Recovery without Hiring, Ten Million Fewer Full-time Jobs, Record High Youth Unemployment, Financial Turbulence and World Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Recovery without Hiring
IA Hiring Collapse
IB Labor Underutilization
IC Ten Million Fewer Full-time Jobs
ID Youth Unemployment
II United States International Trade
IIA United States International Trade Balance
IIB United States Import and Export Prices
III World Financial Turbulence
IIIA Financial Risks
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
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
Inflation in advanced economies has been fluctuating in waves at the production level alternation of surges and moderation of commodity price shocks. Table IV-6 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI fell 0.6 percent in Jun and fell 1.3 percent in 12 months. Measured by 12-month rates, CGPI inflation increased from minus 0.2 percent in Jul 2010 to a high of 2.2 percent in Jul 2011 and to much lower 0.3 percent in Mar 2012, minus 0.4 percent in Apr 2012, minus 0.7 percent in May 2012 and minus 1.3 percent in Jun 2012. Calendar-year inflation for 2011 is 1.5 percent, which is the highest after declines in 2009 and 2010 but lower than 4.6 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows waves similar to those in other indices around the world (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html). In the first wave, annual equivalent inflation reached 5.9 percent in Jan-Apr, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent deflation of 1.2 percent in May-Jun. In the third wave, renewed risk aversion caused annual equivalent decline of the CGPI of minus 2.2 percent in Jul-Nov. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Dec 2011 to Jan 2012. In the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 3.3 percent in Feb-Apr 2012. Finally, in the sixth wave, annual equivalent inflation dropped to minus 6.4 percent in May-Jun 2012. Unconventional monetary policies of zero interest rates and quantitative easing have created a difficult environment for economic and financial decisions with significant inflation volatility.
Table IV-6, Japan, Corporate Goods Price Index (CGPI) ∆%
| Month | Year | |
| Jun 2012 | -0.6 | -1.3 |
| May | -0.5 | -0.7 |
| AE ∆% May-Jun | -6.4 | |
| Apr | 0.1 | -0.4 |
| Mar | 0.5 | 0.3 |
| Feb 2012 | 0.2 | 0.4 |
| AE ∆% Feb-Apr | 3.3 | |
| Jan | -0.1 | 0.3 |
| Dec 2011 | 0.0 | 0.8 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | -0.1 | 1.3 |
| Oct | -0.8 | 1.3 |
| Sep | -0.2 | 2.0 |
| Aug | -0.1 | 2.2 |
| Jul | 0.3 | 2.2 |
| AE ∆% Jul-Nov | -2.2 | |
| Jun | 0.0 | 1.9 |
| May | -0.2 | 1.6 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.8 | 1.8 |
| Mar | 0.6 | 1.3 |
| Feb | 0.1 | 0.7 |
| Jan | 0.4 | 0.6 |
| AE ∆% Jan-Apr | 5.9 | |
| Dec 2010 | 0.5 | 1.2 |
| Nov | -0.1 | 0.9 |
| Oct | -0.1 | 0.9 |
| Sep | 0.0 | -0.1 |
| Aug | -0.1 | 0.0 |
| Jul | 0.0 | -0.2 |
| Calendar Year | ||
| 2011 | 1.5 | |
| 2010 | -0.1 | |
| 2009 | -5.3 | |
| 2008 | 4.6 |
AE: annual equivalent
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html#
Chart IV-13 of the Bank of Japan provides year-on-year percentage changes of the domestic and services Corporate Goods Price Index (CGPI) of Japan. Percentage changes of inflation of services are not as sharp as those of goods. Japan had the same sharp waves of inflation during the 1970s as in the US (see Table IV-7 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html). Inflation also collapsed in the beginning of the 1980s as a result of tight monetary policy in the US with focus on inflation instead of on the gap of actual relative to potential output. The areas in shade correspond to the dates of cyclical recessions. The salient event is the sharp rise of inflation of the domestic goods CGPI in 2008 during the global recession that was purely the result of carry trades from fed funds rates collapsing to zero to long positions in commodity futures in an environment of relaxed financial risk appetite. The panic of toxic assets in banks to be withdrawn by the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009) drove unusual risk aversion with unwinding of carry trades of exposures in commodities and other risk financial assets. Carry trades returned once TARP was clarified as providing capital to financial institutions and stress tests verified the soundness of US banks. The return of carry trades explains the rise of CGPI inflation after mid 2009. Inflation of the CGPI fluctuated with zero interest rates in alternating episodes of risk aversion and risk appetite.
Chart IV-13, Japan, Domestic Corporate Goods Price and Services Index, Year-on-Year Percentage Change, 1980-2012
Notes: Blue: Domestic Corporate Goods Price Index All Commodities; Red: Corporate Price Services Index
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
There is similar behavior of year-on-year percentage changes of the US producer price index from 1980 to 2012 in Chart IV-14 of the US Bureau of Labor Statistics as in Chart IV-13 with the domestic goods CGPI. The US producer price index increased together with the CGPI driven by the period of one percent fed funds rates from 2003 to 2004 inducing carry trades into commodity futures and other risk financial assets and the slow adjustment in increments of 25 basis points at every FOMC meeting from Jun 2004 to Jun 2006. There is also the same increase in inflation in 2008 during the global recession followed by collapse because of unwinding positions during risk aversion and new rise of inflation during risk appetite.
Chart IV-14, US, Producer Price Index Finished Goods, Year-on-Year Percentage Change, 1980-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Finer detail is provided by Chart IV-15 of the domestic CGPI from 2008 to 2012. The CGPI rose almost vertically in 2008 as the collapse of fed funds rates toward zero drove exposures in commodities and other risk financial assets because of risk appetite originating in the belief that the financial crisis was restricted to structured financial products and not to contracts negotiated in commodities and other exchanges. The panic with toxic assets in banks to be removed by TARP (Cochrane and Zingales 2009) caused unwinding carry trades in flight to US government obligations that drove down commodity prices and price indexes worldwide. Apparent resolution of the European debt crisis of 2010 drove risk appetite in 2011 with new carry trades from zero fed funds rates into commodity futures and other risk financial assets. Domestic CGPI inflation returned in waves with upward slopes during risk appetite and downward slopes during risk aversion.
Chart IV-15, Japan, Domestic Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
There is similar behavior of the US producer price index from 2008 to 2012 in Chart IV-16 as in the domestic CGPI in Chart IV-16. A major difference is the strong long-term trend in the US producer price index with oscillations originating mostly in bouts of risk aversion such as the downward slope in the final segment in Chart IV-16. Carry trades from zero interest rates to commodity futures and other risk financial assets drive the upward trend of the US producer price index while oscillations originate in alternating episodes of risk aversion and risk appetite.
Chart IV-16, US, Producer Price Index Finished Goods, Monthly, 2008-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-17 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI in Chart IV-17 trends down with oscillations after a brief rise in the final part of the recession in 2009.
Chart IV-17, Japan, Export Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
Japan imports primary commodities and raw materials. As a result, the import corporate goods price index in Chart IV-18 shows an upward trend after the rise during the global recession in 2008 driven by carry trades from fed funds rates collapsing to zero into commodity futures and decline during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan.
Chart IV-18, Japan, Import Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-7. Petroleum and coal with weight of 5.4 percent declined 5.2 percent in Jun and fell 3.6 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.8 percent, were flat in Jun and increased 0.4 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income.
Table IV-7, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%
| Jun 2012 | Weight | Month ∆% | 12 Month ∆% |
| Total | 1000.0 | -0.6 | -1.3 |
| Food, Beverages, Tobacco, Feedstuffs | 137.5 | -0.2 | 0.0 |
| Petroleum & Coal | 57.4 | -5.2 | -3.6 |
| Production Machinery | 30.8 | 0.0 | 0.4 |
| Electronic Components | 31.0 | -0.1 | -2.4 |
| Electric Power, Gas & Water | 52.7 | 1.6 | 10.9 |
| Iron & Steel | 52.6 | -0.7 | -6.8 |
| Chemicals | 92.1 | -0.7 | -2.7 |
| Transport | 136.4 | -0.3 | -1.4 |
Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1206.pdf
Percentage point contributions to change of the corporate goods price index (CGPI) in May 2012 are provided in Table IV-8 divided into domestic, export and import segments. In the domestic CGPI petroleum and coal deducted 0.35 percentage points, nonferrous metals deducted 0.06 percentage points and chemical and related products deducted 0.06 percentage points. The exports CGPI declined 0.9 percent on the basis of the contract currency and decreased 1.3 percent on the basis of the yen with deductions of 0.43 percentage points by chemical and related products, 0.27 percentage points by metals and related products and 0.17 percentage points by other primary products and manufactured goods. The imports CGPI decreased 2.3 percent on the contract currency basis and fell 2.7 percent on the yen basis. Petroleum, coal & natural gas deducted 1.81 percentage points and metals & related products deducted 0.37 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions.
Table IV-8, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index
| Groups Jun 2012 | Contribution to Change Percentage Points |
| A. Domestic Corporate Goods Price Index | Monthly Change: |
| Petroleum & Coal Products | -0.35 |
| Chemicals & Related Products | -0.06 |
| Nonferrous Metals | -0.06 |
| Scrap & Waste | -0.06 |
| Iron & Steel | -0.04 |
| Information & Communications Equipment | -0.04 |
| Electric Power, Gas & Water | 0.10 |
| Agriculture, Forestry & Fishery Products | 0.06 |
| B. Export Price Index | Monthly Change: |
| Chemicals & Related Products | -0.43 |
| Metals & Related Products | -0.27 |
| Other Primary Products & Manufactured Goods | -0.17 |
| Electric & Electronic Products | -0.06 |
| Transportation Equipment | 0.10 |
| C. Import Price Index | Monthly Change: -2.3 % contract currency basis |
| Petroleum, Coal & Natural Gas | -1.81 |
| Metals & Related Products | -0.37 |
| Chemicals & Related Products | -0.06 |
| Other Primary Products & Manufactured Goods | -0.06 |
Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1206.pdf
China is experiencing similar inflation behavior as the advanced economies in the form of declining commodity prices, as shown in Table IV-9. Inflation of the price indexes for industry in Jun 2012 is minus 0.7 percent; 12-month inflation is minus 2.1 percent in Jun; and inflation in Jan-Jun 2012 relative to Jan-Jun 2011 is minus 0.6 percent. Inflation of segments in Jun 2012 in China is provided in Table IV-9 in column “Month Jun ∆%.” There were decreases of prices of mining & quarrying of 2.3 percent in Jun and 2.9 percent in 12 months. Prices of consumer goods were flat in Jun and increased 0.7 percent in 12 months. Prices of inputs in the purchaser price index fell 0.8 percent in Jun and declined 2.5 percent in 12 months. Fuel and power decreased 1.6 percent in Jun and were flat in 12 months. An important category of inputs for exports is textile raw materials, decreasing 0.5 percent in Jun and 1.9 percent in 12 months.
Table IV-9, China, Price Indexes for Industry ∆%
| Month Jun ∆% | 12-Month Jun ∆% | Jan-Jun 2012/Jan-Jun 2011 ∆% | |
| I Producer Price Indexes | -0.7 | -2.1 | -0.6 |
| Means of Production | -0.9 | -2.9 | -1.2 |
| Mining & Quarrying | -2.3 | -2.9 | 2.0 |
| Raw Materials | -1.8 | -3.0 | -0.1 |
| Processing | -0.4 | -2.9 | -2.1 |
| Consumer Goods | 0.0 | 0.7 | 1.3 |
| Food | -0.2 | 1.3 | 2.3 |
| Clothing | 0.2 | 2.1 | 2.5 |
| Daily Use Articles | 0.1 | 0.9 | 1.2 |
| Durable Consumer Goods | -0.1 | -1.2 | -0.8 |
| II Purchaser Price Indexes | -0.8 | -2.5 | -0.3 |
| Fuel and Power | -1.6 | 0.0 | 3.7 |
| Ferrous Metals | -1.2 | -6.7 | -4.3 |
| Nonferrous Metals | -1.1 | -7.6 | -4.9 |
| Raw Chemical Materials | -1.3 | -5.0 | -2.4 |
| Wood & Pulp | -0.2 | 0.4 | 1.0 |
| Building Materials | -0.3 | -1.0 | 1.2 |
| Other Industrial Raw Materials | -0.2 | -1.3 | -0.4 |
| Agricultural | -0.2 | -1.3 | 1.0 |
| Textile Raw Materials | -0.5 | -1.9 | 0.0 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
China’s producer price inflation follows waves similar to those around the world (http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html), as shown in Table IV-10. In the first wave, annual equivalent inflation was 6.4 percent in Jan-Jun, driven by carry trades from zero interest rates to commodity futures. In the second wave, risk aversion unwound carry trades, resulting in annual equivalent inflation of minus 3.1 percent in Jul-Nov. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 2.4 percent in Dec-Jan. In the fourth wave, new carry trades resulted in annual equivalent inflation of 2.4 percent in Feb-Apr 2012. A fifth wave is beginning with annual equivalent minus 6.4 percent in May-Jun 2012.
