 0.6 percent in Feb, as shown in Table IV-7. Producer price inflation has moderated since May. Energy inflation has oscillated with the shocks of risk aversion that cause unwinding of carry trade positions from zero interest rates to commodity futures. Energy prices increased 1.4 percent in Mar, 1.1 percent in Jan, 2.3 percent in Jan and 7.2 percent from Sep to Mar, which is equivalent to 12.6 percent per year but is 20.9 percent annual equivalent in Jan-Mar 2012. Prices of capital goods have barely moved. Prices of durable consumer goods have accelerated in Sep-Mar at annual equivalent rate of 2.6 percent compared with only 1.2 percent annual equivalent in Apr-Jun but were flat in Mar 2012.
Table IV-7, Euro Zone, Industrial Producer Prices Month ∆%
| Mar 2012 | Feb 2012 | Jan 2012 | Dec 2011 | Nov 2011 | Oct | Sep | |
| Industry ex | 0.5 | 0.6 | 0.8 | -0.2 | 0.3 | 0.1 | 0.3 |
| Industry ex | 0.2 | 0.3 | 0.3 | -0.1 | -0.1 | -0.1 | 0.0 |
| Intermediate | 0.3 | 0.6 | 0.3 | -0.2 | -0.4 | -0.5 | -0.1 |
| Energy | 1.4 | 1.1 | 2.3 | -0.5 | 1.0 | 0.7 | 1.0 |
| Capital Goods | 0.1 | 0.1 | 0.3 | 0.1 | 0.0 | 0.1 | 0.0 |
| Durable Consumer Goods | 0.0 | 0.3 | 0.4 | 0.0 | 0.2 | 0.2 | 0.4 |
| Nondurable Consumer Goods | 0.2 | 0.3 | 0.3 | 0.1 | 0.3 | 0.2 | 0.2 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03052012-AP/EN/4-03052012-AP-EN.PDF
Although moderating significantly in recent months, 12-month rate of increase of producer prices in the euro zone continue at relatively high levels, as shown in Table IV-8. The 12-month percentage change of industrial prices excluding construction fell from 5.8 percent in Sep to 3.3 percent in Feb. Industrial prices excluding construction and energy increased 1.5 percent in the 12 months ending in Mar while energy prices increased 8.5 percent. There is major vulnerability in producer price inflation that can return together with long positions in commodity futures with carry trades from zero interest during relaxation of risk aversion.
Table IV-8, Euro Zone, Industrial Producer Prices 12 Months ∆%
| Mar 2012 | Feb 2012 | Jan 2012 | Dec 2011 | Nov | Oct 2011 | Sep | |
| Industry ex | 3.3 | 3.6 | 3.8 | 4.3 | 5.4 | 5.5 | 5.8 |
| Industry ex | 1.5 | 1.6 | 1.9 | 2.5 | 3.0 | 3.2 | 3.5 |
| Intermediate | 0.9 | 1.0 | 1.6 | 2.7 | 3.5 | 4.1 | 5.0 |
| Energy | 8.5 | 9.3 | 9.2 | 9.4 | 12.3 | 12.3 | 12.2 |
| Capital Goods | 1.1 | 1.1 | 1.2 | 1.4 | 1.4 | 1.6 | 1.5 |
| Durable Consumer Goods | 2.3 | 2.4 | 2.3 | 2.3 | 2.5 | 2.5 | 2.5 |
| Nondurable Consumer Goods | 2.8 | 2.9 | 3.1 | 3.3 | 3.6 | 3.5 | 3.5 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03052012-AP/EN/4-03052012-AP-EN.PDF
Industrial producer prices in the euro area are following similar inflation waves as in the rest of the world (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html), as shown in Table IV-9. In the first wave in Jan-Apr, annual equivalent producer price inflation was 12.0 percent driven by carry trades from zero interest rates into commodity futures. In the second wave in May-Jun, annual equivalent producer price inflation declined at minus 1.2 percent. In the third wave in Jul-Sep, annual equivalent inflation increased at 2.0 percent. In the third wave in Oct-Dec, risk aversion resulting from the European sovereign debt crisis interrupted commodity carry trades, resulting in annual equivalent inflation of only 0.8 percent. In the fifth wave in Jan-Mar 2012, annual equivalent inflation jumped to 7.9 percent with a high annual equivalent rate of 8.7 percent in Jan-Feb. The bottom part of Table IV-7 provides 12-month percentage changes from 1999 to 2010. The final row of Table IV-7 provides the average annual rate of producer-price inflation in the euro area at 2.6 percent in Dec from 1999 to 2011.
Table IV-9, Euro Area, Industrial Producer Prices Excluding Construction, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| Mar 2012 | 0.5 | 3.3 |
| Feb | 0.6 | 3.6 |
| Jan | 0.8 | 3.8 |
| AE ∆% Jan-Mar | 7.9 | |
| Dec | -0.2 | 4.3 |
| Nov | 0.3 | 5.4 |
| Oct | 0.1 | 5.5 |
| AE ∆% Oct-Dec | 0.8 | |
| Sep | 0.3 | 5.8 |
| Aug | -0.2 | 5.8 |
| Jul | 0.4 | 6.1 |
| AE ∆% Jul-Sep | 2.0 | |
| Jun | 0.0 | 5.9 |
| May | -0.2 | 6.2 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.9 | 6.8 |
| Mar | 0.8 | 6.8 |
| Feb | 0.8 | 6.6 |
| Jan | 1.3 | 5.9 |
| AE ∆% Jan-Apr | 12.0 | |
| Dec 2010 | 0.8 | 5.4 |
| Dec 2009 | -2.9 | |
| Dec 2008 | 1.1 | |
| Dec 2007 | 4.7 | |
| Dec 2006 | 3.8 | |
| Dec 2005 | 4.5 | |
| Dec 2004 | 3.8 | |
| Dec 2003 | 0.8 | |
| Dec 2002 | 1.5 | |
| Dec 2001 | -0.6 | |
| Dec 2000 | 4.6 | |
| Dec 1999 | 2.6 | |
| Average ∆% 1999-2011 | 2.6 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Italy’s producer price inflation in Table IV-10 also has the same six waves in 2011 and into 2012 observed for many countries (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). The annual equivalent producer price inflation in the first wave Jan-Apr was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was minus 0.2 percent in May and flat in Jun for annual equivalent inflation rate in May-Jun of minus 1.2 percent. In the third wave, annual equivalent inflation was 2.4 percent in Jul-Sep in a pause of risk aversion. With the return of risk aversion in the fourth wave coinciding with worsening sovereign debt crisis in Europe, annual equivalent inflation was 0.4 percent in Oct-Dec. In a fifth wave from Nov 2011 to Jan 2012, annual equivalent inflation returned at 4.5 percent. Inflation accelerated in the sixth wave in Jan and Feb 2012 to annual equivalent 7.4 percent and annual equivalent of 6.2 percent in Jan-Mar.
Table IV-10, Italy, Industrial Prices, Internal Market
| Month ∆% | 12-Month ∆% | |
| Mar 2012 | 0.3 | 2.7 |
| Feb | 0.4 | 3.2 |
| Jan | 0.8 | 3.5 |
| AE ∆% Jan-Feb | 7.4 | |
| Dec 2011 | 0.0 | 3.9 |
| Nov | 0.3 | 4.7 |
| AE ∆% Nov-Jan | 4.5 | |
| Oct | -0.2 | 4.7 |
| AE ∆% Oct-Dec | 0.4 | |
| Sep | 0.2 | 4.7 |
| Aug | 0.1 | 4.8 |
| Jul | 0.3 | 4.9 |
| AE ∆% Jul-Sep | 2.4 | |
| Jun | 0.0 | 4.6 |
| May | -0.2 | 4.8 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.7 | 5.6 |
| Mar | 0.8 | 6.2 |
| Feb | 0.7 | 5.8 |
| Jan | 1.2 | 5.3 |
| AE ∆% Jan-Apr | 10.7 | |
| Dec 2010 | 0.7 | 4.7 |
| Year | ||
| 2011 | 5.0 | |
| 2010 | 3.0 | |
| 2009 | -5.4 | |
| 2008 | 5.9 | |
| 2007 | 3.3 | |
| 2006 | 5.2 | |
| 2005 | 4.0 | |
| 2004 | 2.7 | |
| 2003 | 1.6 | |
| 2002 | 0.2 | |
| 2001 | 1.9 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60408
Chart IV-14 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Jan 2012 with increases of 0.8 percent in the month of Jan 2012 and 0.2 percent in Feb. Inflation was 0.3 percent in Mar 2012 and 2.7 percent in 12 months.
Chart IV-14, Italy, Producer Price Index 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table IV-11. Energy prices increased 1.5 percent in Mar 2012 and rose 10.3 percent in 12 months. Producer-price inflation is positive for all components in the month of Mar with the exception of zero in durable goods capital goods and intermediate goods. There is higher inflation in 12 months of 2.6 percent for nondurable goods than 2.1 percent for durable goods.
Table IV-11, Italy, Industrial Prices, Internal Market, ∆%
| Mar 2012/ | Mar 2012/ | |
| Total | 0.3 | 2.7 |
| Consumer Goods | 0.2 | 2.5 |
| Durable Goods | 0.0 | 2.1 |
| Nondurable | 0.3 | 2.6 |
| Capital Goods | 0.0 | 0.4 |
| Intermediate | 0.0 | 0.3 |
| Energy | 1.5 | 10.3 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60408
There are the same waves of inflation in Italy as in other countries and regions in the world (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). The first wave of commodity price increases in the first four months of 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-12. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in the six months Oct-Nov jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.8 percent in Feb-Apr 2012.
Table IV-12, Italy, Consumer Price Index
| Month | 12 Months | |
| Apr 2012 | 0.5 | 3.3 |
| Mar | 0.5 | 3.3 |
| Feb | 0.4 | 3.3 |
| AE ∆% Feb-Apr | 5.8 | |
| Jan | 0.3 | 3.2 |
| Dec 2011 | 0.4 | 3.3 |
| AE ∆% Dec-Jan | 4.3 | |
| Nov | -0.1 | 3.3 |
| Oct | 0.6 | 3.4 |
| AE ∆% Oct-Nov | 3.0 | |
| Sep | 0.0 | 3.0 |
| Aug | 0.3 | 2.8 |
| Jul | 0.3 | 2.7 |
| AE ∆% Jul-Sep | 2.4 | |
| Jun | 0.1 | 2.7 |
| May | 0.1 | 2.6 |
| AE ∆% May-Jun | 1.2 | |
| Apr | 0.5 | 2.6 |
| Mar | 0.4 | 2.5 |
| Feb | 0.3 | 2.4 |
| Jan | 0.4 | 2.1 |
| AE ∆% Jan-Apr | 4.9 | |
| Dec 2010 | 0.4 | 1.9 |
| Annual | ||
| 2011 | 2.8 | |
| 2010 | 1.5 | |
| 2009 | 0.8 | |
| 2008 | 3.3 | |
| 2007 | 1.8 | |
| 2006 | 2.1 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60298
Consumer price inflation in Italy by segments in Apr 2012 is provided in Table IV-13. Total consumer price inflation in Apr was 0.5 percent and 3.3 percent in 12 months. Inflation of goods was 0.4 percent and 4.2 percent in 12 months. Prices of durable goods fell 0.1 in Apr and increased only 0.8 percent in 12 months, as typical in most countries. Prices of energy goods jumped 2.1 percent in Apr and 15.6 percent in 12 months. Food prices fell 0.1 percent in Apr and increased 2.4 percent in 12 months. Prices of services increased 0.7 percent in Apr and rose 2.2 percent in 12 months. Transport prices, also influenced by commodity prices, increased 1.3 percent in Apr and 3.9 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion.