Table IV-10, China, Month and 12-Month Rate of Change of Producer Price Index, ∆%
| 12-Month ∆% | Month ∆% | |
| Jun 2012 | -2.1 | -0.7 |
| May 2012 | -1.4 | -0.4 |
| AE ∆% May-Jun | -6.4 | |
| Apr | -0.7 | 0.2 |
| Mar | -0.3 | 0.3 |
| Feb | 0.0 | 0.1 |
| AE ∆% Feb-Apr | 2.4 | |
| Jan | 0.7 | -0.1 |
| Dec 2011 | 1.7 | -0.3 |
| AE ∆% Dec-Jan | -2.4 | |
| Nov | 2.7 | -0.7 |
| Oct | 5.0 | -0.7 |
| Sep | 6.5 | 0.0 |
| Aug | 7.3 | 0.1 |
| Jul | 7.5 | 0.0 |
| AE ∆% Jul-Nov | -3.1 | |
| Jun | 7.1 | 0.0 |
| May | 6.8 | 0.3 |
| Apr | 6.8 | 0.5 |
| Mar | 7.3 | 0.6 |
| Feb | 7.2 | 0.8 |
| Jan | 6.6 | 0.9 |
| AE ∆% Jan-Jun | 6.4 | |
| Dec 2010 | 5.9 | 0.7 |
AE: Annual Equivalent
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
Chart IV-19 of the National Bureau of Statistics of China provides monthly and 12-month rates of inflation of the price indexes for the industrial sector. Negative monthly rates in Oct, Nov, Dec 2011, Jan, Mar, May and Jun 2012 pulled down the 12-month rates to 5.0 percent in Oct 2011, 2.7 percent in Nov, 1.7 percent in Dec, 0.7 percent in Jan 2012, 0.0 percent in Feb, minus 0.3 percent in Mar, minus 0.7 percent in Apr, minus 1.4 percent in May and minus 2.1 in Jun.
Chart IV-19, China, Producer Prices for the Industrial Sector Month and 12 months ∆%
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
Chart IV-20 of the National Bureau of Statistics of China provides monthly and 12-month inflation of the purchaser product indices for the industrial sector. Decreasing monthly inflation with four successive contractions from Oct 2011 to Jan 2012 and May-Jun 2012 pulled down the 12-month rate to minus 2.5 percent in Jun.
Chart IV-20, China, Purchaser Product Indices for Industrial Sector
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in Jun was minus 0.6 percent and 2.2 percent in 12 months, as shown in Table IV-11. Food prices fell 1.6 percent in Jun but increased 3.8 percent in 12 months and 6.9 percent in Jan-Jun 2012 relative to Jan-Jun 2011. Another area of concern is housing inflation which was flat in Jun but increased 1.6 percent in 12 months. Prices of services increased 0.3 percent in Jun and gained 1.9 percent in 12 months.
Table IV-11, China, Consumer Price Index
| 2012 | Jun Month ∆% | Jun 12- Month ∆% | Jan-Jun 2012 ∆% Jan-Jun 2011 |
| Consumer Prices | -0.6 | 2.2 | 3.3 |
| Urban | -0.6 | 2.2 | 3.3 |
| Rural | -0.5 | 2.0 | 3.3 |
| Food | -1.6 | 3.8 | 6.9 |
| Non-food | 0.0 | 1.4 | 1.6 |
| Consumer Goods | -0.9 | 2.3 | 3.9 |
| Services | 0.3 | 1.9 | 1.7 |
| Commodity Categories: | |||
| Food | -1.6 | 3.8 | 6.9 |
| Tobacco, Liquor | 0.1 | 3.2 | 3.5 |
| Clothing | 0.0 | 3.3 | 3.5 |
| Household | 0.1 | 1.9 | 2.2 |
| Healthcare & Personal Articles | 0.1 | 1.9 | 2.4 |
| Transportation & Communication | -0.5 | -0.4 | 0.0 |
| Recreation, Education, Culture & Services | 0.0 | 0.3 | 0.2 |
| Residence | 0.0 | 1.6 | 1.8 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
Month and 12-month rates of change of consumer prices are provided in Table IV-12. There are waves of consumer price inflation in China similar to those around the world (http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html). In the first wave, consumer prices increased at the annual equivalent rate of 8.3 percent in Jan-Mar 2011, driven by commodity price increases resulting from unconventional monetary policy of zero interest rates. In the second wave, risk aversion unwound carry trades with annual equivalent inflation falling to the rate of 2.0 percent in Apr-Jun 2011. In the third wave, inflation returned at 2.9 percent with renewed interest in commodity exposures in Jul-Nov 2011. In the fourth wave, inflation returned at a high 5.8 percent annual equivalent in Dec 2011 to Mar 2012. In the fifth wave, annual equivalent inflation was minus 3.9 percent in Apr to Jun 2012. Inflation volatility originating in unconventional monetary policy clouds investment and consumption decisions by business and households.
Table IV-12, China, Month and 12-Month Rates of Change of Consumer Price Index ∆%
| Month ∆% | 12-Month ∆% | |
| Jun 2012 | -0.6 | 2.2 |
| May | -0.3 | 3.0 |
| Apr | -0.1 | 3.4 |
| AE ∆% Apr to Jun | -3.9 | |
| Mar | 0.2 | 3.6 |
| Feb | -0.1 | 3.2 |
| Jan | 1.5 | 4.5 |
| Dec 2011 | 0.3 | 4.1 |
| AE ∆% Dec to Mar | 5.8 | |
| Nov | -0.2 | 4.2 |
| Oct | 0.1 | 5.5 |
| Sep | 0.5 | 6.1 |
| Aug | 0.3 | 6.2 |
| Jul | 0.5 | 6.5 |
| AE ∆% Jul to Nov | 2.9 | |
| Jun | 0.3 | 6.4 |
| May | 0.1 | 5.5 |
| Apr | 0.1 | 5.3 |
| AE ∆% Apr to Jun | 2.0 | 2.0 |
| Mar | -0.2 | 5.4 |
| Feb | 1.2 | 4.9 |
| Jan | 1.0 | 4.9 |
| AE ∆% Jan to Mar | 8.3 | |
| Dec 2010 | 0.5 | 4.6 |
AE: Annual Equivalent
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
Chart IV-21 of the National Bureau of Statistics of China provides monthly and 12-month rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates. Consumer prices fell 0.2 percent in Nov 2011 after increasing only 0.1 percent in Oct but increased 0.3 percent in Dec and a high 1.5 percent in Jan 2012, declining 0.1 percent in Feb, rising 0.2 percent in Mar and declining 0.1 percent in Apr, 0.3 percent in May and 0.6 percent in Jun 2012. The decline of 0.1 percent in Feb 2012 pulled down the 12-month rate to 3.2 percent, which bounced back to 3.6 percent in Mar with the monthly increase of 0.2 percent and fell to 2.2 percent in Jun with increasing monthly decline from Apr to May 2012.
Chart IV-21, China, Consumer Prices ∆% Month and 12 Months Aug 2010 to Aug 2011
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/
The estimate of consumer price inflation in Germany in Table IV-13 is 1.7 percent in 12 months ending in Jun 2012, minus 0.1 percent NSA and flat SA in Jun relative to May. There are waves of consumer price inflation in Germany similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html), as shown in Table IV-13. In the first wave, annual equivalent inflation was 4.9 percent in Feb-Apr 2011 NSA and 2.4 percent NSA during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent NSA and 2.4 percent SA in May-Jun 2011 because of risk aversion caused by European sovereign debt. In the third wave, annual equivalent consumer price inflation was 1.2 percent NSA and 2.2 percent SA in Jul-Nov 2011 as a result of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 1.8 percent NSA and 1.2 percent SA in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 4.9 percent NSA and 2.4 percent SA in Feb-Apr 2012 during another energy-commodity carry trade shock. In the sixth wave, annual equivalent inflation in Jun 2012 is minus 1.8 percent NSA and flat SA. Under unconventional monetary policy of zero interest rates and quantitative easing inflation becomes highly volatile during alternative shocks of risk aversion and risk appetite, preventing sound investment and consumption decisions.
Table IV-13, Germany, Consumer Price Index ∆%
| 12-Month ∆% | Month ∆%NSA | Month ∆% SA | |
| Jun 2012 | 1.7 | -0.1 | 0.0 |
| May 2012 | 1.9 | -0.2 | 0.0 |
| AE ∆% May-Jun | -1.8 | 0.0 | |
| Apr | 2.1 | 0.2 | 0.2 |
| Mar | 2.1 | 0.3 | 0.1 |
| Feb | 2.3 | 0.7 | 0.3 |
| AE ∆% Feb-Apr | 4.9 | 2.4 | |
| Jan | 2.1 | -0.4 | 0.1 |
| Dec 2011 | 2.1 | 0.7 | 0.1 |
| AE ∆% Dec-Jan | 1.8 | 1.2 | |
| Nov | 2.4 | 0.0 | 0.1 |
| Oct | 2.5 | 0.0 | 0.1 |
| Sep | 2.6 | 0.1 | 0.3 |
| Aug | 2.4 | 0.0 | 0.2 |
| Jul | 2.4 | 0.4 | 0.2 |
| AE ∆% Jul-Nov | 1.2 | 2.2 | |
| Jun | 2.3 | 0.1 | 0.2 |
| May | 2.3 | 0.0 | 0.2 |
| AE ∆% May-Jun | 0.6 | 2.4 | |
| Apr | 2.4 | 0.2 | 0.2 |
| Mar | 2.1 | 0.5 | 0.2 |
| Feb | 2.1 | 0.5 | 0.2 |
| Jan | 2.0 | -0.4 | 0.2 |
| AE ∆% Feb-Apr | 4.9 | 2.4 | |
| Dec 2010 | 1.7 | 1.0 | |
| Nov | 1.5 | 0.1 | |
| Oct | 1.3 | 0.1 | |
| Sep | 1.3 | -0.1 | |
| Aug | 1.0 | 0.0 | |
| Annual Average ∆% | |||
| 2011 | 2.3 | ||
| 2010 | 1.1 | ||
| 2009 | 0.4 | ||
| 2008 | 2.6 |
AE: Annual Equivalent
Source: Statistiche Bundesamt Deutschland
Chart IV-22, of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany from 2003 to 2012. There is an evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in subsequent months with renewed strength in Dec, decline in Jan 2012 and another upward spike from Feb to Apr 2012 and new drop in May-Jun 2012. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.
Chart IV-22, Germany, Consumer Price Index, Unadjusted, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-23, of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index and trend of Germany from 2003 to 2012. Chart IV-23 captures inflation waves with alternation of periods of positive and negative slopes resulting from zero interest rates with shocks of risk appetite and risk aversion. For example, the current negative slope of decline of inflation 0.2 percent in May 2012 and 0.1 percent in Jun 2012 follows an upward slope of price increases in Feb-Apr 2012 after decline of inflation by 0.4 percent in Jan 2012. The waves occur around an upward trend of prices, disproving the proposition of fear of deflation.
Chart IV-23, Germany, Consumer Price Index, Unadjusted and Trend, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table IV-14 provides the monthly and 12-month rate of inflation for segments of the consumer price index of Germany in Jun 2012. Inflation excluding energy increased 0.1 percent in Jun 2012 and rose 1.4 percent in 12 months. Excluding household energy inflation was flat in May and rose 1.5 percent in 12 months. Food prices increased 1.2 percent in Jun and 3.6 percent in 12 months. There were differences in inflation of energy-related prices. Heating oil rose 3.1 percent in 12 months but fell 4.3 percent in Jun. Motor fuels decreased 2.9 percent in Jun and increased 2.2 percent in 12 months.
Table IV-14, Germany, Consumer Price Index ∆%
| Jun 2012 | Weight | 12- Month ∆% | Month ∆% |
| Total | 1,000.00 | 1.7 | -0.1 |
| Excluding heating oil and motor fuels | 955.42 | 1.6 | 0.1 |
| Excluding household energy | 940.18 | 1.5 | 0.0 |
| Excluding Energy | 904.81 | 1.4 | 0.1 |
| Total Goods | 493.00 | 2.7 | -0.3 |
| Nondurable Consumer Goods | 305.11 | 3.3 | -0.2 |
| Medium-Term Life Consumer Goods | 95.24 | 2.1 | -0.7 |
| Durable Consumer Goods | 92.65 | 0.3 | 0.1 |
| Services | 507.00 | 0.8 | 0.1 |
| Energy Components | |||
| Motor Fuels | 35.37 | 2.2 | -2.9 |
| Household Energy | 59.82 | 4.9 | -0.6 |
| Heating Oil | 9.21 | 3.1 | -4.3 |
| Food | 89.99 | 3.6 | 1.2 |
Source: Statistiche Bundesamt Deutschland
Table IV-15 provides monthly and 12 months consumer price inflation in France. There are the same five waves as in inflation worldwide (http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html). In the first wave, annual equivalent inflation in Jan-Apr 2011 was 4.3 percent driven by the carry trade from zero interest rates to commodity futures positions in an environment of risk appetite. In the second wave, risk aversion caused the reversal of carry trades into commodity futures, resulting in the fall of the annual equivalent inflation rate to minus 0.8 percent in May-Jul 2011. In the third wave, annual equivalent inflation rose to 2.7 percent in Aug-Nov with alternations of risk aversion and risk appetite. In the fourth wave, risk aversion originating in the European debt crisis caused annual equivalent inflation of 0.0 percent from Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation increased to 5.3 percent in Feb-Apr 2012. A sixth wave appears is developing at the margin with annual equivalent inflation of minus 0.6 percent in May-Jun 2012 during another bout of risk aversion causing reversal of carry trades from zero interest rates to commodity price futures exposures.
Table IV-15, France, Consumer Price Index, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| Jun 2012 | 0.0 | 1.9 |
| May | -0.1 | 2.0 |
| AE ∆% May-Jun | -0.6 | |
| Apr | 0.1 | 2.1 |
| Mar | 0.8 | 2.3 |
| Feb | 0.4 | 2.3 |
| AE ∆% Feb-Apr | 5.3 | |
| Jan | -0.4 | 2.3 |
| Dec 2011 | 0.4 | 2.5 |
| AE ∆% Dec-Jan | 0.0 | |
| Nov | 0.3 | 2.5 |
| Oct | 0.2 | 2.3 |
| Sep | -0.1 | 2.2 |
| Aug | 0.5 | 2.2 |
| AE ∆% Aug-Nov | 2.7 | |
| Jul | -0.4 | 1.9 |
| Jun | 0.1 | 2.1 |
| May | 0.1 | 2.0 |
| AE ∆% May-Jul | -0.8 | |
| Apr | 0.3 | 2.1 |
| Mar | 0.8 | 2.0 |
| Feb | 0.5 | 1.7 |
| Jan | -0.2 | 1.8 |
| AE ∆% Jan-Apr | 4.3 | |
| Dec 2010 | 0.5 | 1.8 |
| Annual | ||
| 2011 | 2.1 | |
| 2010 | 1.5 | |
| 2009 | 0.1 | |
| 2008 | 2.8 | |
| 2007 | 1.5 | |
| 2006 | 1.6 | |
| 2005 | 1.8 | |
| 2004 | 2.1 | |
| 2003 | 2.1 | |
| 2002 | 1.9 | |
| 2001 | 1.7 | |
| 2000 | 1.7 | |
| 1999 | 0.5 | |
| 1998 | 0.7 | |
| 1997 | 1.2 | |
| 1996 | 2.0 | |
| 1995 | 1.8 | |
| 1994 | 1.6 | |
| 1993 | 2.1 | |
| 1992 | 2.4 | |
| 1991 | 3.2 |
AE: Annual Equivalent
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20120712
Table IV-15 provides in the lower panel the estimates of inflation by the Institut National de la Statistique et des Études Économiques (INSEE) for the years from 1991 to 2011. Inflation has been relatively moderate in France. The rise of inflation to 2.8 percent in 2008 was caused by the commodity price shock as investment funds shifted from other risk financial assets into carry trades driven by interest rates falling toward zero. INSEE estimates 2011 inflation at 2.1 percent.
Chart IV-24 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows headline and core consumer price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. Unconventional monetary policy with alternations of risk aversion resulted in higher inflation in France that stabilized in recent months until the increase of 0.2 percent in Oct 2011, 0.3 percent in Nov and 0.4 percent in Dec that were followed by decline of 0.4 percent in Jan 2012 and increases of 0.4 percent in Feb and 0.8 percent in Mar followed by 0.1 percent in Apr minus 0.1 percent in May and no change in Jun 2012. Both the headline and core indexes are showing negative slopes in the new environment of risk aversion that causes reversals of carry trades into commodity futures prices.
Chart IV-24, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20120712
There are the same waves of inflation in Italy as in other countries and regions in the world (http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html). The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-16. 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 Oct-Nov jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. Inflation of consumer prices was flat in May 2012, 0.2 percent in Jun 2012 for annual equivalent inflation of 1.2 percent in May-Jun 2012 and 3.3 percent in 12 months ending in Jun 2012 in what could be yet another seventh wave. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion.
Table IV-16, Italy, Consumer Price Index
| Month | 12 Months | |
| Jun 2012 | 0.2 | 3.3 |
| May | 0.0 | 3.2 |
| AE ∆% May-Jun | 1.2 | |
| Apr | 0.5 | 3.3 |
| Mar | 0.5 | 3.3 |
| Feb | 0.4 | 3.3 |
| AE ∆% Feb-Apr | 5.7 | |
| 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/66826
Consumer price inflation in Italy by segments in the second estimate by ISTAT for Jun 2012 is provided in Table IV-17. Total consumer price inflation in Jun was 0.2 percent and 3.3 percent in 12 months. Inflation of goods was 0.1 percent in Jun and 4.2 percent in 12 months. Prices of durable goods increased 0.2 in Jun and increased only 1.0 percent in 12 months, as typical in most countries. Prices of energy goods fell 1.6 percent in Jun and increased 14.5 percent in 12 months. Food prices increased 0.8 percent in Jun and increased 2.8 percent in 12 months. Prices of services increased 0.4 percent in Jun and rose 2.0 percent in 12 months. Transport prices, also influenced by commodity prices, increased 1.0 percent in Jun and increased 4.1 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-17, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%
| Jun 2012 | Month ∆% | 12-Month ∆% |
| Total | 0.2 | 3.3 |
| I Goods | 0.1 | 4.2 |
| Food | 0.8 | 2.8 |
| Energy | -1.6 | 14.5 |
| Durable | 0.2 | 1.0 |
| Nondurable | 0.1 | 0.6 |
| II Services | 0.4 | 2.0 |
| Housing | 0.1 | 2.5 |
| Communications | 0.4 | 1.7 |
| Transport | 1.0 | 4.1 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/66826
Chart IV-25 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy that could continue in the wave of declines of commodity prices followed by new increase at the margin in Italy.
Chart, IV-25, Italy, Consumer Price Index, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
V World Economic Slowdown. Table V-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
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
Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog. Growth is weak throughout most of the world. Japan’s GDP increased 1.2 percent in IQ2012 and 2.8 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). China’s GDP grew 7.6 percent in IIQ2012 relative to IQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. GDP was flat in the euro area in IQ2012 and fell 0.1 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. US GDP increased 0.5 percent in IQ2012 and 2.0 percent relative to a year earlier (Section I http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html) but with substantial underemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html).
Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%
| IQ2012/IVQ2011 | IQ2012/IQ2011 | |
| United States | 0.5 | 2.0 |
| Japan | 1.2 | 2.8 |
| Euro Area | 0.0 | -0.1 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.3 |
| Italy | -0.8 | -1.4 |
| United Kingdom | -0.3 | -0.1 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| China | 1.8 | 7.6 |
Source: Country Statistical Agencies
http://www.bea.gov/national/index.htm#gdp http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html http://www.stats.gov.cn/enGliSH/
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 52.1 in May to 50.3 in Jun, indicating expansion at a lower rate but close to stagnation and to the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). This index has remained above the contraction territory of 50.0 during 34 months. Both global manufacturing and services have slowed down considerably. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth in IIQ2012 could be the slowest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell to 48.9 in Jun from 50.6 in May, for the lowest reading in three years and the first change of direction to contraction since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). David Hensley, Director of Global Economics Coordination at JPMorgan, finds that inventory adjustment is the driver of the only second change to contraction in the current expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). The HSBC Brazil Composite Output Index, compiled by Markit, rose from marginal contraction of 49.6 in May to moderate expansion at 51.5 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). Andre Loes, Chief Economist, Brazil, at HSBC, finds that PMI data for IIQ2012 could signal weaker activity in services, which can restrain growth of GDP in the year, although the HSBC Services PMI Business Activity Index increased from 49.7 in May to 53.0 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) fell to 48.5 in Jun from 49.3 in May, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733). Andre Loes, Chief Economist, Brazil at HSBC, finds that the manufacturing index average of 49.0 in IIQ2012 is lower than the prior quarter’s average of 51.0 with Brazil experiencing competitive pressures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733).
VA United States. The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® fell 3.8 percentage points from 53.5 in May to 49.7 in Jun, for the first contraction since Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm). The index of new orders fell 12.3 percentage points from 60.1 in May to 47.8 in Jun, interrupting growth in 37 months for the first contraction since Apr 2009. The Non-Manufacturing ISM Report on Business® PMI fell 1.6 percentage points from 53.7 in May to 52.1 in Jun while the index of new orders decreased 3.9 percentage points from 55.6 in May to 55.3 in Jun (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Table USA provides the country economic indicators for the US.
Table USA, US Economic Indicators
| Consumer Price Index | May 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.3 May month ∆%: -0.3; ex food and energy ∆%: 0.2 |
| Producer Price Index | Jun 12-month NSA ∆%: 0.7; ex food and energy ∆% 2.6 |
| PCE Inflation | May 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.8 |
| Employment Situation | Household Survey: Jun Unemployment Rate SA 8.2% |
| 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 SAAR ∆%: 3.0 IQ2012 SAAR ∆%: 1.9 IQ2012/IQ2011 ∆%: 2.0 |
| Personal Income and Consumption | May month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.3 |
| Quarterly Services Report | IQ12/IQ11 SA ∆%: |
| Employment Cost Index | IQ2012 SA ∆%: 0.4 |
| Industrial Production | May month SA ∆%: -0.1 Manufacturing May SA ∆% -0.4 May 12 months SA ∆% 5.2, NSA 5.4 |
| Productivity and Costs | Nonfarm Business Productivity IQ2012∆% SAAE -0.9; IQ2012/IQ2011 ∆% 0.4; Unit Labor Costs SAAE IQ2012 ∆% 1.3; IQ2012/IQ2011 ∆%: 0.9 Blog 6/10/2012 |
| New York Fed Manufacturing Index | General Business Conditions From May 17.09 to Jun 2.29 |
| Philadelphia Fed Business Outlook Index | General Index from May minus 5.8 to Jun minus 16.6 |
| Manufacturing Shipments and Orders | May New Orders SA ∆%: 0.7; ex transport ∆%: 0.4 |
| Durable Goods | May New Orders SA ∆%: 1.1; ex transport ∆%: 0.4 |
| Sales of New Motor Vehicles | Jun 2012 7,272,160; Jun 2011 6,332,566. Jun SAAR 14.08 million, May SAAR 13.78 million, Jun 2011 SAAR 11.56 million Blog 7/8/12 |
| Sales of Merchant Wholesalers | Jan-May 2012/Jan-May 2011 NSA ∆%: Total 8.4; Durable Goods: 10.6; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Apr 12/Apr 11 NSA ∆%: Sales Total Business 4.9; Manufacturers 4.3 |
| Sales for Retail and Food Services | Jan-May 2012/Jan-May 2011 ∆%: Retail and Food Services 7.0; Retail ∆% 6.8 |
| Value of Construction Put in Place | May SAAR month SA ∆%: 0.9 May 12-month NSA: 7.4 |
| Case-Shiller Home Prices | Apr 2012/Apr 2011 ∆% NSA: 10 Cities minus 2.2; 20 Cities: minus 1.9 |
| FHFA House Price Index Purchases Only | Apr SA ∆% 0.8; |
| New House Sales | May 2012 month SAAR ∆%: |
| Housing Starts and Permits | May Starts month SA ∆%: minus 4.8 ; Permits ∆%: 7.9 |
| Trade Balance | Balance May SA -$48684 million versus Apr -$50597 million |
| Export and Import Prices | Jun 12-month NSA ∆%: Imports -2.1; Exports -2.6 |
| Consumer Credit | May ∆% annual rate: 8.0 |
| Net Foreign Purchases of Long-term Treasury Securities | Apr Net Foreign Purchases of Long-term Treasury Securities: $25.6 billion |
| Treasury Budget | Fiscal Year Oct-Jun 2012/2011 ∆%: Receipts 5.2; Outlays 0.9; Individual Income Taxes 3.1 Deficit Fiscal Year 2012 Oct-Jun $904,236 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 7/15/2012 |
| Flow of Funds | IQ2012 ∆ since 2007 Assets -$4113B Real estate -$4916B Financial $367.3MM Net Worth -$3300B Blog 6/17/12 |
| Current Account Balance of Payments | IQ2012 -$137B %GDP 3.6 Blog 06/17/12 |
Links to blog comments in Table USA:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
Sales and inventories of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-1 for May 2012 and percentage changes from the prior month and for Jan-May 2012 relative to Jan-May 2011. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 8.4 percent in Jan-May 2012 relative to Jan-May 2011 and fell 0.8 percent in May 2012 relative to Apr 2012. The value of total sales is quite high at $2038.2 billion, exceeding four trillion dollars in a year. Value in the breakdown is useful in identifying relative importance of individual categories. Sales of durable goods in Jan-May 2012 reached $904.7 billion, over two trillion for a year, increasing 0.6 percent in May relative to Apr and increasing 10.6 percent in Jan-May 2012 relative to Jan-May 2011. Sales of automotive products reached $162.1 billion in Jan-May 2012, increasing 0.9 percent in the month and increasing 26.9 percent relative to a year earlier. There is strong performance of 18.1 percent in machinery and 3.1 percent in electrical products. Sales of nondurable goods rose 6.7 percent over a year earlier but fell 1.9 percent in May 2012 relative to Apr 2012. The influence of commodity prices moderated as shown by decrease of 6.9 percent in farm products and increase of only 9.5 percent in petroleum products with decrease of 4.7 percent in May. The final three columns in Table VA-9 provide the value of inventories and percentage changes from the prior month and relative to the same month a year earlier. US total inventories of wholesalers increased 0.3 percent in May and increased 6.6 percent relative to a year earlier. Inventories of durable goods of $285.7 billion are 59.6 percent of total inventories of $479.8 billion and rose 10.2 percent relative to a year earlier. Automotive inventories jumped 19.7 percent relative to a year earlier. Machinery inventories of $77.4 billion rose 18.3 percent relative to a year earlier. Inventories of nondurable goods of $194.2 billion are 40.5 percent of the total and increased 1.7 percent relative to a year earlier. Inventories of farm products decreased 5.1 percent in May relative to Apr and declined 20.3 percent relative to a year earlier. Inventories of petroleum products increased 3.6 percent in May and fell 4.0 percent relative to a year earlier.