Table IV-13, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%
| Apr 2012 | Month ∆% | 12-Month ∆% |
| Total | 0.5 | 3.3 |
| I Goods | 0.4 | 4.2 |
| Food | -0.1 | 2.4 |
| Energy | 2.1 | 15.6 |
| Durable | -0.1 | 0.8 |
| Nondurable | 0.0 | 0.3 |
| II Services | 0.7 | 2.2 |
| Housing | 0.2 | 2.6 |
| Communications | -0.3 | 1.6 |
| Transport | 1.3 | 3.9 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60298
Chart IV-15 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy that could be reversed if commodity prices continue increasing.
![clip_image027[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles266187B\0430prezzialconsumoen3.jpg "clip_image027[1]")
Chart, IV-15, Italy, Consumer Price Index, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
V World Economic Slowdown. Table I-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) to show GDP in dollars in 2010 and the growth rate of real GDP of the world and selected regional countries from 2011 to 2014. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.5 percent in 2012 but accelerating to 4.1 percent in 2013, 4.4 percent in 2014 and 4.5 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,670 billion of world output of $69,660 billion, or 48.3 percent, but are projected to grow at much lower rates than world output, 2.1 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole. While the world would grow 17.6 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.5 percent. The difference in dollars of 2011 is rather high: growing by 17.6 percent would add $12.3 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.5 percent would add $5.9 trillion of output to the world, or about the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,237 billion, or 36.2 percent of world output. The EMDEs would grow cumulatively 26.5 percent or at the average yearly rate of 6.1 percent, contributing $6.7 trillion from 2012 to 2015 or the equivalent of somewhat less than the GDP of $7,298 billion of China in 2011. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,317 billion, or 19.1 percent of world output, which is equivalent to 39.6 percent of the combined output of the major advanced economies of the G7.
Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth
| GDP USD 2011 | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| World | 69,660 | 3.5 | 4.1 | 4.4 | 4.5 |
| G7 | 33,670 | 1.5 | 1.9 | 2.3 | 2.5 |
| Canada | 1,737 | 2.1 | 2.2 | 2.4 | 2.4 |
| France | 2,776 | 0.5 | 1.1 | 1.9 | 1.9 |
| DE | 3,577 | 0.6 | 1.5 | 1.3 | 1.3 |
| Italy | 2,199 | -1.9 | -0.3 | 0.5 | 1.0 |
| Japan | 5,869 | 2.0 | 1.7 | 1.5 | 1.3 |
| UK | 2,418 | 0.8 | 2.0 | 2.5 | 2.6 |
| US | 15,094 | 2.1 | 2.4 | 2.9 | 3.3 |
| Euro Area | 13,115 | -0.3 | 0.9 | 1.4 | 1.6 |
| DE | 3,577 | 0.6 | 1.5 | 1.3 | 1.3 |
| France | 2,776 | 0.5 | 1.1 | 1.9 | 1.9 |
| Italy | 2,199 | -1.9 | -0.3 | 0.5 | 1.0 |
| POT | 239 | -3.3 | 0.3 | 2.1 | 1.9 |
| Ireland | 218 | 0.5 | 2.1 | 2.5 | 2.8 |
| Greece | 303 | -4.7 | 0.0 | 2.5 | 3.1 |
| Spain | 1,494 | -1.8 | 0.1 | 1.6 | 1.6 |
| EMDE | 25,237 | 5.7 | 6.0 | 6.2 | 6.3 |
| Brazil | 2,493 | 3.0 | 4.2 | 4.0 | 4.1 |
| Russia | 1,850 | 4.0 | 3.9 | 3.9 | 3.9 |
| India | 1,676 | 6.9 | 7.3 | 7.5 | 7.7 |
| China | 7,298 | 8.2 | 8.8 | 8.7 | 8.7 |
Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal
Source: IMF World Economic Outlook databank
http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx
The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, fell from 55.4 in Mar to 52.2 in Apr, which is the lowest reading in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). Sharp deceleration in services offset stronger manufacturing. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth easing into the middle of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, improved marginally at 51.4 in Apr relative to 51.1 in Mar, for a fifth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520). Higher oil and transportation prices were contributing to higher costs of inputs. David Hensley, Director of Global Economics Coordination at JPMorgan, finds that the global PMI™ finds consistency of the index with global manufacturing growth at annual equivalent 2.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520).
The HSBC Brazil Services PMI™ with Composite PMI data, compiled by Markit, fell marginally from 53.4 in Mar to 52.7 in Apr, suggesting sound activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9533). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI increased to 54.4 in Apr relative to 53.8 in Feb, but expansion of services in the Brazilian economist has continued during 33 consecutive months even at a lower reading than 55.3 in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). There is continuing strength in other indicators of the services sector. The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) fell slightly from 51.1 in Mar to 49.3 in Apr, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496). Andre Loes, Chief Economist, Brazil at HSBC, finds broad weakness in the index with all segments below the borderline of contraction at 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496 ).
Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table ESV-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 12.7 percent for Portugal (POT), 14.4 percent for Ireland, 17.3 percent for Greece, 21.6 percent for Spain and 8.4 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.7 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.
Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force
| % Labor Force 2011 | % Labor Force 2012 | % Labor Force 2013 | % Labor Force 2014 | % Labor Force 2015 | |
| World | NA | NA | NA | NA | NA |
| G7 | 7.7 | 7.4 | 7.3 | 7.0 | 6.7 |
| Canada | 7.5 | 7.4 | 7.3 | 7.1 | 6.9 |
| France | 9.7 | 9.9 | 10.1 | 9.8 | 9.4 |
| DE | 6.0 | 5.6 | 5.5 | 5.3 | 5.3 |
| Italy | 8.4 | 9.5 | 9.7 | 9.8 | 9.5 |
| Japan | 4.5 | 4.5 | 4.4 | 4.3 | 4.2 |
| UK | 8.0 | 8.3 | 8.2 | 7.8 | 7.4 |
| US | 8.9 | 8.2 | 7.9 | 7.5 | 6.9 |
| Euro Area | 10.1 | 10.9 | 10.8 | 10.5 | 10.1 |
| DE | 6.0 | 5.6 | 5.5 | 5.3 | 5.3 |
| France | 9.7 | 9.9 | 10.1 | 9.8 | 9.4 |
| Italy | 8.4 | 9.5 | 9.7 | 9.8 | 9.5 |
| POT | 12.7 | 14.3 | 13.9 | 13.2 | 12.4 |
| Ireland | 14.4 | 14.5 | 13.8 | 12.9 | 12.0 |
| Greece | 17.3 | 19.4 | 19.4 | 18.2 | 16.8 |
| Spain | 21.6 | 24.2 | 23.9 | 22.8 | 21.9 |
| EMDE | NA | NA | NA | NA | NA |
| Brazil | 6.0 | 6.0 | 6.5 | 7.0 | 7.0 |
| Russia | 7.5 | 6.5 | 6.0 | 6.0 | 6.0 |
| India | NA | NA | NA | NA | NA |
| China | 4.1 | 4.0 | 4.0 | 4.0 | 4.0 |
Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)
Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx
VA United States. Table USA provides the data table for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Mar 12 months NSA ∆%: 2.7; ex food and energy ∆%: 2.3 Mar month ∆%: 0.3; ex food and energy ∆%: 0.2 |
| Producer Price Index | Mar 12 months NSA ∆%: 2.8; ex food and energy ∆% 2.9 |
| PCE Inflation | Mar 12-month NSA ∆%: headline 2.1; ex food and energy ∆% 2.0 |
| Employment Situation | Household Survey: Apr Unemployment Rate SA 8.1% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 IQ2012 SAAR ∆%: 2.2 IQ2012/IQ2011 ∆%: 2.1 |
| Personal Income and Consumption | Mar month ∆% SA Real Disposable Personal Income (RDPI) Mar month SA ∆% minus 0.2 |
| Quarterly Services Report | IVQ11/IIIQ11 SA ∆%: |
| Employment Cost Index | IQ2012 SA ∆%: 0.4 |
| Industrial Production | Mar month SA ∆%: 0.0 Manufacturing Mar SA ∆% Minus 0.3 Mar 12 months SA ∆% 4.8, NSA 4.7 |
| Productivity and Costs | Nonfarm Business Productivity IQ2012∆% SAAE -0.5; IQ2012/IQ2011 ∆% 0.5; Unit Labor Costs SAAE IQ2012 ∆% 2.0; IQ2012/IQ2011 ∆%: 2.1 Blog 4/6/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Mar 20.21 to Apr 6.56 |
| Philadelphia Fed Business Outlook Index | General Index from Mar 12.5 to Apr 8.5 |
| Manufacturing Shipments and Orders | Mar New Orders SA ∆%: -1.5; ex transport ∆%: 0.0 |
| Durable Goods | Mar New Orders SA ∆%: minus 4.2; ex transport ∆%: minus 1.1 |
| Sales of New Motor Vehicles | Apr 2012 4,651,943; Apr 2011 4,217,599. Apr SAAR 14.4 million, Mar SAAR 14/37 million, Mar 2011 SAAR 13.17 million Blog 5/6/12 |
| Sales of Merchant Wholesalers | Jan-Feb 2012/Jan-Feb 2010 NSA ∆%: Total 12.2; Durable Goods: 15.3; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Feb 12/Feb 11 NSA ∆%: Sales Total Business 11.9; Manufacturers 11.4 |
| Sales for Retail and Food Services | Jan-Mar 2012/Jan-Mar 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 7.9 |
| Value of Construction Put in Place | Mar SAAR month SA ∆%: minus 0.1 Mar 12-month NSA: 5.4 |
| Case-Shiller Home Prices | Feb 2012/Feb 2011 ∆% NSA: 10 Cities minus 3.6; 20 Cities: minus 3.5 |
| FHFA House Price Index Purchases Only | Feb SA ∆% 0.3; |
| New House Sales | Mar 2012 month SAAR ∆%: |
| Housing Starts and Permits | Mar Starts month SA ∆%: Minus 5.8; Permits ∆%: +4.5 |
| Trade Balance | Balance Feb SA -$46,025 million versus Jan -$52,522 million |
| Export and Import Prices | Mar 12 months NSA ∆%: Imports 3.4; Exports 0.9 |
| Consumer Credit | Feb ∆% annual rate: 4.2 |
| Net Foreign Purchases of Long-term Treasury Securities | Feb Net Foreign Purchases of Long-term Treasury Securities: $10.1 billion |
| Treasury Budget | Fiscal Year Oct-Mar 2012/2011 ∆%: Receipts 4.4; Outlays -0.3; Individual Income Taxes 1.8 Deficit Fiscal Year 2012 Oct-Mar $778,988 million CBO Forecast 2012FY Deficit $1.079 trillion Blog 4/15/2012 |
| 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:
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used is (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table VA-1 provides revised data for nonfarm business sector productivity and unit labor costs for the final two quarters of 2011 and the first quarter of 2012 in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increases in output of 2.7 percent and of 3.2 percent in hours worked, nonfarm business sector labor productivity fell at a SAAE rate of 0.5 percent in IQ2012, as shown in column 2 “IQ2012 SAEE.” The increase of labor productivity from IQ2011 to IQ2012 was 0.5 percent, reflecting increases in output of 2.8 percent and of hours worked of 2.2 percent, as shown in column 3 “IQ2012 YoY.” The BLS defines unit labor costs as (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs increased at the SAAE rate of 2.0 percent in IQ2012 and rose 2.1 percent in IQ2012 relative to IQ2011. Hourly compensation in IQ2012 increased at the SAAE rate of 1.5 percent, which deflating by the estimated consumer price increase SAAE rate in IQ2012 results in decrease of real hourly compensation at 0.9 percent. Real hourly compensation decreased 0.2 percent in IQ2012 relative to IQ2011.