Table VA-1, US, Sales and Inventories of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, Month ∆%
| 2012 | Sales $ Billions Jan-May 2012 | Sales May ∆% SA | Sales∆% Jan-May 2012 from Jan-May 2011 NSA | INV $ Billions May 2012 NSA | INV May ∆% SA | INV ∆% May 2012 from May 2011 NSA |
| US Total | 2038.2 | -0.8 | 8.4 | 479.8 | 0.3 | 6.6 |
| Durable | 904.7 | 0.6 | 10.6 | 285.7 | 0.6 | 10.2 |
| Automotive | 162.6 | 0.9 | 26.9 | 45.0 | 1.3 | 19.7 |
| Prof. Equip. | 153.3 | 0.6 | 4.1 | 32.2 | 0.4 | 3.7 |
| Computer Equipment | 77.0 | 1.4 | 1.4 | 11.9 | 1.2 | 0.5 |
| Electrical | 151.3 | -0.1 | 3.1 | 40.7 | 0.0 | 2.8 |
| Machinery | 159.8 | 2.2 | 18.1 | 77.4 | 1.4 | 18.3 |
| Not Durable | 1133.5 | -1.9 | 6.7 | 194.2 | -0.2 | 1.7 |
| Drugs | 179.7 | -1.7 | 4.6 | 34.1 | 2.8 | 9.7 |
| Apparel | 56.5 | -1.7 | 5.0 | 21.2 | 0.9 | 5.6 |
| Groceries | 239.9 | -0.1 | 9.7 | 34.6 | 7.5 | 7.5 |
| Farm Products | 91.2 | -1.7 | -6.9 | 17.4 | -5.1 | -20.3 |
| Petroleum | 329.9 | -4.7 | 9.5 | 27.1 | 3.6 | -4.0 |
Note: INV: inventories
Source: US Census Bureau
http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf
Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-2. The total for the US has remained almost unaltered at 1.18 in May 2012, 1.17 in Apr 2012 and 1.17 in May 2011. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.55 in May-Apr 2012 and 1.53 in May 2011. Computer equipment operates with low inventory/sales ratios of 0.73 in May-Apr 2012 relative to 0.74 in May 2011 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.88 in May 2012 and 0.86 in Apr 2012, which is almost equal to 0.89 in May 2011. There are exceptions such as 1.90 in May 2012 in apparel that is higher than 1.85 in Apr 2012 and higher than 1.84 in May 2011 perhaps because of the expectation of stronger spring and summer sales.
Table VA-2, Inventory/Sales Ratios of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, % SA
| May 2012 | Apr 2012 | May 2011 | |
| US Total | 1.18 | 1.17 | 1.17 |
| Durable | 1.55 | 1.55 | 1.53 |
| Automotive | 1.41 | 1.41 | 1.62 |
| Prof. Equip. | 1.00 | 1.00 | 1.01 |
| Comp. Equip. | 0.73 | 0.73 | 0.74 |
| Electrical | 1.33 | 1.33 | 1.27 |
| Machinery | 2.33 | 2.35 | 2.28 |
| Not Durable | 0.88 | 0.86 | 0.89 |
| Drugs | 0.97 | 0.93 | 0.88 |
| Apparel | 1.90 | 1.85 | 1.84 |
| Groceries | 0.74 | 0.72 | 0.73 |
| Farm Products | 1.10 | 1.14 | 1.25 |
| Petroleum | 0.42 | 0.41 | 0.46 |
Source: US Census Bureau
http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf
Chart VA-1 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2012 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.
Chart VA-1, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2002-2011
Source: US Census Bureau
http://www2.census.gov/wholesale/img/mwtsbrf.jpg
The report of consumer credit outstanding of the Board of Governors of the Federal Reserve System is provided in Table VA-3. The data are in seasonally-adjusted annual rates both percentage changes and billions of dollars. The estimate of consumer credit “covers most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate (http://www.federalreserve.gov/releases/g19/current/default.htm). Consumer credit is divided into two categories. (1) Revolving consumer credit (REV in Table VA-3) consists mainly of unsecured credit cards. (2) Non-revolving consumer credit (NREV in Table VA-3) “includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers or vacations” (http://www.federalreserve.gov/releases/g19/current/default.htm). In May 2012, revolving credit was $870 billion, or 33.8 percent of total consumer credit of $2573 billion, and non-revolving credit was $1703 billion, or 66.2 percent of total consumer credit outstanding. Consumer credit grew at relatively high rates before the recession beginning in IVQ2007 and extending to IIQ2009 as dated by the National Bureau of Economic Research or NBER (http://www.nber.org/cycles/cyclesmain.html). Percentage changes of consumer credit outstanding fell already in 2008. Rates were still negative in 2010 with decline of 1.3 percent in annual data and sharp decline of 7.4 percent in revolving credit. There was a sharp jump in consumer credit outstanding in Mar 2012: 6.1 percent total, 5.1 percent revolving and 6.6 percent non-revolving. Growth continued in Apr 2012 with 4.7 percent in total, minus 4.9 percent in revolving and 9.6 percent in non-revolving. Consumer credit increased 8.0 percent in May 2012 with increase of revolving credit by 11.2 percent and growth of non-revolving credit by 6.5 percent.
Table VA-3, US, Consumer Credit Outstanding, SA, Annual Rate and Billions of Dollars
| Total ∆% | REV ∆% | NRV ∆% | Total $B | REV $B | NREV $B | |
| 2012 | ||||||
| May | 8.0 | 11.2 | 6.5 | 2573 | 870 | 1703 |
| Apr | 4.7 | -4.9 | 9.6 | 2556 | 862 | 1694 |
| Mar | 6.1 | 5.1 | 6.6 | 2546 | 866 | 1680 |
| IQ | 5.9 | 0.4 | 8.9 | 2546 | 866 | 1680 |
| 2011 | ||||||
| IVQ | 6.7 | 3.2 | 8.6 | 2508 | 865 | 1644 |
| IIIQ | 2.3 | -0.4 | 3.7 | 2467 | 858 | 1609 |
| IIQ | 3.3 | 0.9 | 4.7 | 2453 | 859 | 1594 |
| IQ | 3.5 | -0.1 | 5.5 | 2433 | 857 | 1576 |
| 2011 | 4.0 | 0.9 | 5.7 | 2508 | 865 | 1644 |
| 2010 | -1.3 | -7.4 | 2.5 | 2412 | 857 | 1554 |
| 2009 | -4.5 | -8.8 | -1.8 | 2439 | 922 | 1517 |
| 2008 | 0.8 | 0.2 | 1.2 | 2549 | 1010 | 1538 |
| 2007 | 5.9 | 8.5 | 4.3 | 2529 | 1008 | 1520 |
Note: REV: Revolving; NREV: Non-revolving; ∆%: simple annual rate from unrounded data; Total may not add exactly because of rounding
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g19/current/default.htm
Chart VA-2 of the Board of Governors of the Federal Reserve System provides percentage changes of total consumer credit outstanding in the US since 1972. The shaded bars are the cyclical contraction dates of the National Bureau of Economic Research (http://www.nber.org/cycles/cyclesmain.html). Consumer credit is cyclical, declining during contractions as shown by negative percentage changes during economic contractions. There is clear upward trend in 2012 but with significant fluctuations.
Chart VA-2, US, Percent Change of Total Consumer Credit, Seasonally Adjusted at an Annual Rate
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g19/current/default.htm
The US Treasury budget for fiscal year 2012 in the first eight months of Oct-Dec 2011 and Jan-Jun 2012 is shown in Table VA-4. Receipts increased 5.2 percent in the first nine months of fiscal year 2012 relative to the same eight months in fiscal year 2011 or Oct-Dec 2010 and Jan-Jun 2011. Individual income taxes have grown 3.1 percent relative to the same period a year earlier. Outlays increased 0.9 percent relative to a year earlier. The final two rows of Table VA-4 provide the projection of the Congressional Budget Office (CBO) of the deficit for fiscal year 2012 at $1.2 trillion not very different from that in fiscal year 2011 of $1.3 trillion. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.2 trillion in four years, which is the worst fiscal performance since World War II.
Table VA-4, US, Treasury Budget in Fiscal Year to Date Million Dollars
| Fiscal Year 2012 | Oct 2011 to Jun 2012 | Oct 2010 to Jun 2011 | ∆% |
| Receipts | 1,824,082 | 1,734,033 | 5.2 |
| Outlays | 2,728,317 | 2,704,559 | 0.9 |
| Deficit | -904,236 | -970,526 | NA |
| Individual Income Taxes | 840,471 | 814,922 | 3.1 |
| Social Insurance | 434,163 | 433,178 | 0.2 |
| Receipts | Outlays | Deficit (-), Surplus (+) | |
| $ Billions | |||
| CBO Forecast Fiscal Year 2012 | 2,456 | 3,627 | -1,171 |
| Fiscal Year 2011 | 2,303 | 3,603 | -1,300 |
| Fiscal Year 2010 | 2,162 | 3,456 | -1,294 |
| Fiscal Year 2009 | 2,105 | 3,518 | -1,413 |
| Fiscal Year 2008 | 2,524 | 2,983 | -459 |
http://www.fms.treas.gov/mts/index.html
CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan. CBO. 2012MarBEO. Updated budget projections: fiscal years 2012 to 2022. Washington, DC: Congressional Budget Office, Mar.
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 contracted at a moderate rate with the Markit Composite Output PMI™ Index declining from 50.1 in May to 49.1 in Jun in the first contraction of activity of the private sector since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). Alex Hamilton, economist at Markit and author of the report, finds deceleration originating in combination of doubts on the global economy and internal reconstruction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit Business Activity Index of Services decreased from 49.8 in May to 49.3 in Jun, also showing slower pace and the second reading below 50.0 in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, fell from 50.7 in May to 49.9 in Jun, indicating virtual standtill in manufacturing in Japan in the weakest reading in seven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713). Alex Hamilton, economist at Markit and author of the report, finds reduction in work originating from the reconstruction effort from the Tōhoku Hurricane and Tsunami of Mar 11, 2011 with simultaneous decline of output and new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713).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 | Jun ∆% -0.6 |
| Consumer Price Index | May NSA ∆% -0.3; May 12 months NSA ∆% 0.2 |
| Real GDP Growth | IQ2012 ∆%: 1.2 on IVQ2011; IQ2012 SAAR 4.7; |
| Employment Report | May Unemployed 2.97 million Change in unemployed since last year: minus 170 thousand |
| All Industry Indices | Apr month SA ∆% 0.1 Blog 6/24/12 |
| Industrial Production | May SA month ∆%: -3.1 |
| Machine Orders | Total May ∆% -14.5 Private ∆%: -21.0 |
| Tertiary Index | May month SA ∆% 0.7 |
| Wholesale and Retail Sales | May 12 months: |
| Family Income and Expenditure Survey | May 12-month ∆% total nominal consumption 4.3, real 4.0 Blog 7/8/12 |
| Trade Balance | Exports May 12 months ∆%: +10.0 Imports May 12 months ∆% +9.3 Blog 6/24/12 |
Links to blog comments in Table JPY:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
06/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
Japan’s total machinery orders in Table VB-1 decreased 14.5 percent in May 2012 after falling 4.0 percent in Apr. Total private sector orders fell 14.8 percent in May but after increasing 5.7 percent in Apr. Private-sector orders excluding volatile orders, which are closely watched, increased 5.7 percent in Apr but fell 14.8 percent in May. Orders for manufacturing fell 8.0 percent in Apr but after increasing 3.4 percent in Apr. Overseas orders increased 0.3 percent in both May and Apr. There is significant volatility in industrial orders in advanced economies.
Table VB-1, Japan, Machinery Orders, Month ∆%, SA
| 2012 | May | Apr | Mar | Feb |
| Total | -14.5 | -4.0 | 4.1 | -11.4 |
| Private Sector | -21.0 | 16.4 | -4.3 | 3.5 |
| Excluding Volatile Orders | -14.8 | 5.7 | -2.8 | 2.8 |
| Mfg | -8.0 | 3.4 | -8.4 | 9.5 |
| Non Mfg ex Volatile | -6.4 | 5.7 | -3.9 | 2.1 |
| Government | -21.8 | -5.0 | 40.0 | -6.1 |
| From Overseas | 0.3 | 0.3 | -14.4 | -13.4 |
| Through Agencies | 8.7 | -21.1 | 21.5 | 3.8 |
Note: Mfg: manufacturing
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/juchu-e.html
Total orders for machinery and total private-sector orders excluding volatile orders for Japan are shown in Chart VB-1 of Japan’s Economic and Social Research Institute at the Cabinet Office. The trend of private-sector orders excluding volatile orders is showing recovery from the drop after Mar 2011 because of the earthquake/tsunami. There could be reversal of the trend of increase in total orders with recent increases. Fluctuations still prevent detecting longer term trends but recovery is evident from the global recession. There was a major setback by the declines in May shown in the last segment of Chart VB-1.
Chart VB-1, Japan, Machinery Orders
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/juchu-e.html
Table VB-2 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 1,597,323 million in May 2012 are divided between JPY 684,650 million overseas orders, or 42.9 percent of the total, and domestic orders of JPY 827,496 million, or 51.8 percent of the total, with orders through agencies of JPY 85,077 million, or 5.3 percent of the total. Orders through agencies are not shown in the table because of the minor value. Twelve-month percentages changes in May 2012 fell again: minus 6.8 percent for total orders, minus 7.0 percent for overseas orders, minus 8.6 percent for domestic orders and 1.0 percent for private orders excluding volatile items. Performance was also strong in Apr with growth of total orders of 7.5 percent mostly because of growth of domestic orders by 23.0 percent and also in Mar with growth of total orders of 8.1 percent and of domestic orders of 19.0 percent. Percentage growth of overseas orders was negative in four consecutive months from Feb to May 2012. Performance in Feb 2012 was weak with growth of total orders of minus 9.3 percent, minus 8.9 percent of overseas orders, minus 11.2 percent of domestic orders and 8.9 percent of private orders excluding volatile items. Jan 2012 was quite strong with growth of total orders of 9.8 percent driven by growth of overseas orders of 18.3 percent. There is sharp reversal of 12-month percentage changes in Nov with increase of 11.0 percent in total orders, 8.0 percent in overseas orders, 13.5 percent in domestic orders and 12.5 percent in private orders excluding volatile items. The pace of increase declined in Dec with growth in 12 months of 0.8 percent for total orders, 12.6 percent for overseas orders, decline of 8.5 percent for domestic orders and growth of private orders excluding volatile items of 6.3 percent. There was strong impact from the global recession with total orders falling 23.3 percent in 2008, overseas orders dropping 29.4 percent and domestic orders decreasing 17.4 percent. Recovery was vigorous in 2010 with increase of total orders by 9.4 percent, overseas orders by 3.5 percent and domestic orders by 14.1 percent. The heavy impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 also affected machinery orders.
Table VB-2, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series
| Total | Overseas | Domestic | Private ex Volatile | |
| Value May 2012 | 1,597,323 | 684,650 | 827,596 | 641,970 |
| % Total | 100.0 | 42.9 | 51.8 | 40.2 |
| Value May 2011 | 1,714,092 | 736,404 | 905,445 | 635,636 |
| % Total | 100.0 | 42.5 | 52.1 | 37.2 |
| 12-month ∆% | ||||
| May 2012 | -6.8 | -7.0 | -8.6 | 1.0 |
| Apr 2012 | 7.5 | -9.6 | 23.0 | 6.6 |
| Mar 2012 | 8.1 | -10.0 | 19.0 | -1.1 |
| Feb 2012 | -9.3 | -8.9 | -11.2 | 8.9 |
| Jan 2012 | 9.8 | 18.3 | 0.5 | 5.7 |
| Dec 2011 | 0.8 | 12.6 | -8.5 | 6.3 |
| Nov 2011 | 11.0 | 8.0 | 13.5 | 12.5 |
| Oct 2011 | -6.8 | -15.6 | -1.0 | 1.5 |
| Dec 2010 | 9.4 | 3.5 | 14.1 | -0.6 |
| Dec 2009 | 1.8 | 0.4 | 3.6 | -1.9 |
| Dec 2008 | -23.3 | -29.4 | -17.4 | -24.7 |
| Dec 2007 | 1.3 | 9.8 | -4.3 | -6.4 |
| Dec 2006 | 0.8 | 0.9 | -0.1 | 0.1 |
Note: Total machinery orders = overseas + domestic demand + orders through agencies. Orders through agencies in May 2012 were JPY 85,077 million, or 5.3 percent of the total, and are not shown in the table. The data are the original numbers without any adjustments and differ from the seasonally-adjusted data.
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/juchu-e.html
The tertiary activity index of Japan increased 0.7 percent SA in May 2012 and 3.0 percent NSA in the 12 months ending in May 2012, as shown in Table VB-3. The tertiary activity index of Japan seasonally adjusted fell at the annual equivalent rate of minus 4.1 percent in Jan-Apr 2012 for cumulative decline of 1.4 percent but increased 2.6 percent not seasonally adjusted in the 12 months ending in Apr 2012, as shown in Table VB-3. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.4 percent in Mar 2011 and 3.4 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep 2011 was weak: increase of 0.4 percent in Jul, increase of 0.1 percent in Aug and decline of 0.2 percent in Sep, after increasing 1.2 percent in Jun. The not seasonally adjusted index increased 4.2 percent in the 12 months ending in Mar 2012. Most of the growth occurred in the quarter from Apr to Jun 2011 with gain of 4.3 percent or at annual equivalent rate of 18.1 percent.
Table VB-3, Japan, Tertiary Activity Index, ∆%
| Month ∆% SA | 12 Months ∆% NSA | |
| May 2012 | 0.7 | 3.0 |
| Apr | -0.2 | 2.6 |
| Mar | -0.6 | 4.2 |
| Feb | 0.0 | 2.4 |
| Jan | -0.6 | 0.4 |
| Dec 2011 | 1.6 | 1.2 |
| Nov | -0.8 | -0.3 |
| Oct | 0.6 | 0.9 |
| Sep | -0.2 | 0.1 |
| Aug | 0.1 | 0.8 |
| Jul | 0.4 | 0.1 |
| Jun | 1.2 | 1.0 |
| May | 0.9 | -0.2 |
| Apr | 2.1 | -2.3 |
| Mar | -5.4 | -3.4 |
| Feb | 0.3 | 2.0 |
| Jan | 0.5 | 1.0 |
| Dec 2010 | -0.2 | 1.8 |
| Nov | 0.6 | 2.5 |
| Oct | 0.2 | 0.5 |
| Sep | -0.4 | 1.3 |
| Aug | 0.1 | 2.3 |
| Jul | 0.7 | 1.6 |
| Jun | 0.1 | 1.0 |
| May | -0.3 | 1.2 |
| Dec 2009 | -5.2 | |
| Dec 2008 | -3.3 | |
| Dec 2007 | -0.3 | |
| Dec 2006 | 0.6 | |
| Dec 2005 | 2.6 | |
| Dec 2004 | 1.6 | |
| Calendar Year | ||
| 2011 | 0.1 | |
| 2010 | 1.3 | |
| 2009 | -5.2 |
Source: http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html
http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201205j.pdf
Month and 12-month rates of growth of the tertiary activity index of Japan and components in Jan are provided in Table VB-4. Electricity, gas, heat supply and water declined 2.8 percent in May and decreased 0.1 percent in the 12 months ending in May. Wholesale and retail trade increased 1.6 percent in the month of May and 2.6 percent in 12 months. Information and communications increased 1.1 percent in May and 1.9 percent in 12 months.
Table VB-4, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%
| May 2012 | Weight | Month ∆% SA | 12 Months ∆% NSA |
| Tertiary Index | 10,000.0 | 0.7 | 3.0 |
| Electricity, Gas, Heat Supply & Water | 372.9 | -2.8 | -0.1 |
| Information & Communications | 951.2 | 1.1 | 1.9 |
| Wholesale & Retail Trade | 2,641.2 | 1.6 | 2.6 |
| Finance & Insurance | 971.1 | -2.0 | 3.4 |
| Real Estate & Goods Rental & Leasing | 903.4 | -1.0 | -1.8 |
| Scientific Research, Professional & Technical Services | 551.3 | 0.4 | 11.0 |
| Accommodations, Eating, Drinking | 496.0 | -1.3 | 1.4 |
| Living-Related, Personal, Amusement Services | 552.7 | 1.3 | 4.2 |
| Learning Support | 116.9 | -0.1 | 2.2 |
| Medical, Health Care, Welfare | 921.1 | 1.1 | 5.5 |
| Miscellaneous ex Government | 626.7 | 0.2 | 0.7 |
Source: http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201205j.pdf
VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm). Table CIPMS provides this index and components from Jan to Jun 2012. The index fell from 57.3 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012.
Table CIPMS, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| Jun | 56.7 | 53.7 | 52.1 | 48.6 | 65.5 |
| May | 55.2 | 52.5 | 53.6 | 48.5 | 65.4 |
| Apr | 56.1 | 52.7 | 57.9 | 50.3 | 66.1 |
| Mar | 58.0 | 53.5 | 60.2 | 52.0 | 66.6 |
| Feb | 57.3 | 52.7 | 59.0 | 51.2 | 63.8 |
| Jan | 55.7 | 52.2 | 58.2 | 51.1 | 65.3 |
Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm
Chart CIPMS provides China’s nonmanufacturing purchasing managers’ index from Jun 2011 to Jun 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012.
Chart CIPMS, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm
China estimates a manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm). Chart CIPMM provides the index from Jun 2011 to Jun 2012. There is deceleration from 52.0 in May 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.2 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011.
Chart CIPMM, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm
The HSBC China Services PMI™, compiled by Markit, moderating business activity in China with the HSBC Composite Output, combining manufacturing and services, decreasing from 51.9 in May to 50.6 in Jun, which is the lowest level in three months with contraction in manufacturing and slower activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds weak employment growth, suggesting that with lower inflation there is room for further stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788).The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, fell slightly to 48.2 in Jun from 48.4 in May, for the lowest reading in IIQ2012 since IQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds continuing slowdown in China’s economy in IIQ2012, which requires further reduction of bank reserve requirements and the policy interest rate together with fiscal measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721).
Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy. Xinhuanet, writing on “China announces surprise rate cuts amid economic downshift,” on Jun 5, 2012 (http://news.xinhuanet.com/english/china/2012-07/05/c_131697843.htm), informs that the central bank of China People’s Bank of China reduced the one year deposit rate by 25 basis points and the one year lending rate by 31 basis points effective Jun 6, 2012. The People’s Bank of China posts the new rates (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Jun 12-month ∆%: minus 2.1 Jun month ∆%: minus 0.7 |
| Consumer Price Index | Jun month ∆%: -0.6 Jun 12 months ∆%: 2.2 |
| Value Added of Industry | Jun month ∆%: 0.76 Jan-Jun 2012/Jan-Jun 2011 ∆%: 10.5 |
| GDP Growth Rate | Year IIQ2012 ∆%: 7.6 |
| Investment in Fixed Assets | Total Jan-Jun 2012 ∆%: 20.4 Real estate development: 16.6 |
| Retail Sales | May month ∆%: 0.84 Jan-May ∆%: 14.5 |
| Trade Balance | Jun balance $31.7 billion Cumulative Jun: $69.4 billion |
Links to blog comments in Table CNY:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
Growth of GDP of China from a quarter relative to the same quarter a year earlier decelerated from 12.1 percent in IQ2010 to 7.6 percent in IIQ2012, as shown in Table VC-1. Growth of GDP in a quarter relative to the prior quarter decelerated from 2.2 percent in IQ2011 or annual equivalent 9.1 percent to 1.8 percent in both IQ2012 and IIQ 2012 or annual equivalent 7.4 percent. Secondary industry activity growth in a quarter relative to the same quarter a year earlier decelerated from growth of 14.5 percent in IQ2010 to 8.3 percent in IIQ2012.
Table VC-1, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2011 | IIQ 2011 | IIIQ 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | |
| GDP | 9.7 | 9.5 | 9.1 | 8.9 | 8.1 | 7.6 |
| Primary Industry | 3.5 | 3.2 | 3.8 | 4.5 | 3.8 | 4.3 |
| Secondary Industry | 11.1 | 11.0 | 10.8 | 10.6 | 9.1 | 8.3 |
| Tertiary Industry | 9.1 | 9.2 | 9.0 | 8.9 | 7.5 | 7.7 |
| GDP ∆% Relative to a Prior Quarter | 2.2 | 2.3 | 2.4 | 1.9 | 1.8 | 1.8 |
| IQ 2010 | IIQ 2010 | IIIQ 2010 | IVQ 2010 | |||
| GDP | 12.1 | 11.2 | 10.7 | 12.1 | ||
| Primary Industry | 3.8 | 3.6 | 4.0 | 3.8 | ||
| Secondary Industry | 14.5 | 13.3 | 12.6 | 14.5 | ||
| Tertiary Industry | 10.5 | 9.9 | 9.7 | 10.5 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402817907.htm
Cumulative and 12-months rates of value added of industry in China are provided in Table VC-2. Value added in total industry in Jan-Jun 2012 increased 10.5 percent relative to a year earlier and 9.5 percent in the 12 months ending in Jun 2012. Heavy industry had been the driver of growth with a cumulative rate of 11.0 percent relative to a year earlier in Jan-Mar 2012 that declined to 10.5 percent in Jan-Apr 2012 relative to the same period a year earlier and further down to 10.1 percent in Jan-Jun 2012. Light industry grew 11.1 percent in Jan-Jun 2012 relative to a year earlier and 9.0 percent in 12 months ending in Jun 2012. Growth of total industry decelerated from cumulative 14.4 percent in Jan-Mar 2011 to 10.5 percent in Jan-Jun 2012.
Table VC-2, China, Growth Rate of Value Added of Industry ∆%
| Industry | Light Industry | Heavy | State | Private | |
| 2012 | |||||
| Jan-Jun | 10.5 | 11.1 | 10.1 | 7.0 | 12.4 |
| 12 M Jun | 9.5 | 9.0 | 9.6 | 6.5 | 11.5 |
| Jan-May | 10.7 | 11.5 | 10.3 | 6.7 | 12.4 |
| 12 M May | 9.6 | 9.1 | 9.8 | 6.6 | 11.0 |
| Jan-Apr | 11.0 | 12.3 | 10.5 | 6.6 | 12.9 |
| 12 M Apr | 9.3 | 10.3 | 8.9 | 4.3 | 10.7 |
| Jan-Mar | 11.6 | 13.2 | 11.0 | 7.2 | 13.8 |
| 12 M Mar | 11.9 | 13.9 | 11.2 | 8.0 | 13.7 |
| Jan-Feb | 11.4 | 12.7 | 10.9 | 7.3 | 13.9 |
| 2011 | |||||
| Jan-Dec | 13.9 | 13.0 | 14.3 | 9.9 | 15.8 |
| 12 M Dec | 12.8 | 12.6 | 13.0 | 9.2 | 14.7 |
| Jan-Nov | 14.0 | 13.0 | 14.4 | 9.9 | 16.0 |
| 12 M Nov | 12.4 | 12.4 | 12.4 | 7.8 | 14.4 |
| Jan-Oct | 14.1 | 13.0 | 14.5 | 10.1 | 9.1 |
| 12 M Oct | 13.2 | 12.1 | 13.7 | 8.9 | 15.1 |
| Jan-Sep | 14.2 | 13.1 | 14.6 | 10.4 | 16.1 |
| 12 M Sep | 13.8 | 12.8 | 14.3 | 9.9 | 16.0 |
| Jan-Aug | 14.2 | 13.1 | 14.6 | 10.4 | 16.1 |
| 12 M Aug | 13.5 | 13.4 | 13.5 | 9.4 | 15.5 |
| Jan-Jul | 14.3 | ||||
| 12 M | 14.0 | 12.8 | 14.5 | 9.5 | |
| Jan-Jun | 14.3 | 13.1 | 14.7 | 10.7 | 19.7 |
| 12 M | 15.1 | 13.9 | 15.6 | 10.7 | 20.8 |
| Jan-May | 14.0 | 12.9 | 14.4 | 10.7 | 19.3 |
| 12 M May | 13.3 | 12.9 | 13.5 | 8.9 | 18.7 |
| Jan-Apr | 14.2 | 12.9 | 14.7 | 11.2 | 19.5 |
| 12 M Apr | 13.4 | 11.9 | 14.0 | 10.4 | 18.0 |
| Jan-Mar | 14.4 | 13.1 | 14.9 | 11.4 | 19.8 |
| 12 M Mar | 14.8 | 12.8 | 15.6 | 12.9 | 19.2 |
| 12 M Feb | 14.9 | 13.1 | 15.6 | 10.5 | 21.7 |
| Jan-Feb | 14.1 | 13.3 | 14.4 | 10.6 | 20.3 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818017.htm
Chart VC-1 provides 12-month percentage changes of value added of industry in 2011 and from Jan to Jun 2012. Growth rates of value added of industry in the first five months of 2010 were higher than in 2011 as would be expected in an earlier phase of recovery from the global recession. Growth rates have converged in the second half of 2011 to lower percentages with further decline into 2012.