Table VA-1, US, Nonfarm Business Sector Productivity and Costs %
| IQ 2012 SAAE | IQ 2012 YoY | IVQ 2011 SAAE | IVQ 2011 YoY | IIIQ | IIIQ | |
| Productivity | -0.5 | 0.5 | 1.2 | 0.4 | 1.8 | 0.5 |
| Output | 2.7 | 2.8 | 3.7 | 2.3 | 2.8 | 2.3 |
| Hours | 3.2 | 2.2 | 2.4 | 1.9 | 1.0 | 1.8 |
| Hourly | 1.5 | 2.6 | 3.9 | 3.5 | 5.7 | 2.6 |
| Real Hourly Comp. | -0.9 | -0.2 | 2.6 | 0.2 | 2.5 | -1.2 |
| Unit Labor Costs | 2.0 | 2.1 | 2.7 | 3.1 | 3.9 | 2.0 |
| Unit Nonlabor Payments | 0.4 | 1.4 | -1.9 | 0.5 | 0.5 | 2.6 |
| Implicit Price Deflator | 1.3 | 1.8 | 0.8 | 2.0 | 2.5 | 2.2 |
Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier
Source: US Bureau of Labor Statistics
http://www.bls.gov/news.release/pdf/prod2.pdf
The revised increases in productivity in Table VA-2 of 4.0 percent in the 2010 annual average and 2.3 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.0 percent in 2010 and 7.2 percent in 2009. The contraction period and the recovery period have been characterized by savings of labor inputs. Hours worked increased 1.9 percent in 2011 but output rose only 2.4 percent such that the increase in productivity was only 0.4 percent. Real hourly compensation fell 0.6 percent in 2011, interrupting increases of 2.1 percent in 2009 and 0.3 percent in 2010.
Table VA-2, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average, ∆% Annual Average
| 2011 ∆% | 2010 ∆% | 2009 ∆% | 2008 ∆% | 2007 ∆% | |
| Productivity | 0.4 | 4.0 | 2.3 | 0.6 | 1.5 |
| Output | 2.4 | 4.0 | -5.1 | -1.5 | 2.1 |
| Hours | 1.9 | 0.0 | -7.2 | -2.1 | 0.5 |
| Hourly | 2.5 | 1.9 | 1.7 | 3.4 | 4.0 |
| Real Hourly Compensation | -0.6 | 0.3 | 2.1 | -0.4 | 1.1 |
| Unit Labor Costs | 2.0 | -2.0 | -0.7 | 2.8 | 2.4 |
Notes: SAAE: seasonally adjusted annual equivalent
Source: http://www.bls.gov/news.release/pdf/prod2.pdf
Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (http://www.nber.org/cycles.html). Table VA-3 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 1999 to 2011. The annual average jumped from 2.9 percent in 2001 to 4.6 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 8.8 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html) and increased during the first phase of expansion from IIQ2009 to IQ2010, trended lower and collapsed in 2011 and 2012.
Table VA-3, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2012
| Year | Qtr1 | Qtr2 | Qtr3 | Qtr4 | Annual |
| 1999 | 3.9 | 0.3 | 3.3 | 7.1 | 3.3 |
| 2000 | -1.5 | 9.4 | 0.1 | 4.0 | 3.4 |
| 2001 | -1.3 | 7.4 | 2.5 | 5.8 | 2.9 |
| 2002 | 8.8 | 0.5 | 3.8 | -0.2 | 4.6 |
| 2003 | 3.7 | 5.5 | 9.5 | 1.5 | 3.7 |
| 2004 | 0.6 | 3.3 | 0.7 | 0.5 | 2.6 |
| 2005 | 4.2 | -0.8 | 3.1 | -0.2 | 1.6 |
| 2006 | 2.5 | 0.4 | -2.2 | 2.7 | 0.9 |
| 2007 | -0.2 | 3.4 | 4.8 | 1.9 | 1.5 |
| 2008 | -2.6 | 2.4 | -0.8 | -3.4 | 0.6 |
| 2009 | 1.3 | 8.3 | 6.4 | 5.3 | 2.3 |
| 2010 | 4.5 | 1.2 | 1.8 | 1.8 | 4.0 |
| 2011 | -1.0 | -0.3 | 1.8 | 1.2 | 0.4 |
| 2012 | -0.5 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-1 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 1999 to 2011. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of sales.
Chart VA-1, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table VA-4. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table VA-4 shows continuing subdued sharper increases in unit labor costs in 2011 and 2012.
Table VA-4, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2012
| Year | Qtr1 | Qtr2 | Qtr3 | Qtr4 | Annual |
| 1999 | 3.0 | 0.5 | 0.1 | 1.6 | 0.9 |
| 2000 | 17.4 | -7.4 | 8.6 | -1.6 | 3.9 |
| 2001 | 10.9 | -5.8 | -1.1 | -1.7 | 1.5 |
| 2002 | -4.1 | 3.4 | -1.6 | 2.2 | -1.3 |
| 2003 | 2.8 | 1.4 | -3.5 | 1.8 | 1.0 |
| 2004 | -2.5 | 2.4 | 5.8 | 2.7 | 0.7 |
| 2005 | -1.0 | 3.5 | 2.6 | 2.6 | 2.3 |
| 2006 | 2.9 | 1.3 | 3.6 | 6.8 | 2.8 |
| 2007 | 4.0 | -1.8 | -1.9 | 4.3 | 2.4 |
| 2008 | 8.7 | -3.4 | 4.3 | 5.7 | 2.8 |
| 2009 | -4.0 | -1.1 | -4.0 | -4.1 | -0.7 |
| 2010 | -3.1 | 1.4 | -0.2 | -1.7 | -2.0 |
| 2011 | 6.2 | -0.1 | 3.9 | 2.7 | 2.0 |
| 2012 | 2.0 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-2 provides percentage changes quarter on quarter at SAAE rates of nonfarm business unit labor costs. With the exception of a jump of 6.2 percent in IQ2011, 2.8 percent in IVQ2011 and 3.9 percent in IIIQ2010, changes in nonfarm business unit labor costs have been negative.
Chart VA-2, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Table VA-5 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 0.5 percent in IQ2011 but fell at annual rates of 4.7 percent in IIQ2011 and at 0.9 percent in IQ2012. In 2011, real hourly compensation fell 0.6 percent.
Table VA-5, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2012
| Year | Qtr1 | Qtr2 | Qtr3 | Qtr4 | Annual |
| 1999 | 5.4 | -2.0 | 0.2 | 5.6 | 2.2 |
| 2000 | 11.4 | -1.8 | 4.7 | -0.4 | 4.0 |
| 2001 | 5.4 | -1.5 | 0.2 | 4.5 | 1.6 |
| 2002 | 2.8 | 0.6 | 0.0 | -0.6 | 1.5 |
| 2003 | 2.4 | 7.7 | 2.5 | 1.8 | 2.4 |
| 2004 | -5.2 | 2.6 | 3.7 | -1.1 | 0.6 |
| 2005 | 1.3 | -0.1 | -0.3 | -1.3 | 0.6 |
| 2006 | 3.1 | -1.8 | -2.6 | 11.6 | 0.5 |
| 2007 | -0.2 | -3.0 | 0.3 | 1.3 | 1.1 |
| 2008 | 1.4 | -6.1 | -2.8 | 12.2 | -0.4 |
| 2009 | -0.3 | 5.2 | -1.4 | -2.0 | 2.1 |
| 2010 | 0.4 | 3.0 | 0.2 | -2.8 | 0.3 |
| 2011 | 0.5 | -4.7 | 2.5 | 2.6 | -0.6 |
| 2012 | -0.9 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-3 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation from 1999 to 2011. There are significant fluctuations in quarterly percentage changes oscillating between positive and negative. There is no clear pattern in the two contractions in the 2000s.
Chart VA-3, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-4 provides percentage change from prior quarter at annual rate for nonfarm business output per hour from 1947 to 2012. The average would be represented by a horizontal line above zero. There is an increase in the rate of improvement of productivity in the 1990s that was not continued into the 2000s.
Chart VA-4, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate 1947-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-5 provides percentage changes from prior quarter at annual rate for US nonfarm business unit labor costs from 1947 to 2012. The most remarkable period is the 1970s in which stagflation occurred in fluctuating but high positive percentage changes of unit labor costs. There was significant moderation of increases in unit labor costs in the 1980s. Fluctuation has characterized the 2000s.
Chart VA-5, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1947-2012
Source: US bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Chart VA-6 provides percentage changes from the prior quarter at annual rate of nonfarm business real hourly compensation from 1947 to 2011. Negative changes have occurred more frequently and pronounced in the 2000s than during the Great Inflation of the 1970s.
Chart VA-6, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1947-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/lpc/home.htm
Motor vehicle sales and production in the US have been in long-term structural change. Table VA-6 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan-Apr 2012, light vehicle sales accumulated to 4,651,943, which is higher by 10.3 percent relative to 4,217,599 a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 14.42 million in Apr 2012, higher than 14.37 million in Mar 2012 and higher than 13.17 million in Apr 2011 (http://www.motorintelligence.com/m_frameset.html).
Table VA-6, US, New Motor Vehicle Sales and Car Production, Thousand Units
| New Motor Vehicle Sales | New Car Sales and Leases | New Truck Sales and Leases | Domestic Car Production | |
| 1990 | 14,137 | 9,300 | 4,837 | 6,231 |
| 1991 | 12,725 | 8,589 | 4,136 | 5,454 |
| 1992 | 13,093 | 8,215 | 4,878 | 5,979 |
| 1993 | 14,172 | 8,518 | 5,654 | 5,979 |
| 1994 | 15,397 | 8,990 | 6,407 | 6,614 |
| 1995 | 15,106 | 8,536 | 6,470 | 6,340 |
| 1996 | 15,449 | 8,527 | 6,922 | 6,081 |
| 1997 | 15,490 | 8,273 | 7,218 | 5,934 |
| 1998 | 15,958 | 8,142 | 7,816 | 5,554 |
| 1999 | 17,401 | 8,697 | 8,704 | 5,638 |
| 2000 | 17,806 | 8,852 | 8,954 | 5,542 |
| 2001 | 17,468 | 8,422 | 9,046 | 4,878 |
| 2002 | 17,144 | 8,109 | 9,036 | 5,019 |
| 2003 | 16,968 | 7,611 | 9,357 | 4,510 |
| 2004 | 17,298 | 7,545 | 9,753 | 4,230 |
| 2005 | 17,445 | 7,720 | 9,725 | 4,321 |
| 2006 | 17,049 | 7,821 | 9,228 | 4,367 |
| 2007 | 16,460 | 7,618 | 8,683 | 3,924 |
| 2008 | 13,494 | 6,814 | 6.680 | 3,777 |
| 2009 | 10,601 | 5,456 | 5,154 | 2,247 |
| 2010 | 11,772 | 5,729 | 6,044 | 2,840 |
Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html
Manufacturers’ shipments increased 0.7 percent in Mar after increasing 0.1 percent in Feb while new orders fell 1.5 percent but after increasing 1.1 percent in Feb, as shown in Table VA-7. These data are very volatile. Volatility is illustrated by increase of 88.1 percent of new orders of nondefense aircraft in Nov and revised 21.0 percent in Dec followed by decline of 17.2 percent in Jan and revised increase by 6.2 percent in Feb but sharp decline of 47.6 percent in Mar. New orders excluding transportation equipment were flat in Mar. Capital goods new orders, indicating investment, fell 8.4 percent in Mar after increasing 1.8 percent in Feb but decreasing 3.4 percent in Jan. New orders of nondefense capital goods fell 9.9 percent in Mar after increasing 1.0 percent in Feb but declining 5.0 percent in Jan but increasing 6.9 percent in Dec. Excluding more volatile aircraft, capital goods orders fell 0.1 percent in Mar after increasing revised 2.7 percent in Feb, declining 3.4 percent in Jan but increasing 3.5 percent in Dec.
Table VA-7, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%
| Mar 2012 | Feb 2012 | Jan 2012 | |
| Total | |||
| S | 0.7 | 0.1 | 0.6 |
| NO | -1.5 | 1.1 | -1.1 |
| Excluding | |||
| S | 0.7 | 0.4 | 0.0 |
| NO | 0.0 | 1.0 | -0.5 |
| Excluding | |||
| S | 0.6 | 0.3 | 0.6 |
| NO | -1.6 | 0.9 | -1.3 |
| Durable Goods | |||
| S | 0.9 | -0.3 | 0.1 |
| NO | -4.0 | 1.9 | -3.5 |
| Machinery | |||
| S | 6.5 | 3.2 | -5.4 |
| NO | -1.9 | 8.0 | -8.8 |
| Computers & Electronic Products | |||
| S | -2.1 | 0.8 | -0.5 |
| NO | -1.7 | 2.0 | 2.4 |
| Computers | |||
| S | -6.1 | -3.6 | -7.0 |
| NO | --0.2 | 0.7 | -11.4 |
| Transport | |||
| S | 1.2 | -2.3 | 5.7 |
| NO | -12.8 | 1.8 | -5.2 |
| Automobiles | |||
| S | 0.5 | 4.0 | 0.8 |
| Motor Vehicles | |||
| S | 0.3 | -0.5 | 0.7 |
| NO | 1.0 | -1.0 | -1.0 |
| Nondefense | |||
| S | -2.4 | -6.2 | 16.2 |
| NO | -47.6 | -2.1 | -17.2 |
| Capital Goods | |||
| S | 2.6 | -0.2 | -0.9 |
| NO | -8.4 | 1.8 | -3.4 |
| Nondefense Capital Goods | |||
| S | 2.0 | 0.6 | -0.8 |
| NO | -9.9 | 1.0 | -5.0 |
| Capital Goods ex Aircraft | |||
| S | 2.86 | 1.5 | -2.8 |
| NO | -0.1 | 2.7 | -3.4 |
| Nondurable Goods | |||
| S | 0.4 | 0.5 | 1.1 |
| NO | 0.4 | 0.5 | 1.1 |
Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation
Source: US Census Bureau
http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
Chart VA-7 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.
Chart VA-7, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr022.html
Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-8. Values are cumulative millions of dollars in Jan-Mar 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Mar 2012 total $1358.4 billion and new orders total $1372.3 billion, growing respectively by 7.7 percent and 7.8 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 7.6 percent and new orders increased 7.3 percent. Excluding defense, shipments grew 8.1 percent and new orders grew 8.5. Durable goods shipments reached $612.4 billion in Jan-Mar 2012, or 45.1 percent of the total, growing by 9.1 percent, and new orders $626.2 billion, or 45.6 percent of the total, growing by 9.2 percent. Important information in Table VA-8 is the large share of nondurable goods: with shipments of 746.0 billion or 54.9 percent of the total, growing by 7.1 percent, and new orders also of $746.0 billion or 54.4 percent of the total. Capital goods have relatively high value of $231.7 billion for shipments, growing 8.0 percent, and new orders $258.9 billion, growing 9.6 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $195.2 billion, growing by 8.5 percent, and new orders $205.5 billion, growing 8.6 percent. There is no suggestion in these data that the US economy is close to recession.
Table VA-8, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars
| Jan-Mar 2012 | Shipments | ∆% 2012/ | New Orders | ∆% 2012/ |
| Total | 1,358,412 | 7.7 | 1,372,255 | 7.8 |
| Excluding Transport | 1,209,613 | 7.6 | 1,208,424 | 7.3 |
| Excluding Defense | 1,330,171 | 8.1 | 1,339,945 | 8.5 |
| Durable Goods | 612,401 | 9.1 | 626,244 | 9.2 |
| Machinery | 93,617 | 13.1 | 100,267 | 10.4 |
| Computers & Electronic Products | 86,082 | -1.5 | 71,071 | 0.1 |
| Computers & Related Products | 9,181 | -14.8 | 8.981 | -14.8 |
| Transport Equipment | 148,799 | 9.1 | 163,831 | 11.6 |
| Automobiles | 17,994 | 18.3 | ||
| Motor Vehicles | 45,057 | 5.3 | 45,102 | 5.2 |
| Nondefense Aircraft | 14,486 | 32.6 | 38,471 | 51.3 |
| Capital Goods | 231,659 | 8.0 | 258,928 | 9.6 |
| Nondefense Capital Goods | 210,240 | 10.3 | 234,086 | 14.2 |
| Capital Goods ex Aircraft | 195,180 | 8.5 | 205,482 | 8.6 |
| Nondurable Goods | 509,898 | 7.1 | 509,898 | 7.1 |
| Food Products | 182,880 | 4.5 | ||
| Petroleum Refineries | 201,574 | 12.7 | ||
| Chemical Products | 185,026 | 4.0 |
Note: Transport: transportation
Source: US Census Bureau
http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
Weakness of construction spending continued in the US with decline of 1.1 percent in Feb 2012 but with recovery of 0.1 percent in Mar, as shown in Table VA-9. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $808.1 billion in Mar, which was higher by 0.1 percent than in the prior month of Feb. Residential investment, with $251.2 billion accounting for 31.1 percent of total value of construction, increased 0.7 percent in Mar and nonresidential investment, with $556.9 billion accounting for 68.9 percent of the total, decreased 0.2 percent. Public construction fell 1.1 percent while private construction increased 0.7 percent. Data in Table VA-4 show that nonresidential construction at $556.9 billion is much higher in value than residential construction at $251.2 billion while total private construction at $531.9 billion is much higher than public construction at $276.2 billion, all in SAAR.
Table VA-9, US, Value of Construction Put in Place in the United States Seasonally Adjusted Annual Rate Billion Dollars and Month and 12-Month ∆%
| Mar 2012 SAAR $ Billions | Month ∆% | 12-Month ∆% | |
| Total | 808.1 | 0.1 | 6.0 |
| Residential | 251.2 | 0.7 | 6.5 |
| Nonresidential | 556.9 | -0.2 | 5.7 |
| Total Private | 531.9 | 0.7 | 11.5 |
| Private Residential | 244.1 | 0.7 | 7.4 |
| New Single Family | 116.9 | 3.8 | 10.3 |
| New Multi-Family | 16.6 | -3.1 | 23.3 |
| Private Nonresidential | 287.8 | 0.7 | 15.2 |
| Total Public | 276.2 | -1.1 | -3.2 |
| Public Residential | 7.1 | 1.4 | -17.0 |
| Public Nonresidential | 269.0 | -1.1 | -2.8 |
SAAR: seasonally adjusted annual rate; B: billions
Source: US Census Bureau http://www.census.gov/construction/c30/pdf/release.pdf
Further information on construction spending is provided in Table VA-10. The original monthly estimates not-seasonally adjusted (NSA) and their 12-month rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011 but another bump in early 2012. On a monthly basis, construction fell four consecutive months from Dec 2010 to Mar 2011, increasing in eight of the nine months from Apr to Dec, with sole decline of 3.3 percent in Jul. Improvement was interrupted in 2012 with decline of 0.7 percent in Jan, further decline of 1.1 percent in Feb and marginal recovery of 0.1 percent in Mar. The 12 months rates of change improved from minus 6.9 percent in Apr to the first positive 12-month percentage change of 0.8 percent in Oct followed by 2.4 percent in Nov, 5.5 percent in Dec, 7.4 percent in Jan 2012 and 7.5 percent in Feb but decline to 5.4 percent in Feb because of the downward pull of the negative changes in Jan and Feb.
Table VA-10, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%
| Value NSA | 12-Month ∆% NSA | Value | Month ∆% SA* | |
| Mar 2012 | 59,772 | 5.4 | 808,069 | 0.1 |
| Feb | 55,247 | 7.5 | 807,270 | -1.4 |
| Jan | 56,158 | 7.4 | 818,604 | -0.7 |
| Dec 2011 | 63,344 | 5.5 | 824,768 | 1.1 |
| Nov | 69,773 | 2.4 | 816,042 | 1.9 |
| Oct | 73,951 | 0.8 | 801,193 | 0.3 |
| Sep | 74,421 | -0.3 | 798,972 | 1.1 |
| Aug | 75,838 | -0.4 | 790,277 | 2.2 |
| Jul | 70,562 | -3.8 | 773,296 | -3.3 |
| Jun | 72,357 | -1.5 | 799,568 | 1.5 |
| May | 67,296 | -1.8 | 787,396 | 2.5 |
| Apr | 61,817 | -6.9 | 768,226 | 0.7 |
| Mar | 56,731 | -5.8 | 762,557 | -0.2 |
| Feb | 51,412 | -4.5 | 764,198 | -1.0 |
| Jan | 52,278 | -5.6 | 771,982 | -1.4 |
| Dec 2010 | 60,066 | -6.3 | 782,880 | -2.5 |
SAAR: Seasonally-adjusted Annual Rate
*Percentages are calculated with values without numbers and may differ from rounded numbers
Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html
The strong contraction of the value of construction in the US is revealed by Table VA-11. Construction spending in Jan-Mar 2012, not seasonally adjusted, reached $171.2 billion, which is higher by 6.7 percent than $160.4 billion in the same period in 2011. The depth of the contraction is shown by the decline of construction spending from $256.5 billion in Jan-Mar 2006 to only $171.2 billion in the same period in 2012, or decline by minus 33.3 percent. The comparable decline from Jan-Mar 2005 to Jan-Mar 2012 is minus 26.3 percent. Construction spending in Jan-Mar 2012 fell by 7.8 percent relative to the same period in 2003. Construction spending is lower by 18.2 percent in Jan-Mar 2012 relative to the same period in 2009. Construction has been weaker than the economy as a whole.
Table VA-11, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%
| Jan-Mar 2012 $ B | 171,177 |
| Jan-Mar 2011 $ B | 160,422 |
| ∆% to 2012 | 6.7 |
| Jan-Mar 2010 | 174,785 |
| ∆% to 2012 | -2.1 |
| Jan-Mar 2009 | 209,164 |
| ∆% to 2012 | -18.2 |
| Jan-Mar 2006 $ B | 256,545 |
| ∆% to 2012 | -33.3 |
| Jan-Mar 2005 $ B | 232,134 |
| ∆% to 2012 | -26.3 |
| Jan-Mar 2003 | 185,559 |
| ∆% to 2012 | -7.8 |
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Monthly construction spending in the US in the quarter Jan-Mar not seasonally adjusted is shown in Table VA-12 for the years between 2002 and 2012. The values of $59.8 billion in Mar 2012 and $56.7 billion in Mar 2011 are lower than $63.8 billion in Mar 2002. Construction in Mar 2012 fell by 35.6 percent from the peak of $92.9 billion in Mar 2006 to $59.8 billion in Mar 2012. The data are not adjusted for inflation or changes in quality.
Table VA-12, US, Value of Construction Spending NSA Millions of Dollars
| 2002 | 59,516 | 58,588 | 63,782 |
| 2003 | 59,877 | 58,526 | 64,506 |
| 2004 | 64,934 | 64,138 | 73,238 |
| 2005 | 71,474 | 72,048 | 81,345 |
| 2006 | 81,058 | 81,478 | 92,855 |
| 2007 | 79,406 | 79,177 | 88,905 |
| 2008 | 77,349 | 77,227 | 82,779 |
| 2009 | 66,944 | 66,296 | 71,624 |
| 2010 | 55,368 | 53,853 | 60,246 |
| 2011 | 52,278 | 51,412 | 56,731 |
| 2012 | 56,158 | 55,247 | 59,772 |
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Chart VA-8 of the US Bureau of the Census shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages defaulted with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession. Chart VA-8 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained after the new decline in the first quarter of 2012.