Chart VC-1, China, Growth Rate of Total Value Added of Industry, 12-Month ∆%
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818017.htm
Yearly rates of growth for the past 12 months and cumulative relative to the earlier year of various segments of industrial production in China are provided in Table VC-3. Rates for Jan-Dec 2011 relative to the same period a year earlier fluctuated but remained mostly above 10 percent with the exception of motor vehicles and crude oil. There is deceleration in Jan-Jun 2012 of percentage change with no segment showing growth exceeding 10 percent with exception of 10.7 percent for motor vehicles in the 12 months ending Apr 2012, 18.5 percent in the 12 months ending in May and 13.8 percent in Jun 2012. Electricity fell from growth of 16.2 percent in the 12 months ending in Jun 2011 to 0.0 percent in the 12 months ending in Jun 2012.
Table VC-3, China, Industrial Production Operation ∆%
| Elec- | Pig Iron | Cement | Crude | Non- | Motor Vehicles | |
| 2012 | ||||||
| Jan-Jun | 3.7 | 6.1 | 5.5 | 1.7 | 6.7 | 6.7 |
| 12 M Jun | 0.0 | 6.7 | 6.5 | -0.6 | 5.8 | 13.8 |
| Jan-May | 4.7 | 6.3 | 5.0 | 2.2 | 5.1 | 6.2 |
| 12 M May | 2.7 | 6.3 | 4.3 | 0.7 | 6.6 | 18.5 |
| Jan-Apr | 5.0 | 6.2 | 5.5 | 2.9 | 4.6 | 3.1 |
| 12 M Apr | 0.7 | 7.9 | 4.9 | -0.3 | 2.3 | 10.7 |
| Jan-Mar | 7.1 | 6.5 | 7.3 | 3.1 | 5.8 | 0.0 |
| 12 M Mar | 7.2 | 10.2 | 7.9 | 2.0 | 3.3 | 5.1 |
| Jan-Feb | 7.1 | 4.6 | 4.8 | 4.0 | 8.4 | -1.8 |
| 2011 | ||||||
| Jan-Dec | 12.0 | 8.4 | 16.1 | 4.9 | 10.6 | 3.0 |
| 12 M Dec | 9.7 | 3.7 | 7.0 | 4.0 | 13.2 | -6.5 |
| Jan-Nov | 12.0 | 13.1 | 17.2 | 5.3 | 10.2 | 3.9 |
| 12 M Nov | 8.5 | 7.8 | 11.2 | 3.2 | 8.2 | -1.3 |
| Jan-Oct | 12.3 | 13.7 | 18.0 | 5.4 | 10.4 | 5.2 |
| 12 M | 9.3 | 13.4 | 16.5 | -0.9 | 3.7 | 1.3 |
| Jan-Sep | 12.7 | 13.9 | 18.1 | 6.0 | 11.2 | 5.5 |
| 12 M Sep | 11.5 | 18.8 | 15.7 | 1.5 | 13.9 | 2.5 |
| Jan-Aug | 13.0 | 13.1 | 18.4 | 6.6 | 4.7 | |
| 12 M Aug | 10.0 | 12.9 | 12.8 | 4.5 | 15.6 | 9.5 |
| Jan-Jul | 13.3 | 13.0 | 19.2 | 6.9 | 9.9 | 4.0 |
| 12 M | 13.2 | 14.9 | 16.8 | 5.9 | 9.8 | -1.3 |
| 12 M | 16.2 | 14.8 | 19.9 | -0.7 | 9.8 | 3.6 |
| 12 M | 12.1 | 10.6 | 19.2 | 6.0 | 14.2 | -1.9 |
| 12 M Apr | 11.7 | 8.3 | 22.4 | 6.8 | 6.1 | -1.6 |
| 12 M Mar | 14.8 | 13.7 | 29.8 | 8.0 | 11.6 | 9.9 |
| 12 M Feb | 11.7 | 14.5 | 9.1 | 10.9 | 14.4 | 10.3 |
| 12 M Jan | 5.1 | 3.5 | 16.4 | 12.2 | 1.4 | 23.9 |
| 12 M Dec 2010 | 5.6 | 4.6 | 17.3 | 10.3 | -1.9 | 27.6 |
M: month
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818017.htm
Monthly growth rates of industrial production in China are provided in Table VC-4. Monthly rates have fluctuated around 1 percent. Jan and Feb 2012 are somewhat weaker but there was improvement to 1.19 percent in Mar. The rate of 0.37 percent in Apr is the lowest in the monthly series from Feb 2011 to Jun 2012. Monthly sales growth remained below 1 percent in all the first six months of 2012.
Table VC-4, China, Industrial Production Operation, Month ∆%
| 2011 | Month ∆% |
| Feb | 0.93 |
| Mar | 0.99 |
| Apr | 1.32 |
| May | 0.79 |
| Jun | 1.30 |
| Jul | 0.76 |
| Aug | 0.84 |
| Sep | 1.01 |
| Oct | 0.76 |
| Nov | 0.75 |
| Dec | 0.98 |
| Jan 2012 | 0.49 |
| Feb | 0.64 |
| Mar | 1.19 |
| Apr | 0.37 |
| May | 0.90 |
| Jun | 0.76 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818017.htm
Table VC-5 provides cumulative growth of investment in fixed assets in China in 2011 relative to 2010 and in Jan-Jun 2012 relative to a year earlier. Total fixed investment has grown at a high rate fluctuating around 25 percent and fixed investment in real estate development has grown at rates in excess of 30 percent. In Jan-Jun 2012 investment in fixed assets in China grew 20.4 percent relative to a year earlier and 18.5 percent in real estate development. There was slight deceleration in the final two months of 2011 that continued into Jan-Jun 2012.
Table VC-5, China, Investment in Fixed Assets ∆% Relative to a Year Earlier
| Total | State | Real Estate Development | |
| Jan-Jun 2012 | 20.4 | 13.8 | 16.6 |
| Jan-May | 20.1 | 10.0 | 18.5 |
| Jan-Apr | 20.2 | 9.5 | 18.7 |
| Jan-Mar | 20.9 | 9.0 | 23.5 |
| Jan-Feb | 21.5 | 8.8 | 27.8 |
| Jan-Dec 2011 | 23.8 | 11.1 | 27.9 |
| Jan-Nov | 24.5 | 11.7 | 29.9 |
| Jan-Oct | 24.9 | 12.4 | 31.1 |
| Jan-Sep | 24.9 | 12.7 | 32.0 |
| Jan-Aug | 25.0 | 12.1 | 33.2 |
| Jan-Jul | 25.4 | 13.6 | 33.6 |
| Jan-Jun | 25.6 | 14.6 | 32.9 |
| Jan-May | 25.8 | 14.9 | 34.6 |
| Jan-Apr | 25.4 | 16.6 | 34.3 |
| Jan-Mar | 25.0 | 17.0 | 34.1 |
| Jan-Feb | 24.9 | 15.6 | 35.2 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818130.htm
Chart VC-2 provides cumulative fixed asset investment in China relative to a year earlier. Growth rose to 25.8 percent in Jan-May 2011 and then fell back to 24.9 percent in Sep and Oct 2011, declining further to 24.5 percent in Nov and 23.8 percent in Dec 2011 with deeper drop in Jan-Feb 2012 to 21.5 percent, 20.9 percent in Jan-Mar, 20.2 percent in Jan-Apr 2012, 20.1 percent in Jan-Apr 2012 and 20.4 percent in Jan-Jun 2012.
Chart VC-2, China, Investment in Fixed Assets, ∆% Cumulative over Year Earlier
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818130.htm
Monetary policy has been used in China in the form of increases in interest rates and required reserves of banks to moderate real estate investment. These policies have been reversed because of lower inflation and weakening economic growth. Chart VC-3 shows decline of fluctuating cumulative growth rates of investment in real estate development relative to a year earlier from 35.2 percent in Jan-Feb 2011 to 31.1 percent in Jan-Oct 2011, 29.9 percent in Jan-Nov 2011, 27.9 percent in Jan-Dec 2011, 27.8 percent in Jan-Feb 2012 and sharper decline to 23.5 percent in Jan-Mar 2012, 18.7 percent in Jan-Apr 2012 and 18.5 percent in Jan-May 2012.
Chart VC-3, China, Investment in Real Estate Development, ∆% Cumulative over Year Earlier
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120612_402811457.htm
Table VC-6 provides monthly growth rates of investment in fixed assets in China from Feb 2011 to May 2012. Growth rates moderated from Nov 2011 to May 2012. The rate of 0.95 percent in Mar 2012 is the lowest for any month after Mar 2011 but rates rebounded to 1.76 percent in May 2012 and 1.71 percent in Jun 2012.
Table VC-6, China, Investment in Fixed Assets, Month ∆%
| Month ∆% | |
| Feb 2011 | -0.23 |
| Mar | 2.45 |
| Apr | 2.22 |
| May | 1.68 |
| Jun | 1.48 |
| Jul | 1.55 |
| Aug | 1.44 |
| Sep | 1.93 |
| Oct | 1.83 |
| Nov | 1.12 |
| Dec | 1.46 |
| Jan 2012 | 1.20 |
| Feb | 1.96 |
| Mar | 0.95 |
| Apr | 1.18 |
| May | 1.76 |
| Jun | 1.71 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120713_402818130.htm
Table VC-7 provides China’s exports, imports, trade balance and percentage changes from Dec 2010 to Jun 2012. Exports increased 11.3 percent in Jun 2012 relative to a year earlier while imports grew 6.3 percent. The rate of growth of exports fell to 4.9 percent in Apr 2012 relative to a year earlier and imports increased 0.3 percent but export growth was 15.3 percent in May and imports increased 12.7 percent. China reversed the large trade deficit of USD 31.48 billion in Feb 2012 with a surplus of $5.35 billion in Mar 2012, $18.42 billion in Apr 2012, $18.7 billion in May 2012 and $31.7 billion in Jun 2012. Exports fell 0.5 percent in the 12 months ending in Jan while imports fell 15.3 percent for a still sizeable trade surplus of $27.3 billion. In Feb, exports increased 18.4 percent while imports jumped 39.6 percent for a sizeable deficit of $31.48 billion. There are distortions from the New Year holidays.
Table VC-7, China, Exports, Imports and Trade Balance USD Billion and ∆%
| Exports | ∆% Relative | Imports USD | ∆% Relative | Balance | |
| Jun | 180.21 | 11.3 | 148.48 | 6.3 | 31.73 |
| May | 181.1 | 15.3 | 162.4 | 12.7 | 18.7 |
| Apr | 163.25 | 4.9 | 144.83 | 0.3 | 18.42 |
| Mar | 165.66 | 8.9 | 160.31 | 5.3 | 5.35 |
| Feb | 114.47 | 18.4 | 145.95 | 39.6 | -31.48 |
| Jan | 149.94 | -0.5 | 122.66 | -15.3 | 27.28 |
| Dec 2011 | 174.72 | 13.4 | 158.20 | 11.8 | 16.52 |
| Nov | 174.46 | 13.8 | 159.94 | 22.1 | 14.53 |
| Oct | 157.49 | 15.9 | 140.46 | 28.7 | 17.03 |
| Sep | 169.67 | 17.1 | 155.16 | 20.9 | 14.51 |
| Aug | 173.32 | 24.5 | 155.56 | 30.2 | 17.76 |
| Jul | 175.13 | 20.4 | 143.64 | 22.9 | 31.48 |
| Jun | 161.98 | 17.9 | 139.71 | 19.3 | 22.27 |
| May | 157.16 | 19.4 | 144.11 | 28.4 | 13.05 |
| Apr | 155.69 | 29.9 | 144.26 | 21.8 | 11.42 |
| Mar | 152.20 | 35.8 | 152.06 | 27.3 | 0.14 |
| Feb | 96.74 | 2.4 | 104.04 | 19.4 | -7.31 |
| Jan | 150.73 | 37.7 | 144.27 | 51.0 | 6.46 |
| Dec 2010 | 154.15 | 17.9 | 141.07 | 25.6 | 13.08 |
Source:
http://english.customs.gov.cn/publish/portal191/
http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1
Table VC-8 provides cumulative exports, imports and the trade balance of China together with percentage growth of exports and imports. The trade balance in 2011 of $155.14 billion is lower than those from 2008 to 2010. China’s trade balance reached $69.4 billion in Jun 2012 with cumulative growth of exports of 9.2 percent and 6.7 percent of imports. There is a rare cumulative deficit of $4.2 billion in Feb 2012 reversed to a small surplus in Mar 2012 and a higher surplus of $19.3 billion in Apr 2012, increasing to $37.9 billion in May and $69.4 billion in Jun 2012. More observations are required to detect trends of Chinese trade.
Table VC-8, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%
| Exports | ∆% Relative | Imports USD | ∆% Relative | Balance | |
| Jun 2012 | 954.38 | 9.2 | 884.98 | 6.7 | 69.4 |
| May | 774.4 | 8.7 | 736.5 | 6.7 | 37.9 |
| Apr | 593.24 | 6.9 | 573.94 | 5.1 | 19.3 |
| Mar | 430.06 | 7.6 | 428.95 | 6.9 | 1.11 |
| Feb | 264.40 | 6.9 | 268.64 | 7.7 | -4.24 |
| Jan | 149.94 | -0.5 | 122.66 | -15.3 | 27.28 |
| Dec 2011 | 1,898.60 | 20.3 | 1,743.46 | 24.9 | 155.14 |
| Nov | 1,724.01 | 21.1 | 1585.61 | 26.4 | 138.40 |
| Oct | 1,549.71 | 22.0 | 1,425.68 | 26.9 | 124.03 |
| Sep | 1,392.27 | 22.7 | 1,285.17 | 26.7 | 107.10 |
| Aug | 1,222.63 | 23.6 | 1,129.90 | 27.5 | 92.73 |
| Jul | 1,049.38 | 23.4 | 973.17 | 26.9 | 76.21 |
| Jun | 874.3 | 24.0 | 829.37 | 27.6 | 44.93 |
| May | 712.37 | 25.5 | 689.41 | 29.4 | 22.96 |
| Apr | 555.30 | 27.4 | 545.02 | 29.6 | 10.28 |
| Mar | 399.64 | 26.5 | 400.66 | 32.6 | -1.02 |
| Feb | 247.47 | 21.3 | 248.36 | 36.0 | -0.89 |
| Jan | 150.7 | 37.7 | 144.27 | 51.0 | 6.46 |
| Dec 2010 | 1577.93 | 31.3 | 1394.83 | 38.7 | 183.10 |
Source:
http://english.customs.gov.cn/publish/portal191/
http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1
VD Euro Area. Table VD-EUR provides inflation, unemployment and real GDP growth in the euro area yearly from 1999 to 2011 together with growth forecasts of EUROSTAT for 2012 and 2013. Inflation in the euro zone remained subdued around 2 percent in the first five years of the euro zone from 1999 to 2004, as shown in Table VD-EUR. Inflation climbed above 2.0 percent after 2005, peaking at 3.3 percent in 2008 with the surge in commodity prices but falling to 0.3 percent in 2009 with the collapse of commodity prices. Inflation climbed back to 1.6 percent in 2010 and 2.7 percent in 2011. Under the regime of zero interest rates inflation returns worldwide during relaxation of risk aversion. The rate of unemployment increased in 2011 while the rate of GDP growth fell. EUROSTAT forecasts slightly negative growth of 0.3 percent in 2012 and growth of 1.0 percent in 2013.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, Unemployment Rate and GDP, ∆%
| Year | HICP ∆% | Unemployment | GDP ∆% |
| 1999 | 1.2 | 9.6 | 2.9 |
| 2000 | 2.2 | 8.7 | 3.8 |
| 2001 | 2.4 | 8.1 | 2.0 |
| 2002 | 2.3 | 8.5 | 0.9 |
| 2003 | 2.1 | 9.0 | 0.7 |
| 2004 | 2.2 | 9.3 | 2.2 |
| 2005 | 2.2 | 9.2 | 1.7 |
| 2006 | 2.2 | 8.5 | 3.3 |
| 2007 | 2.1 | 7.6 | 3.0 |
| 2008 | 3.3 | 7.6 | 0.4 |
| 2009 | 0.3 | 9.6 | -4.4 |
| 2010 | 1.6 | 10.1 | 2.0 |
| 2011 | 2.7 | 10.2 | 1.5 |
| 2012* | -0.3 | ||
| 2013* | 1.0 |
*EUROSTAT forecast
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.0 in May to 46.4 in Jun, which is still in sharp contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769) in the deepest contraction in three years. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.6 percent IIQ2012, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769). The Markit Eurozone Manufacturing PMI® was unchanged at 45.1 in Jun, which indicates the sharpest deteriorating in activity in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of about 1 percent, exerting pressure on GDP in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708).
Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IQ2012 ∆% 0.0; IQ2012/IQ2011 ∆% -0.1 Blog 6/10/12 |
| Unemployment | May 2012: 11.1% unemployment rate May 2012: 17.561 million unemployed Blog 7/8/12 |
| HICP | May month ∆%: -0.1 12 months May ∆%: 2.4 |
| Producer Prices | Euro Zone industrial producer prices May ∆%: -0.5 |
| Industrial Production | May month ∆%: 0.6; May 12 months ∆%: -2.8 |
| Retail Sales | May month ∆%: 0.6 |
| Confidence and Economic Sentiment Indicator | Sentiment 89.9 Jun 2012 Confidence minus 19.8 Jun 2012 Blog 7/2/12 |
| Trade | Jan-Apr 2012/Jan-Apr 2011 Exports ∆%: 7.9 Apr 2012 12-month Exports ∆% 6.1 Imports ∆% -0.9 |
Links to blog comments in Table EUR:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
Industrial production in the euro area increased 0.6 percent in May 2012, declining in five of seven months from Nov 2011 to May 2012, as shown in Table VD-1 with revised estimates by EUROSTAT. Energy was the only segment decreasing in May. Improved weather caused decline of energy by 7.9 percent in Mar that drove down the rate of growth of total industry to minus 0.1 percent. All segments of industrial production fell in Dec. Industrial production is highly volatile in the euro zone.
Table VD-1, Euro Zone, Industrial Production Month ∆%
| Total | INT | ENE | CG | DUR | NDUR | |
| May 2012 | 0.6 | 0.3 | -2.3 | 0.9 | 0.5 | 1.7 |
| Apr | -1.1 | -1.2 | 5.3 | -3.0 | -0.9 | -1.7 |
| Mar | -0.1 | 1.0 | -7.9 | 1.3 | -0.1 | 1.6 |
| Feb | 0.7 | -1.3 | 8.0 | 1.1 | -1.5 | -1.3 |
| Jan | -0.2 | 0.7 | 0.7 | -1.0 | 0.0 | -0.6 |
| Dec 2011 | -0.8 | -1.0 | -2.8 | -0.3 | 0.2 | 0.0 |
| Nov | -0.4 | -0.1 | 0.2 | 0.1 | 0.3 | -1.6 |
Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12072012-AP/EN/4-12072012-AP-EN.PDF
Table VD-2 provides monthly and 12-month percentage changes of industrial production and major industrial categories in the euro zone. Industrial production decreased 2.8 percent in the 12 months ending in May. All segments fell in 12 months ending in May 2012 while all increased in May with exception of decline of energy by 2.3 percent.
Table VD-2, Euro Zone, Industrial Production 12-Month ∆%
| 2012 | May Month ∆% | May 12-Month ∆% |
| Total | 0.6 | -2.8 |
| Intermediate Goods | 0.3 | -3.9 |
| Energy | -2.3 | -1.6 |
| Capital Goods | 0.9 | -1.9 |
| Durable Consumer Goods | 0.5 | -6.4 |
| Nondurable Consumer Goods | 1.7 | -2.1 |
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12072012-AP/EN/4-12072012-AP-EN.PDF
There has been significant decline in percentage changes of industrial production and major categories in 12-month rates throughout 2011 and into 2012 as shown in Table VD-3. The 12-month rate of growth in Nov 2011 of 0.0 percent has fallen to minus 2.8 percent in May 2012. Trend is difficult to identify because of significant volatility. Capital goods were growing at 4.7 percent in the 12 months ending in Nov 2011 and at minus 1.9 percent in the 12 months ending in May 2012.
Table VD-3, Euro Zone, Industrial Production 12-Month ∆%
| Total | INT | ENE | CG | DUR | NDUR | |
| May 2012 | -2.8 | -3.9 | -1.6 | -1.9 | -6.4 | -2.1 |
| Apr | -2.4 | -4.4 | 3.2 | -0.7 | -6.9 | -3.9 |
| Mar | -1.5 | -2.7 | -6.3 | 2.9 | -6.0 | -2.1 |
| Feb | -1.6 | -4.5 | 3.8 | 1.4 | -5.7 | -4.6 |
| Jan | -1.7 | -1.7 | -7.3 | 1.7 | -3.0 | -1.9 |
| Dec 2011 | -1.7 | -0.1 | -12.2 | 2.1 | -2.9 | -0.5 |
| Nov | 0.0 | -0.6 | -5.4 | 4.7 | -3.1 | -1.7 |
Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12072012-AP/EN/4-12072012-AP-EN.PDF
Blanchard (2011WEOSep) analyzes the difficulty of fiscal consolidation efforts during periods of weak economic growth. Table VD-4 provides monthly and 12-month percentage changes of industrial production in the euro zone for various members and the UK, which is not a member. The only positive growth rate of industrial production in the 12 months ending in May 2012 is 4.4 percent for Ireland.
Table VD-4, Euro Zone, Industrial Production, Month and 12-Month ∆%
| Month ∆%May 2012 | Month ∆% Apr 2012 | 12 Months ∆% May 2012 | 12 Months ∆% Apr 2012 | |
| Euro Zone | 0.6 | -1.1 | -2.8 | -2.4 |
| Germany | 1.5 | -2.0 | -0.2 | -0.7 |
| France | -2.1 | 1.4 | -3.8 | 2.0 |
| Netherlands | -1.6 | 3.1 | -1.7 | 4.8 |
| Finland | 0.6 | 0.8 | -2.8 | -2.4 |
| Belgium | NA | -7.2 | NA | -8.5 |
| Portugal | 4.1 | -6.5 | -6.7 | -7.6 |
| Ireland | 1.4 | 1.5 | 4.4 | -0.4 |
| Italy | 0.8 | -2.0 | -6.9 | -9.3 |
| Greece | 0.3 | 0.1 | -2.8 | -2.5 |
| Spain | 0.9 | -0.6 | -6.1 | -8.3 |
| UK | 1.0 | -0.4 | -1.8 | -2.5 |
| European Union | 0.5 | -0.7 | -2.3 | -2.0 |
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12072012-AP/EN/4-12072012-AP-EN.PDF
VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-DE, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2011 | 3.0 | 3.1 |
| 2010 | 3.7 | 3.6 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html
The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, fell from 49.3 in May to 48.1 in Jun, indicating marginal deterioration in private sector output for the first time in six months and the deepest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). Tim Moore, Senior Economist at Markit and author of the report, finds that the index suggests flat GDP in Germany in IIQ2012 with possible deterioration in the future (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 45.2 in May to 45.0 in Jun, remaining below 50.0 during four consecutive months for the longest period since the global recession of 2008 and 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765). Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output is showing the sharpest drop in about three years with contracting orders from export markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IQ2012 0.5 ∆%; I/Q2012/IQ2011 ∆% 1.7 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 5/27/12 |
| Consumer Price Index | Jun month SA ∆%: -0.1 |
| Producer Price Index | May month ∆%: -0.3 |
| Industrial Production | Mfg May month SA ∆%: 1.9 |
| Machine Orders | May month ∆%: 0.6 |
| Retail Sales | Apr Month ∆% 0.6 12-Month ∆% minus 3.8 Blog 6/3/12 |
| Employment Report | Unemployment Rate May 5.5% |
| Trade Balance | Exports May 12-month NSA ∆%: 0.5 Blog 7/15/12 |
Links to blog comments in Table DE:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/27 http://cmpassocregulationblog.blogspot.com/2012_05_01_archive.html
Twelve-month rates of growth Germany’s exports and imports are shown in Table VE-1. There was sharp decline in the rates in Jun and Jul 2011 to single-digit levels especially for exports. In the 12 months ending in Aug, exports rose 14.4 percent and imports 13.2 percent. In Sep, exports grew 10.4 percent relative to a year earlier and imports grew 12.0 percent. Growth rates in 12 months ending in Oct fell significantly to 3.7 percent for exports and 8.9 percent for imports. Lower prices may explain part of the decline in nominal values. Exports grew 3.4 percent in 12 months ending in Apr 2012 and only 0.5 percent in the 12 months ending in May 2012 while imports fell 1.0 percent in the 12 months ending in Apr and 0.2 percent in May 2012. Growth had been much stronger in the recovery during 2010 and 2011 from the fall from 2007 to 2009. Germany’s trade grew at high rates in 2006 and 2005.