Chart VA-8, US, Construction Expenditures SAAR 1993-2012
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr050.html
Construction spending at SAARs in the quarter Jan to Mar is shown in Table VA-13 for the years between 2002 and 2012. There is a peak in 2005 to 2006 with subsequent collapse of SAARs.
Table VA-13, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars
| 2002 | 858,654 | 862,338 | 844,551 |
| 2003 | 863,855 | 859,225 | 851,132 |
| 2004 | 938,826 | 938,656 | 960,946 |
| 2005 | 1,036,187 | 1,056,492 | 1,065,262 |
| 2006 | 1,183,861 | 1,199,767 | 1,213,270 |
| 2007 | 1,149,899 | 1,156,008 | 1,167,402 |
| 2008 | 1,106,047 | 1,092,331 | 1,094,910 |
| 2009 | 962,704 | 959,907 | 954,984 |
| 2010 | 813,408 | 795,224 | 806,681 |
| 2011 | 771,982 | 764,198 | 762,557 |
| 2012 | 818,604 | 807,270 | 808,069 |
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Annual available data for the value of construction put in place in the US between 1993 and 2011 are provided in Table VA-14. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 62.7 percent between 1993 and 2011 but most of the growth, 65.3 percent, was concentrated in 1993 to 2000 with decline of 1.6 percent between 2000 and 2011. Total value of construction fell 6.9 percent between 2002 and 2011 with value of nonresidential construction increasing 22.1 percent while value of residential construction fell 38.9 percent. Value of total construction fell 30.7 percent between 2005 and 2011, with value of residential construction declining 60.2 percent while value of nonresidential construction rose 11.8 percent. Value of total construction fell 32.3 percent between 2006 and 2011, with value of nonresidential construction decreasing 0.6 percent while value of residential construction fell 60.4 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2011, the share of nonresidential construction in total value rose to 68.9 percent while that of residential construction fell to 31.1 percent.
Table VA-14, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars and ∆%
| Total | Private Nonresidential | Private Residential | |
| 1993 | 485,548 | 150,006 | 208,180 |
| 1994 | 531,892 | 160,438 | 241,033 |
| 1995 | 548,666 | 180,534 | 228,121 |
| 1996 | 599,693 | 195,523 | 257,495 |
| 1997 | 631,853 | 213,720 | 264,696 |
| 1998 | 688,515 | 237,394 | 296,343 |
| 1999 | 744,551 | 249,167 | 326,302 |
| 2000 | 802,756 | 275,293 | 346,138 |
| 2001 | 840,249 | 273,922 | 364,414 |
| Total | Total Nonresidential | Total Private Residential | |
| 2002 | 847,874 | 445,914 | 401,960 |
| 2003 | 891,497 | 440,246 | 451,251 |
| 2004 | 991,356 | 452,948 | 538,408 |
| 2005 | 1,140,136 | 486,629 | 617,507 |
| 2006 | 1,167,222 | 547,408 | 619,814 |
| 2007 | 1,152,351 | 651,883 | 500,468 |
| 2008 | 1,067,564 | 709,818 | 357,746 |
| 2009 | 903,201 | 649,273 | 253,928 |
| 2010 | 803,621 | 554,915 | 248,706 |
| 2011 | 789,780 | 544,293 | 245,487 |
| ∆% 1993-2011 | 62.7 | ||
| ∆% 1993-2000 | 65.3 | ||
| ∆% 2000-2011 | -1.6 | ||
| ∆% 2002-2011 | -6.9 | 22.1 | -38.9 |
| ∆% 2005-2011 | -30.7 | 11.8 | -60.2 |
| ∆% 2006-2011 | -32.3 | -0.6 | -60.4 |
Source: http://www.census.gov/const/www/c30index.html
VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf
http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf). For fiscal 2012, the forecast is of growth of GDP between 2.1 and 2.4 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.4 to 0.7 percent and the all items CPI less fresh food of 0.1 to 0.4 percent.
Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year
| Fiscal Year | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +0.5 |
Figures in brackets are the median of forecasts of Policy Board members
Source: Policy Board, Bank of Japan
http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf
http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf
Private-sector activity in Japan expanded at lower pace with the Markit Composite Output PMI™ Index declining from 53.2 in Mar to 51.3 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). Alex Hamilton, economist at Markit and author of the report, finds softer conditions in Japan relative to Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit Business Activity Index of Services decreased from 53.7 in Mar to 51.0 in Apr, also showing slower pace ()http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, fell from 51.1 in Mar to 50.7 in Apr, for the highest reading in seven months, indicating marginal improvement in manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9457). Alex Hamilton, economist at Markit and author of the report, finds that investment goods drove the recovery and that new orders registered strong growth but that foreign demand and yen overvaluation are important risk of continuing improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9457).
Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Mar ∆% 0.6 |
| Consumer Price Index | Mar NSA ∆% 0.5 |
| Real GDP Growth | IVQ2011 ∆%: -0.2 on IIIQ2011; IVQ2011 SAAR minus 0.7% |
| Employment Report | Mar Unemployed 3.07 million Change in unemployed since last year: minus 150 thousand |
| All Industry Indices | Feb month SA ∆% minus 0.1 Blog 4/29/12 |
| Industrial Production | Mar SA month ∆%: 1.0 |
| Machine Orders | Total Feb ∆% -14.5 Private ∆%: -3.0 |
| Tertiary Index | Feb month SA ∆% 0.0 |
| Wholesale and Retail Sales | Mar 12 months: |
| Family Income and Expenditure Survey | Mar 12-month ∆% total nominal consumption 4.1, real 3.4 Blog 4/29/12 |
| Trade Balance | Exports Mar 12 months ∆%: +5.9 Imports Mar 12 months ∆% +10.5 Blog 4/22/12 |
Links to blog comments in Table JPY:
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
7/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
VC China. The HSBC China Services PMI™, compiled by Markit, finds marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 49.9 in Mar to 51.4 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China will reach bottom in IIQ2012 because of improving conditions in services originating in new business together with moderate manufacturing conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484).The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, increased to 49.3 in Apr from 48.3 in Feb, in a six consecutive month of declining conditions in manufacturing in China but at a marginal rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479). The index for the first quarter of 2012 was the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilization with likely bottom of growth of 8.1 percent growth of GDP in IQ2012 that may increase to 8.5 percent for the second half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479). Table CNY provides the country table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Mar 12 months ∆%: minus 0.3 Mar month ∆%: 0.3 |
| Consumer Price Index | Mar month ∆%: 0.2 Mar 12 month ∆%: 3.6 |
| Value Added of Industry | Mar month ∆%: 0.93 Jan-Mar 2012/Jan-Mar 2011 ∆%: 11.6 |
| GDP Growth Rate | Year IQ2012 ∆%: 8.1 |
| Investment in Fixed Assets | Total Jan-Mar 2012 ∆%: 20.9 Real estate development: 23.5 |
| Retail Sales | Mar month ∆%: 1.2 Jan-Mar ∆%: 14.8 |
| Trade Balance | Mar balance $5.35 billion Cumulative Mar: $1.11 billion |
Links to blog comments in Table CNY:
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
VC Euro Area. The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.1 in Mar to 46.7 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542) in one of the deepest contractions since the middle of 2009. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.5 percent in Apr, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI® declined close to a three-year low at 45.9 in Apr from 47.7 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Chris Williamson, Chief Economist at Markit, finds that output in the euro area in Apr declined at a quarterly rate in excess of 2.2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Table EUR provides the economic indicators for the euro area. Table EUR provides the economic indicators for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 3/11/12 |
| Unemployment | Mar 2012: 10.9% unemployment rate Mar 2012: 17.365 million unemployed Blog 5/6/12 |
| HICP | Mar month ∆%: 1.3 12 months Feb ∆%: 2.7 |
| Producer Prices | Euro Zone industrial producer prices Mar ∆%: 0.5 |
| Industrial Production | Feb month ∆%: 0.5 Feb 12 months ∆%: -1.8 |
| Industrial New Orders | Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 |
| Construction Output | Feb month ∆%: minus 7.1 |
| Retail Sales | Mar month ∆%: 0.3 |
| Confidence and Economic Sentiment Indicator | Sentiment 93.2 Apr 2012 Confidence minus 8.7 Apr 2012 Blog 4/29/12 |
| Trade | Jan-Feb 2012/Jan-Feb 2011 Exports ∆%: 11.0 Feb 2012 12-month Exports ∆% 11.2 Imports ∆% 6.9 |
| HICP, Rate of Unemployment and GDP | Historical from 1999 to 2011 Blog 4/22/12 3/18/12 |
Links to blog comments in Table EUR:
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
4/2/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
Eurostat reported the rate of unemployment in the euro area as 10.9 percent in Mar 2012, as shown in Table VD-1. The number of unemployed in Mar 2012 was 17.365 million, which was 1.732 million higher than 15.633 million in Mar 2011. The rate of unemployment jumped from 9.9 percent in Mar 2011 to 10.9 percent in Mar 2012.
Table VD-1, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions, SA
| Unemployment Rate % | Number Unemployed | |
| Mar 2012 | 10.9 | 17.365 |
| Feb | 10.8 | 17.196 |
| Jan | 10.8 | 17.056 |
| Dec 2011 | 10.6 | 16.872 |
| Nov | 10.6 | 16.753 |
| Oct | 10.4 | 16.515 |
| Sep | 10.3 | 16.304 |
| Aug | 10.2 | 16.057 |
| Jul | 10.1 | 15.964 |
| Jun | 10.0 | 15.803 |
| May | 10.0 | 15.732 |
| Apr | 9.9 | 15.626 |
| Mar | 9.9 | 15.633 |
| Feb | 10.0 | 15.648 |
| Jan | 10.0 | 15.705 |
| Dec 2010 | 10.0 | 15.795 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Table VD-2 shows the disparity in rates of unemployment in the euro area with 10.9 for the region as a whole and 17.365 million unemployed but 5.6 percent in Germany and 2.382 million unemployed. At the other extreme is Spain with rate of unemployment of 24.1 percent and 5.540 million unemployed. The rate of unemployment of the European Union in Mar is 10.2 percent with 24.772 million unemployed.
Table VD-2, Unemployed and Unemployment Rate in Countries and Regions, Millions and %
| Mar 2012 | Unemployment Rate % | Unemployed Millions |
| Euro Zone | 10.9 | 17.365 |
| Germany | 5.6 | 2.382 |
| France | 10.0 | 2.940 |
| Netherlands | 5.0 | 0.441 |
| Finland | 7.5 | 0.203 |
| Portugal | 15.3 | 0.829 |
| Ireland | 14.5 | 0.307 |
| Italy | 9.8 | 2.506 |
| Greece | NA | NA |
| Spain | 24.1 | 5.540 |
| Belgium | 7.3 | 0.353 |
| European Union | 10.2 | 24.772 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-02052012-AP/EN/3-02052012-AP-EN.PDF
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Chart VD-1 provides Eurosat estimates of unemployment rates in the European Union. There is significant diversity in the rates of unemployment in members of the euro zone and the European Union.
Chart VD-1, Unemployment Rate in Various Countries and Regions
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Advanced economies are experiencing weak demand. Table VD-4 provides the volume of retail sales in the euro zone from Jan 2011 to Mar 2012. Retail sales decreased revised 0.2 percent in
Feb 2012 and fell 2.1 percent in the 12 months ending in Feb 2012 but rebounded with growth of 0.3 percent in Mar, reducing the rate of decline in 12 months to 0.2 percent. The 12-month rates of growth have become negative since Mar with exception of 1.1 percent in Apr and stability in Aug. The lower part of Table VD-3 provides annual percentage changes of inflation-adjusted retail sales in the euro zone since 2002. Retail sales fell 2.4 percent in 2009 after falling 0.8 percent in 2008 and fell again by 0.6 percent in 2011. The average yearly rate of increase of retail sales from 2002 to 2007 was 1.8 percent but growth has not recovered.
Table VD-3, Euro Zone, Volume of Retail Sales, Deflated ∆%
| Month ∆% | 12-Month ∆% | |
| Mar 2012 | 0.3 | -0.2 |
| Feb 2012 | -0.2 | -2.1 |
| Jan | 1.0 | -1.1 |
| Dec 2011 | -1.2 | -1.7 |
| Nov | -0.3 | -1.4 |
| Oct | -0.1 | -0.7 |
| Sep | -0.6 | -1.1 |
| Aug | -0.1 | 0.0 |
| Jul | 0.5 | -0.4 |
| Jun | 0.9 | -0.8 |
| May | -1.4 | -1.7 |
| Apr | 0.7 | 1.1 |
| Mar | -1.1 | -1.3 |
| Feb | 0.4 | 1.1 |
| Jan | 0.2 | 0.6 |
| Annual ∆% | ||
| 2011 | -0.6 | |
| 2010 | 0.9 | |
| 2009 | -2.4 | |
| 2008 | -0.8 | |
| 2007 | 1.6 | |
| 2006 | 2.2 | |
| 2005 | 2.0 | |
| 2004 | 1.5 | |
| 2003 | 1.5 | |
| 2002 | 2.1 | |
| Average ∆% 2002-2007 | 1.8 |
Source:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Growth rates of retail sales of the euro zone by products are in Table VD-4. Total sales increased 0.3 percent in Mar 2012 and declined 0.2 percent in the 12 months ending in Mar 2012. The 12-month percentage change for food, drinks and tobacco is negative by 0.3 percent and nonfood products excluding automotive fuel increased 0.3 percent.
Table VD-4, Euro Zone, Volume of Retail Sales by Products, ∆%
| Mar 2012 | Month ∆% | 12-Month ∆% |
| Total | 0.3 | -0.2 |
| Food, Drinks, Tobacco | 0.0 | -0.3 |
| Nonfood Products ex Automotive Fuel | 0.1 | 0.3 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04052012-AP/EN/4-04052012-AP-EN.PDF
Month and 12-month rates of change of retail sales by member countries of the euro zone are shown in Table VD-5 for Mar 2012. Retail sales are weak throughout the euro zone. The 12-month percentage changes are negative for all members with the exception of 0.3 percent for Germany, 2.7 percent for France, 5.3 percent for Finland and 2.9 percent for Belgium. The 12-month percentage change for the UK, which is not a member of the euro zone, was 4.9 percent. The European Union’s 12-month percentage change was also positive by 1.0 percent.
Table VD-5, Euro Zone, Volume of Retail Sales by Member Countries, ∆%
| Mar 2012 | Month ∆% | 12-Month ∆% |
| Euro Zone | 0.3 | -0.2 |
| Germany | 0.8 | 0.3 |
| France | 0.9 | 2.7 |
| Netherlands | NA | NA |
| Finland | -0.4 | 5.3 |
| Belgium | -0.5 | 2.9 |
| Portugal | -2.2 | -5.0 |
| Ireland | 0.0 | -1.0 |
| Italy | NA | NA |
| Greece | NA | NA |
| Spain | -0.5 | -3.9 |
| UK | 1.9 | 4.9 |
| European Union | 0.7 | 1.0 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04052012-AP/EN/4-04052012-AP-EN.PDF
VE Germany. The Markit Germany Composite Output Index, combining services and manufacturing activity with high association with German GDP, fell from 51.6 in Mar to 50.5 in Apr, indicating modest growth of private-sector activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9540). Tim Moore, Senior Economist at Markit and author of the report, finds that weakness of the index leaves thin margin for another contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9540). The Markit/BME Germany Purchasing Managers’ Index® (PMI®) fell from 48.4 in Mar to 46.2 in Apr, for a second month below the contraction frontier of 50.0, in the sharpest weakening since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9510). Tim Moore, Senior Economist at Markit and author of the report, finds that Germamy begins IIQ2012 in the worst conditions in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9510). 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 2/26/12 |
| Consumer Price Index | Apr month SA ∆%: +0.1 |
| Producer Price Index | Mar month ∆%: 0.6 |
| Industrial Production | Mfg Feb month SA ∆%: -0.3 |
| Machine Orders | Feb month ∆%: 0.3 |
| Retail Sales | Mar Month ∆% 0.8 12-Month ∆% 2/3 Blog 5/6/12 |
| Employment Report | Unemployment Rate Mar 5.5% |
| Trade Balance | Exports Feb 12 months NSA ∆%: 8.6 Blog 4/15/12 |
Links to blog comments in Table DE:
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
04/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
Germany’s labor market continues to show strength not found in most of the advanced economies, as shown in Table VE-1. The number unemployed, not seasonally adjusted, fell from 2.73 million in Mar 2011 to 2.31 million in Mar 2012, or 15.4 percent, while the unemployment rate fell from 6.5 percent in Mar 2011 to 5.5 percent in Mar 2012. The number of persons in employment, not seasonally adjusted, increased from 39.08 million in Mar 2011 to 39.89 million in Mar 2012, or 2.1 percent, while the employment rate increased from 62.0 percent in Mar 2011 to 63.2 percent in Mar 2012. The number unemployed, seasonally adjusted, increased from 2.37 million in Feb 2012 to 2.38 million in Mar 2012, or 0.4 percent, while the unemployment rate remained at 5.6 percent. The number of persons in employment, not seasonally adjusted, fell from 39.96 million in Feb 2012 to 39.94 million in Mar 2012, or 0.1 percent.
Table VE-1, Germany, Unemployment Labor Force Survey
| Mar 2012 | Feb 2012 | Mar 2011 | |
| NSA | |||
| Number | 2.31 ∆% Mar 2012/Feb 2012: -7.2 ∆% Mar 2012/Mar 2011: -15.4 | 2.49 | 2.73 |
| % Rate Unemployed | 5.5 | 5.9 | 6.5 |
| Persons in Employment Millions | 39.89 ∆% Mar 2012/Feb 2012: 0.4 ∆% Mar 2012/Mar 2011: 2.1 | 39.72 | 39.08 |
| Employment Rate | 63.2 | 62.8 | 62.0 |
| SA | |||
| Number | 2.38 ∆% Mar 2012/Feb 2012: 0.4 ∆% Mar 2012/Mar 2011: –8.1 | 2.37 | 2.59 |
| % Rate Unemployed | 5.6 | 5.6 | 6.2 |
| Persons in Employment Millions | 39.94 ∆% Mar 2012/Feb 2012: –0.1 ∆% Mar 2012/Mar 2011: 1.4 | 39.96 | 39.37 |
NSA: not seasonally adjusted; SA: seasonally adjusted
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_153_132.html;jsessionid=BEA3F424D49AD65CE7D5BBD4404AC607.cae2
The unemployment rate in Germany as percent of the labor force in Table VE-2 stood at 7.0 percent in Mar 2011, which is slightly higher than 6.6 percent in Dec 2011. The rate is much lower than 11.1 percent in 2005 and 9.6 percent in 2006.
Table VE-2, Germany, Unemployment Rate in Percent of Labor Force
| Percent of Labor Force | |
| Apr | 7.0 |
| Mar | 7.2 |
| Feb | 7.4 |
| Jan | 7.3 |
| Dec | 6.6 |
| Nov | 6.4 |
| Oct | 6.5 |
| Sep | 6.6 |
| Aug | 7.0 |
| Jul | 7.0 |
| Jun | 6.9 |
| May | 7.0 |
| Apr | 7.3 |
| Mar | 7.6 |
| Feb | 7.9 |
| Jan | 7.9 |
| Dec 2010 | 7.1 |
| Dec 2009 | 7.8 |
| Dec 2008 | 7.4 |
| Dec 2007 | 8.1 |
| Dec 2006 | 9.6 |
| Dec 2005 | 11.1 |
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart VE-1 of Statistisches Bundesamt Deutschland, or Federal Statistical Office of Germany, shows the long-term decline of the rate of unemployment in Germany from more than 12 percent in early 2005 to 6.6 percent in Dec 2011 and slight increase to 7.0 percent in Mar 2012.
Chart VIIE-1, Germany, Unemployment Rate, Original Value, Percent
Note: Statistics of the Federal Employment Agency. No results before 2005.
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Retail sales in Germany adjusted for inflation are provided in Table VE-3. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales increased 0.8 percent in Mar and increased 2.3 percent in 12 months.
Table VE-3, Retail Sales in Germany Adjusted for Inflation
| 12-Month ∆% NSA | Month ∆% SA and Calendar Adjusted | |
| Mar 2012 | 2.3 | 0.8 |
| Feb | 2.1 | -0.9 |
| Jan | 1.9 | -1.0 |
| Dec 2011 | 1.3 | 0.6 |
| Nov | 1.3 | -0.3 |
| Oct | -0.3 | -0.2 |
| Sep | 1.5 | 0.4 |
| Aug | 3.5 | -0.9 |
| Jul | -1.9 | 0.6 |
| Jun | -2.3 | 2.8 |
| May | 4.7 | -1.9 |
| Apr | 5.0 | 0.4 |
| Mar | -2.6 | -1.5 |
| Feb | 2.5 | 0.1 |
| Jan | 3.0 | 0.6 |
| Dec 2010 | 0.6 | 0.6 |
| Dec 2009 | -2.2 | |
| Dec 2008 | 3.3 | |
| Dec 2007 | -6.2 | |
| Dec 2006 | 1.3 |
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart VE-2 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at constant prices from 2007 to 2012. There appear to be fluctuations without trend.
Chart VE-2, Germany, Turnover in Retail Trade at Constant Prices 2005=100
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart VE-3 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at current prices from 2007 to 2011. There are also sharp fluctuations but without trend.
Chart VE-3, Germany, Turnover in Retail Sales at Current Prices, Original Values, 2005=100
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 48.7 in Mar to 45.9 in Apr, which is the lowest reading in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds general deteriorating conditions in France with hopes of improvement of outlook after the elections (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538).The Markit France Manufacturing Purchasing Managers’ Index® was virtually unchanged at 46.9 in Apr relative to 46.7 in Mar with the sharpest decline in new orders in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing deterioration in manufacturing with trend of decline in new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511).Table FR provides the country data table for France. Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Mar month ∆% 0.8 |
| PPI | Mar month ∆%: 0.5 Blog 4/29/12 |
| GDP Growth | IVQ2011/IIIQ2011 ∆%: 0.2 |
| Industrial Production | Feb/Jan SA ∆%: |
| Industrial New Orders | Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12 |
| Consumer Spending | Mar Manufactured Goods |
| Employment | IVQ2011 Unemployed 2.678 million |
| Trade Balance | Feb Exports ∆%: month 1.0, 12 months 7.2 Feb Imports ∆%: month 2.8, 12 months 6.7 Blog 4/8/12 |
| Confidence Indicators | Historical averages 100 Apr Mfg Business Climate 95 Blog 4/29/12 |
Links to blog comments in Table FR:
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
VG Italy. The Markit/ADACI Business Activity Index fell from 44.3 in Mar to 42.3 in Apr, indicating sharp contraction of output of Italy’s services sector at the lowest reading in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the rates of contraction are approaching the ones experienced at the bottom of the 2008-2009 contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). The Markit/ADACI Purchasing Managers’ Index® (PMI®), fell from 47.9 in Mar relative to 43.8 in Apr for a ninth consecutive month of contraction of Italy’s manufacturing and the sharpest since Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds the sharpest fall in monthly new business in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Apr month ∆%: 0.5 |
| Producer Price Index | Mar month ∆%: 0.3 Blog 5/6/12 |
| GDP Growth | IVQ2011/IVQ2010 SA ∆%: minus 0.4 |
| Labor Report | Mar 2012 Participation rate 63.3% Employment ratio 57.0% Unemployment rate 9.8% Blog 5/6/12 |
| Industrial Production | Feb month ∆%: -0.7 |
| Retail Sales | Feb month ∆%: 0.6 Feb 12-month ∆%: 0.1 Blog 4/29/12 |
| Business Confidence | Mfg Apr 89.5, Dec 91.3 Construction Apr 82.9, Dec 80.5 Blog 4/29/12 |
| Consumer Confidence | Consumer Confidence Apr 89.0, Mar 96.3 Economy Apr 72.1, Mar 85.4 Blog 4/29/12 |
| Trade Balance | Balance Feb SA -€588 million versus Jan -€379 |
Links to blog comments in Table IT:
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
Data on Italy’s labor market since 2004 are provided in Table VG-1. The unemployment rate has risen from 6.3 percent in Dec 2006 to 9.8 in Mar 2012. As in other advanced economies, unemployment has reached high levels.
Table VG-1, Italy, Labor Report
| Participation Rate % | Employment Ratio % | Unemployment Rate % | |
| Mar 2012 | 63.3 | 57.0 | 9.8 |
| Feb | 63.2 | 57.1 | 9.6 |
| Jan | 63.0 | 57.0 | 9.5 |
| Dec 2011 | 62.8 | 57.0 | 9.3 |
| Nov | 62.6 | 56.8 | 9.2 |
| Oct | 62.5 | 56.9 | 8.8 |
| Sep | 62.3 | 56.8 | 8.7 |
| Aug | 62.2 | 57.0 | 8.3 |
| Jul | 62.3 | 57.0 | 8.3 |
| Jun | 62.1 | 56.9 | 8.2 |
| May | 62.2 | 57.2 | 8.1 |
| Apr | 61.9 | 56.8 | 8.1 |
| Mar | 62.2 | 57.2 | 8.1 |
| Feb | 61.9 | 56.9 | 8.1 |
| Jan | 62.0 | 56.8 | 8.2 |
| Dec 2010 | 62.1 | 57.0 | 8.2 |
| Dec 2009 | 62.3 | 57.1 | 8.5 |
| Dec 2008 | 62.6 | 58.1 | 7.0 |
| Dec 2007 | 63.2 | 59.1 | 6.5 |
| Dec 2006 | 62.5 | 58.5 | 6.3 |
| Dec 2005 | 62.6 | 57.8 | 7.7 |
| Dec 2004 | 62.5 | 57.5 | 8.0 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60390
Table VG-2 provides more detail on the labor report for Italy in Mar 2012. The level of employment decreased 35,000 from Feb to Mar 2012 and decreased 88,000 from Mar 2011 to Mar 2012. Unemployment increased 66,000 in Mar 2012 and 476,000 from a year earlier. A dramatic aspect found in most advanced economies is the high rate of unemployment of youth at 36.9 percent in Mar 2012 for ages 15 to 24.
Table VG-2, Italy, Labor Report
| Mar 2012 | 1000s | Change from Prior Month 1000s | ∆% from Prior Month | Change from Prior Year 1000s | ∆% from Prior Year |
| EMP | 22.947 | -35 | -0.2 | -88 | -04 |
| UNE | 2.506 | 66 | 2.7 | 476 | 23.4 |
| INA 15-64 | 14.548 | -40 | -0.3 | -427 | -2.9 |
| EMP % | 57.0 | -0.1 | -0.2 | ||
| UNE % | 9.8 | 0.2 | 1.7 | ||
| Youth UNE % 15-24 | 35.9 | 2.0 | 7.7 | ||
| INA % 15-64 | 36.7 | -0.1 | -1.1 |
Notes: EMP: Employed; UNE: Unemployed; INA 15-64: Inactive aged 15 to 64; EMP %: Employment Rate; UNE %: Unemployment Rate; Youth UNE % 15-24: Youth Unemployment Rate aged 15 to 24; INA % 15-64: Inactive Rate aged 15 to 64.
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/60390
Chart VG-1 of the Istituto Nazionale di Statistica provides the rate of unemployment in Italy. The rate stabilized in 2011 at around 8 percent until mid year and then climbed to 9.8 percent in Mar 2012.
Chart VG-1, Italy, Rate of Unemployment, %
Source: Istituto Nazionale di Statistica
VH United Kingdom. The Business Activity Index of the Markit/CIPS UK Services PMI® fell from 55.3 in Mar to 53.3 in Apr for 16 consecutive monthly increases but the slowest growth since Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). Chris Williamson, Chief Economist at Markit, finds that services continue to expand and that the data from panelists are not consistent with the economy in recession such that there is room for a change of the first estimate of IQ2012 GDP from negative to moderately positive (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell from revised 51.9 in Mar to 50.5 in Apr, which is above the border of contraction of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds that manufacturing growth requires dynamism in new orders that was frustrated by declining foreign demand in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487).Table UK provides the country data table for the UK.
Table UK, UK Economic Indicators
| CPI | Mar month ∆%: 0.3 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IQ2012 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.0 |
| Industrial Production | Feb 2011/Feb 2011 NSA ∆%: Production Industries minus 2.3; Manufacturing minus 1.4 |
| Retail Sales | Mar month SA ∆%: 1.8 |
| Labor Market | Dec-Feb Unemployment Rate: 8.3%; Claimant Count 4.9%; Earnings Growth 1.1% |
| Trade Balance | Balance Feb minus ₤3396 million |
Links to blog comments in Table UK:
4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 May 4, 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 | 5/4/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3084 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 5/4/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2928 |
| 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 1.3084/EUR on May 4, 2012 or by 9.8 percent {[(1.3084/1.192)-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 6.2928/USD on Fri May 4, 2012, or by an additional 7.8 percent, for cumulative revaluation of 23.9 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-2 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. Financial markets were closed in China during the week of Jan 27. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. In the week of Feb 10 China revalued by an additional 0.1 percent. There was marginal devaluation of 0.1 percent in the week of Feb 17. The rate remained virtually unchanged at CNY 6.2986 in the week of Feb 24. 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 depreciated by 0.4 percent. In the week of Mar 30, China resumed revaluation of 0.1 percent to CNY 6.2976/USD. The yuan depreciated 0.1 percent in the week of Apr 6, 2012, appreciated 0.1 percent in the week of Apr 13, depreciated 0.1 percent in the week of Apr 20 and appreciated 0.1 percent in the week of Apr 27, as shown in the final row of Table VI-2. The rate of CNY 6.2928/USD on May 4, 2012 is equivalent to revaluation of 7.8 percent from CNY 6.8211 on Jul 15, 2008 {[(6.2928/6.8211) – 1]100} and cumulative 23.9 percent from CNY 8.2765 on Jul 21, 2005 {[(6.2928/8.2765) -1]100}. 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. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):
“Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:
Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.
In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.”
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 | 5/4 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3084 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 5/4/2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2928 |
| Weekly Rates | 4/13/2012 | 4/20/2012 | 4/27/2012 | 5/4/2012 |
| CNY/USD | 6.2982 | 6.3048 | 6.3016 | 6.2928 |
| ∆% from Earlier Week* | 0.1 | -0.1 | 0.1 | 0.1 |
*Negative sign is depreciation, positive sign is appreciation
Source: Table VI-1 and same table in earlier blog posts.
The database of the World Economic Outlook (WEO) of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2011 and 2015. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):
“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”
The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:
“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”
Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| US | 15094 | -7.3 | -3.1 | 80.3 | -2.3 | -3.2 | 88.3 |
| Japan | 5869 | -9.1 | 2.0 | 126.6 | -5.8 | 2.4 | 155.0 |
| UK | 2418 | -5.8 | -1.9 | 78.3 | -0.8 | -0.4 | 88.1 |
| Euro | 13115 | -1.6 | 0.3 | 68.4 | 1.1 | 1.2 | 71.3 |
| Ger | 3577 | 0.7 | 5.7 | 56.1 | 1.4 | 4.3 | 52.4 |
| France | 2776 | -2.9 | -2.2 | 80.4 | 0.3 | -0.8 | 83.8 |
| Italy | 2199 | 0.8 | -3.2 | 99.6 | 4.4 | -1.6 | 101.5 |
| Can | 1737 | -4.1 | -2.8 | 33.3 | -1.1 | -2.5 | 37.4 |
| China | 7298 | -1.2 | 2.7 | 25.8 | -0.1 | 3.4 | 14.8 |
| Brazil | 2493 | 3.1 | -2.1 | 36.4 | 3.1 | -3.4 | 31.9 |
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/2012/01/weodata/weoselgr.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. The IMF (2012WEOApr) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSRApr) (http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMApr) (http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf). 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, which are analyzed in the comments of this blog.
Economic risks include the following:
1. China’s Economic Growth. 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 GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IQ2012 of 1.8 percent is equivalent to 7.4 percent per year (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). There is also ongoing political development in China during a decennial political reorganization
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.6 percent in 2011 (Section I in http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html), 1.7 percent in annual equivalent in the five quarter from IQ2011 to IQ2012 and 2.1 percent in IQ2012 relative to IQ2011 (see Section I at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html). (ii) The labor market continues fractured with 27.8 million unemployed or underemployed (see Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section II at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html). (iii) There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012. The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases
3. Economic Growth and Labor Markets in Advanced Economies. 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 0.3 percent in IVQ2011 and 0.2 percent in IQ2012. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html)
A list of financial uncertainties includes:
1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk. Adjustment programs consist of immediate adoption of economic reforms that would increase future growth permitting fiscal consolidation, which would reduce risk spreads on sovereign debt. Fiscal consolidation is challenging in an environment of weak economic growth as analyzed by Blanchard (2011WEOSep) and consolidation can restrict growth as analyzed by Blanchard (2012WEOApr). Adjustment of countries such as Italy requires depreciation of the currency to parity, as proposed by Caballero and Giavazzi (2012Jan15), but it is not workable within the common currency and zero interest rates in the US. Bailouts of euro area member countries with temporary liquidity challenges cannot be permanently provided by stronger members at the risk of impairing their own sovereign debt credibility
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation. After deep global recession, regulation, trade and devaluation wars were to be expected (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars”
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 34.6 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 33.9 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” Another version of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (1)
Equation (1) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The present value of the firm can also be expressed as the discounted future value of net cash flows. Equities can inflate beyond sound values if cash flows that depend on economic activity prove to be illusory in continuing mediocre growth
4. Duration Trap of the Zero Bound. 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. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Mar 13, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014” (http://www.federalreserve.gov/newsevents/press/monetary/20120313a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see 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 and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.
The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see 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).
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 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 now complicated by political developments, 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 or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). 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 5/4/12,” 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. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: 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 have fluctuated with events such as the surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. Financial markets were under stress in the week of Apr 13 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt, continuing into the week of Apr 27. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. The highest valuations in column “∆% Trough to 5/4/12” are by US equities indexes: DJIA 34.6 percent and S&P 500 33.9 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. 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, almost all assets in the column “∆% Trough to 5/4/12” had double digit gains relative to the trough around Jul 2, 2010 but now only four valuation show increase of less than 10 percent: China’s Shanghai Composite is 2.9 percent above the trough; STOXX 50 of Europe is 3.2 percent above the trough; Japan’s Nikkei Average is 6.3 percent above the trough; and NYSE Financial is 7.4 percent above the trough. DJ UBS Commodities is 10.6 percent above the trough; Dow Global is 11.2 percent above the trough; DJ Asia Pacific is 10.7 percent above the trough; and DAX is 15.7 percent above the trough. Japan’s Nikkei Average is 6.3 percent above the trough on Aug 31, 2010 and 17.7 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9380.25 on Fri May 4, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 8.5 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 9.8 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 5/4/12” in Table VI-4 shows that with exception of increase of 2.9 percent of China’s Shanghai Composite there were decreases of all valuations of risk financial assets in the week of May 4, 2012 such as 1.4 percent for DJIA, 2.4 percent for S&P 500, 3.1 percent for NYSE Financial, 2.7 percent for Dow Global, 0.2 percent for DJ Asia Pacific, 3.5 percent for Dax and 2.5 percent for DJ UBS Commodities. 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 5/4/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to May 4, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 5/4/12” but also relative to the peak in column “∆% Peak to 5/4/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 16.4 percent, S&P 500 12.5 percent and Dax 3.6 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 14.4 percent, Nikkei Average by 17.7 percent, Shanghai Composite by 22.5 percent, STOXX 50 by 12.6 percent and Dow Global by 9.3 percent. DJ UBS Commodities Index is now 2.5 percent below 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. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 5/4 /12 | ∆% Week 5/4/ 12 | ∆% Trough to 5/4 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 16.4 | -1.4 | 34.6 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 12.5 | -2.4 | 33.9 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -14.4 | -3.1 | 7.4 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -9.3 | -2.7 | 11.2 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -3.1 | -0.2 | 10.7 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -17.7 | -1.5 | 6.3 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -22.5 | 2.3 | 2.9 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -12.6 | -2.2 | 3.2 |
| DAX | 4/26/ | 5/25/ | -10.5 | 3.6 | -3.5 | 15.7 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 13.5 | 1.3 | 9.8 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -5.4 | -2.5 | 10.6 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.876 |
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 Apr 20, 2012, shows that the S&P 500 is now 12.9 percent above the Apr 26, 2010 level and the DJIA is 16.4 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 | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| 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 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
| Apr 6 | -1.1 | 16.6 | -0.7 | 15.3 |
| Apr 13 | -1.6 | 14.7 | -2.0 | 13.1 |
| Apr 20 | 1.4 | 16.3 | 0.6 | 13.7 |
| Apr 27 | 1.5 | 18.1 | 1.8 | 15.8 |
| May 4 | -1.4 | 16.4 | -2.3 | 12.9 |
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 8.2 percent to ZAR 7.8293/USD on May 4, 2012, which is still 32.4 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 7.7 percent stronger at SGD 1.2373/USD on May 4, 2012 relative to the trough of depreciation but still stronger by 19.9 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 10.8 percent relative to the trough to BRL 1.9245/USD on May 4, 2012 but still stronger by 20.8 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 by 75 basis points for the fifth 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 9.00 percent
18/04/2012 8:06:00 PM
Brasília - Continuing the adjustment process of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 9.00 percent.”
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 | May 4, 2012 | ∆T May 4, 2012 | ∆P May 4, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 5/4 2012 | |||
| Rate | 1.59 | 1.192 | 1.3084 | |||
| ∆% | -33.4 | 8.9 | -21.5 | |||
| JPY USD | 8/18 | 9/15 | 5/4 2012 | |||
| Rate | 110.19 | 83.07 | 79.84 | |||
| ∆% | 24.6 | 3.9 | 27.5 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 5/4 2012 | |||
| Rate | 1.225 | 1.025 | 0.9181 | |||
| ∆% | 16.3 | 10.4 | 25.1 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 5/4 2012 | |||
| Rate | 2.006 | 1.388 | 1.6150 | |||
| ∆% | -44.5 | 14.1 | -24.2 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 5/4 | |||
| Rate | 1.0215 | 1.6639 | 1.0173 | |||
| ∆% | -62.9 | 40.9 | 3.8 | |||
| ZAR USD | 10/22 2008 | 8/15 | 5/4 2012 | |||
| Rate | 11.578 | 7.238 | 7.8293 | |||
| ∆% | 37.5 | -8.2 | 32.4 | |||
| SGD USD | 3/3 | 8/9 | 5/4 | |||
| Rate | 1.553 | 1.348 | 1.2448 | |||
| ∆% | 13.2 | 7.7 | 19.9 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 5/4 | |||
| Rate | 7.813 | 7.752 | 7.7609 | |||
| ∆% | 0.8 | 0.1 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 5/4 2012 | |||
| Rate | 2.43 | 1.737 | 1.9245 | |||
| ∆% | 28.5 | -10.8 | 20.8 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 5/4 | |||
| Rate | 22.19 | 18.693 | 19.248 | |||
| ∆% | 15.7 | -2.9 | 13.3 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 5/4 2012 | |||
| Rate | 9.313 | 7.108 | 6.8178 | |||
| ∆% | 23.7 | 4.1 | 26.8 | |||
| CNY USD | 7/20 2005 | 7/15 | 5/4 | |||
| Rate | 8.2765 | 6.8211 | 6.2928 | |||
| ∆% | 17.6 | 7.8 | 23.9 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 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, US Dollar Currency Indexes
Source: Board of Governors of the Federal Reserve System
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
Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.931 percent at the close of market on Fri May 4, 2012 would be equivalent to price of 106.8004 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.5 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the 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 May 2, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2847 billion, or $2.9 trillion, with portfolio of long-term securities of $2583 billion, or $2.6 trillion, consisting of $1572 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $95 billion Federal agency debt securities and $848 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1481 billion or $1.5 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 |
| 03/23/12 | 2.234 | 103.4867 | 2.2 |
| 03/30/12 | 2.214 | 103.6687 | 2.4 |
| 04/06/12 | 2.058 | 105.1010 | 3.8 |
| 04/13/12 | 1.987 | 105.7603 | 4.4 |
| 04/20/12 | 1.959 | 106.0216 | 4.7 |
| 04/27/12 | 1.931 | 106.2836 | 5.0 |
| 05/04/12 | 1.876 | 106.8004 | 5.5 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
VII Economic Indicators. Crude oil input in refineries decreased 0.1 percent to 14,498 thousand barrels per day on average in the four weeks ending on Apr 27, 2012 from 14,509 thousand barrels per day in the four weeks ending on Apr 20, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.8 percent on Apr 27, 2012, which is higher than 82.4 percent on Apr 29, 2011 and almost equal to 84.7 percent on Apr 20, 2012. Imports of crude oil decreased 2.7 percent from 8,907 thousand barrels per day on average in the four weeks ending on Apr 20 to 8,668 thousand barrels per day in the week of Apr 27. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.8 million barrels per day last week, up by 56 thousand barrels per day from the previous week [Apr 20]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Similar use in utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 2.9 million barrels from 373.0 million barrels on Apr 20 to 375.9 million barrels on Apr 27. Motor gasoline production decreased 0.5 percent to 8,851 thousand barrels per day in the week of Apr 27 from 8,897 thousand barrels per day on average in the week of Apr 20. Gasoline stocks decreased 2.0 million barrels and stocks of fuel oil decreased 1.9 million barrels. Supply of gasoline fell from 9,084 thousand barrels per day on Apr 29, 2011, to 8,661 thousand barrels per day on Apr 27, 2012, or by 4.7 percent, while fuel oil supply decreased 1.6 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. WTI crude oil price traded at $104.86/barrel on Apr 27, 2012, falling 7.5 percent relative to $113.39/barrel on Apr 29, 2011. Gasoline prices fell 3.4 percent from May 2, 2011 to May 30, 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 had been 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 | 4/27/12 | 4/20/12 | 4/29/11 |
| Crude Oil Refineries Input | 14,498 Week ∆%: -0.1 | 14,509 | 14,064 |
| Refinery Capacity Utilization % | 84.8 | 84.7 | 82.4 |
| Motor Gasoline Production | 8,851 Week ∆%: -0.5 | 8,897 | 8,951 |
| Distillate Fuel Oil Production | 4,252 Week ∆%: -1.2 | 4,302 | 4,117 |
| Crude Oil Imports | 8,668 Week ∆%: -2.7 | 8,907 | 8,658 |
| Motor Gasoline Supplied | 8,661 ∆% 2012/2011= -4.7% | 8,684 | 9,084 |
| Distillate Fuel Oil Supplied | 3,824 ∆% 2012/2011 = -1.6% | 3,835 | 3,886 |
| 4/27/12 | 4/20/12 | 4/29/11 | |
| Crude Oil Stocks | 375.9 ∆= +2.9 MB | 373.0 | 366.5 |
| Motor Gasoline Million B | 209.7 ∆= -2.0 MB | 211.7 | 204.5 |
| Distillate Fuel Oil Million B | 124.0 | 125.9 | 145.1 |
| WTI Crude Oil Price $/B | 104.86 ∆% 2012/2011 -7.5 | 103.58 | 113.39 |
| 4/30/12 | 4/23/12 | 5/2/11 | |
| Regular Motor Gasoline $/G | 3.830 ∆% 2012/2011 | 3.870 | 3.963 |
B: barrels; G: gallon
Source: US Energy Information Administration
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 followed by several sharp weekly increases.
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 crude oil stocks since Jun 2010. There is a recent spike in crude oil stocks.
Chart VII-2, US, Distillate Fuel Oil Stocks
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.
Chart VII-3, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 27,000 from 392,000 on Apr 21 to 365,000 on Apr 28. Claims not adjusted for seasonality decreased 40,158 from 370,633 on Apr 21 to 330,475 on Apr 28. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Apr 28, 12 | 365,000 | 330,475 | 383,500 |
| Apr 21, 12 | 392,000 | 370,633 | 382,750 |
| Change | -27,000 | -40,158 | +750 |
| Apr 14, 12 | 389,000 | 370,482 | 375,500 |
| Prior Year | 464,000 | 415,974 | 430,000 |
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 583,457 on Apr 25, 2009 to 387,867 on Apr 23, 2011, and now to 330,475 on Apr 28, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Section II Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Apr 28, 2001 | 353,831 | 406,000 |
| Apr 27, 2002 | 367,350 | 414,000 |
| Apr 26, 2003 | 401,302 | 444,000 |
| Apr 24, 2004 | 313,686 | 339,000 |
| Apr 23, 2005 | 299,891 | 317,000 |
| Apr 22, 2006 | 291,349 | 308,000 |
| Apr 21, 2007 | 303,984 | 321,000 |
| Apr 26, 2008 | 337,854 | 369,000 |
| Apr 25, 2009 | 583,457 | 618,000 |
| Apr 24, 2010 | 429,196 | 450,000 |
| Apr 23, 2011 | 387,867 | 426,000 |
| Apr 28, 2012 | 330,475 | 365,000 |
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 Jan to Mar 2012, CPI inflation for all items seasonally adjusted was 3.7 percent in annual equivalent, that is, compounding inflation in Jan-Mar 2012 and assuming it would be repeated for a full year. In the 12 months ending in Mar, CPI inflation of all items not seasonally adjusted was 2.7 percent. Inflation in Mar 2012 not seasonally adjusted was 0.3 percent relative to Feb 2011 (http://www.bls.gov/cpi/), which is equivalent to 3.7 percent per year. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.07 percent for three months, 0.13 percent for six months, 0.17 percent for 12 months, 0.25 percent for two years, 0.36 percent for three years, 0.78 percent for five years, 1.28 percent for seven years, 1.88 percent for ten years and 3.07 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 Mar 2012/Mar | ∆% Annual Equivalent Jan-Mar 2012 SA | |
| CPI All Items | 2.7 | 3.7 |
| CPI ex Food and Energy | 2.3 | 2.0 |
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 and now 2012 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.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
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