Table VE-1, Germany, Exports and Imports NSA Euro Billions and 12-Month ∆%
| Exports EURO Billions | 12- Month | Imports | 12-Month | |
| May 2011 | 92.5 | 0.5 | 77.2 | -0.2 |
| Apr | 87.1 | 3.4 | 72.7 | -1.0 |
| Mar | 98.8 | 0.6 | 81.4 | 2.5 |
| Feb | 91.2 | 8.5 | 76.3 | 5.8 |
| Jan | 86.0 | 9.3 | 72.8 | 6.2 |
| Dec 2011 | 85.0 | 4.9 | 72.1 | 5.4 |
| Nov | 94.8 | 8.2 | 78.9 | 7.0 |
| Oct | 89.2 | 3.7 | 77.9 | 8.9 |
| Sep | 95.0 | 10.4 | 77.8 | 12.0 |
| Aug | 85.1 | 14.4 | 73.5 | 13.2 |
| Jul | 85.7 | 5.3 | 75.3 | 10.0 |
| Jun | 88.1 | 3.3 | 75.6 | 6.2 |
| May | 92.0 | 20.8 | 77.4 | 17.2 |
| Apr | 84.3 | 12.1 | 73.4 | 18.1 |
| Mar | 98.2 | 14.7 | 79.4 | 14.5 |
| Feb | 84.1 | 20.1 | 72.1 | 27.1 |
| Jan | 78.6 | 24.1 | 68.5 | 24.4 |
| Dec 2010 | 81.0 | 20.0 | 68.4 | 24.4 |
| Nov | 87.6 | 21.2 | 73.7 | 30.9 |
| Oct | 86.0 | 18.7 | 71.5 | 19.2 |
| Sep | 86.0 | 21.2 | 69.5 | 17.0 |
| Aug | 74.4 | 23.8 | 64.9 | 27.1 |
| Jul | 81.4 | 15.3 | 68.4 | 24.4 |
| Jun | 85.3 | 27.5 | 71.2 | 33.9 |
| May | 76.2 | 25.6 | 66.1 | 31.3 |
| Apr | 75.2 | 16.8 | 62.2 | 14.4 |
| Mar | 85.6 | 22.0 | 69.3 | 18.0 |
| Feb | 70.0 | 9.7 | 56.8 | 3.2 |
| Jan | 63.4 | -0.3 | 55.1 | -1.9 |
| Dec 2009 | 67.5 | 1.2 | 55.0 | -7.3 |
| Dec 2008 | 66.7 | -8.6 | 59.4 | -5.1 |
| Dec 2007 | 73.0 | -0.6 | 62.5 | -0.1 |
| Dec 2006 | 73.4 | 10.2 | 62.6 | 8.5 |
| Dec 2005 | 66.6 | 11.5 | 57.7 | 18.1 |
| Dec 2004 | 59.7 | 9.2 | 48.9 | 10.8 |
| Dec 2003 | 54.7 | 7.6 | 44.1 | 3.9 |
| Dec 2002 | 50.8 | 5.5 | 42.5 | 6.4 |
| Dec 2001 | 48.2 | -3.7 | 39.9 | -17.5 |
| Dec 2000 | 50.0 | 48.4 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table VE-2 provides monthly rates of growth of exports and imports of Germany. Exports fell 1.7 percent in Apr 2012, rebounding 3.9 percent in May and imports declined 4.9 percent, rebounding 6.3 percent in May 2012. The decline in 12-month growth rates in Mar 2012 is explained by the jump of 5.6 percent in exports in Mar 2011 and 2.5 percent in imports. Export growth and import growth were vigorous in Jan-Mar 2011 when Germany’s economy outperformed most advanced economies but less dynamic and consistently in following months.
Table VE-2, Germany, Exports and Imports Month ∆% Calendar and Seasonally Adjusted
| Exports | Imports | |
| May 2012 | 3.9 | 6.3 |
| Apr | -1.7 | -4.9 |
| Mar | 0.8 | 0.9 |
| Feb | 1.5 | 2.9 |
| Jan | 2.4 | 2.8 |
| Dec 2011 | -3.1 | -3.9 |
| Nov | 2.2 | -0.2 |
| Oct | -2.7 | 0.1 |
| Sep | 0.7 | -0.9 |
| Aug | 3.2 | -0.1 |
| Jul | -1.0 | 0.5 |
| Jun | -0.6 | -0.1 |
| May | 2.3 | 2.4 |
| Apr | -3.4 | -0.9 |
| Mar | 5.6 | 2.5 |
| Feb | 1.7 | 2.6 |
| Jan | 0.2 | 4.0 |
| Dec 2010 | 0.1 | -2.6 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-1 of the Statistisches Bundesamt Deutschland shows exports and trend of German exports. Growth has been with fluctuations around a strong upward trend.
Chart VE-1, Germany, Exports Original Value and Trend 2007-2011
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-2 of the Statistisches Bundesamt Deutschland provides German imports and trend. Imports also fell sharply and have been recovering with fluctuations around a strong upward trend that could be flattening.
Chart VE-2, Germany, Imports Original Value and Trend 2007-2012
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-3 of the Statistisches Bundesamt Deutschland shows the trade balance of Germany since 2007. There was sharp decline during the global recession and fluctuations around a mild upward trend during the recovery with stabilization followed by stronger trend in recent months.
Chart VE-3, Germany, Trade Balance Original and Trend 2007-2012
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
There is extremely important information in Table VE-3 for the current sovereign risk crisis in the euro zone. Table VE-3 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for May 2012. German exports to other European Union (EU) members are 57.9 percent of total exports in May 2012 and 58.1 percent in Jan-May 2012. Exports to the euro area are 41.8 percent in May and 38.7 percent in Jan-May. Exports to third countries are 42.1 percent of the total in May and 41.8 percent in Jan-May. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of its high share in exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table VE-3, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| May 2012 | May 12-Month | Jan–May 2012 € Billions | Jan-May 2012/ | |
| Total | 92.5 | 0.5 | 455.6 | 4.2 |
| A. EU | 53.6 % 57.9 | -1.5 | 265.3 % 58.1 | 0.8 |
| Euro Area | 38.7 % 41.8 | -2.3 | 176.5 % 38.7 | -0.1 |
| Non-euro Area | 17.8 % 19.2 | 0.2 | 88.7 % 19.5 | 3.7 |
| B. Third Countries | 38.9 % 42.1 | 3.4 | 190.3 % 41.8 | 9.4 |
| Total Imports | 77.2 | -0.2 | 380.4 | 2.6 |
| C. EU Members | 49.5 % 64.1 | 0.4 | 241.5 % 63.5 | 2.8 |
| Euro Area | 34.8 % 45.1 | -0.6 | 169.7 % 44.6 | 2.4 |
| Non-euro Area | 14.7 % 19.0 | 2.7 | 71.7 % 18.8 | 3.7 |
| D. Third Countries | 27.7 % 35.9 | -1.2 | 139.0 % 36.5 | 2.2 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistiche Bundesamt Deutschland
VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 44.6 in May to 47.3 in Jun, indicating contraction of private sector activity at a more moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that weak services and manufacturing survey data suggest contraction of GDP in IIQ2012 after no growth in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783).The Markit France Manufacturing Purchasing Managers’ Index® increased to 45.2 in Jun from 44.7 in May, which was the sharpest decline of the manufacturing economy in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing deterioration in manufacturing with IIQ2012 being the weakest quarter for French manufacturing in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Jun month ∆% 0.0 |
| PPI | May month ∆%: -1.1 Blog 7/2/12 |
| GDP Growth | IQ2012/IVQ2011 ∆%: 0.0 |
| Industrial Production | May SA ∆%: |
| Consumer Spending | May Manufactured Goods |
| Employment | IQ2012 Unemployed 2.746 million |
| Trade Balance | May Exports ∆%: month 1.3, 12 months 7.8 Apr Imports ∆%: month 0.1, 12 months 3.2 Blog 7/8/12 |
| Confidence Indicators | Historical averages 100 Jun Mfg Business Climate 92 Blog 6/24/12 |
Links to blog comments in Table FR:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules versus-discretionary-authorities_10.html
Table VF-2 provides longer historical perspective of manufacturing in France. Decline of manufacturing in five of the six months from Dec 2011 to May 2012 with cumulative decline of 3.1 percent from Dec 2011 to May 2012, or 6.1 percent annual equivalent, pulled down the 12-month percentage change to minus 4.3 percent in May 2012. In contrast, the increase of 1.4 percent in manufacturing in Mar 2012 reduced the decline in 12 months to minus 0.5 percent. In the quarter Dec 2011 to Feb 2012, manufacturing fell 2.6 at the annual equivalent rate of minus 9.9 percent. There is strength earlier in the recovery in 2010 and early 2011 with less strong performance in the latter part of 2011. Manufacturing fell 13.0 percent in 2008 during the global contraction and an additional 2.8 percent in 2009.
Table VF-1, France, Manufacturing, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| May 2012 | -1.0 | -4.3 |
| Apr | -0.9 | -1.6 |
| Mar | 1.4 | -0.5 |
| Feb | -1.0 | -3.5 |
| Jan | -0.1 | -1.7 |
| Dec 2011 | -1.5 | 0.4 |
| Nov | 1.2 | 2.1 |
| Oct | 0.2 | 2.7 |
| Sep | -2.4 | 1.7 |
| Aug | 0.5 | 4.8 |
| Jul | 1.4 | 3.9 |
| Jun | -2.2 | 3.3 |
| May | 1.7 | 4.1 |
| Apr | 0.2 | 3.4 |
| Mar | -1.6 | 4.2 |
| Feb | 0.9 | 7.2 |
| Jan | 2.1 | 6.4 |
| Dec 2010 | 0.1 | 5.1 |
| Dec 2009 | -2.8 | |
| Dec 2008 | -13.0 | |
| Dec 2007 | -0.2 | |
| Dec 2006 | 2.3 | |
| Dec 2005 | 0.0 | |
| Dec 2004 | 1.4 | |
| Dec 2003 | 0.4 | |
| Dec 2002 | -0.5 | |
| Dec 2001 | -4.9 | |
| Dec 2000 | 5.2 | |
| Annual | ||
| Average ∆% 1990-2000 | 1.6 | |
| Average ∆% 2000-2007 | 1.6 |
Source:
Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120710
Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques shows indices of manufacturing in France from 2008 to 2012. Manufacturing, which is CZ in Chart VF-1, fell deeply in 2008 and part of 2009. All curves of industrial indices tend to flatten recently with oscillations.
Chart VF-1, France, Industrial Production Indices 2007-2011
Legend : CZ : Manufacturing - (C1) : Manufacture of food products and beverages - (C3) : Electrical and electronic equipment; machine equipment - (C4) : Manufacture of transport equipment - (C5) : Other manufacturing
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120710
VG Italy. The Markit/ADACI Business Activity Index increased from 42.8 in May to 43.1 in Jun, indicating sharp contraction of output of Italy’s services sector in 13 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the combined manufacturing and services indexes suggest continuing recession in IIQ2012 at the sharpest rate since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). The Markit/ADACI Purchasing Managers’ Index® (PMI®), fell slightly from 44.8 in May to 44.6 in Jun for nine consecutive months of contraction of Italy’s manufacturing quite sharp relative to the history of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds continuing sharp contraction of new orders of manufacturing in Italy and manufacturing output lower than in the first quarter when it fell at a quarterly rate of 2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Jun month ∆%: 0.2 |
| Producer Price Index | May month ∆%: -0.3 Blog 7/2/12 |
| GDP Growth | IQ2012/IVQ2011 SA ∆%: minus 0.8 |
| Labor Report | Apr 2012 Participation rate 63.4% Employment ratio 57.0% Unemployment rate 10.2% Blog 6/3/12 |
| Industrial Production | May month ∆%: 0.8 |
| Retail Sales | Apr month ∆%: -1.6 Apr 12-month ∆%: -6.9 Blog 7/2/12 |
| Business Confidence | Mfg Jun 88.9, Feb 90.9 Construction Jun 85.6, Feb 84.6 Blog 7/2/12 |
| Consumer Confidence | Consumer Confidence May 86.5, Apr 88.8 Economy May 64.4, Apr 71.6 Blog 5/27/12 |
| Trade Balance | Balance Apr SA -€36 million versus Mar +€714 |
Links to blog comments in Table IT:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/27/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
Italy’s industrial production fell 2.0 percent in Apr 2012, pulling down the 12-month rate of growth to minus 9.3 percent, as shown in Table VG-1. Industrial production recovered with growth of 0.8 percent in May 2012 but growth in the 12 months ending in May 2012 was minus 6.9 percent. There have been negative changes with oscillations in monthly industrial production. Industrial production fell 18.8 percent in 2009 after falling 3.2 percent in 2008.
Table VG-1, Italy, Industrial Production ∆%
| Month ∆% SA | 12-Month ∆% Calendar Adjusted | |
| May 2012 | 0.8 | -6.9 |
| Apr | -2.0 | -9.3 |
| Mar | 0.7 | -5.6 |
| Feb | -0.8 | -6.9 |
| Jan | -2.7 | -4.8 |
| Dec 2011 | 1.2 | -1.7 |
| Nov | 0.1 | -4.1 |
| Oct | -0.9 | -3.9 |
| Sep | -4.9 | -2.6 |
| Aug | 3.5 | 4.8 |
| Jul | -0.9 | -1.1 |
| Jun | -0.8 | 0.4 |
| May | -1.4 | 2.1 |
| Apr | 1.7 | 4.0 |
| Mar | -0.2 | 3.4 |
| Feb | 1.5 | 2.5 |
| Jan | -0.8 | 0.2 |
| Dec 2010 | -0.6 | 6.7 |
| Nov | 0.8 | 5.5 |
| Oct | 0.0 | 4.2 |
| Sep | 0.2 | 5.8 |
| Aug | -0.7 | 11.4 |
| Jul | 0.6 | 7.5 |
| Jun | 0.7 | 9.9 |
| May | 0.9 | 8.9 |
| Apr | 0.9 | 9.5 |
| Mar | -0.2 | 8.5 |
| Feb | -0.3 | 4.5 |
| Jan | 4.0 | 0.6 |
| Dec 2009 | -1.3 | -6.6 |
| Year | ||
| 2011 | -0.7 | |
| 2010 | 7.0 | |
| 2009 | -18.8 | |
| 2008 | -3.2 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/66461
Chart VG-1 of Italy’s 12-month percentage changes of Italy’s industrial production are provided in Chart VG-1 of Istituto Nazionale di Statistica. There is trend of deterioration after Aug 2011, sharply deteriorating after Dec 2011 into 2012 with marginal recovery in May 2012 but still in negative territory.
Chart VG-1, Italy, Industrial Production, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Month and 12-month rates of growth of Italy’s industrial production and major categories are provided in Table VG-2 for May 2012. All growth rates in 12 months are sharply negative. Durable goods output decreased 3.0 percent in May 2012 and fell 12.2 percent relative to a year earlier.
Table VG-2, Italy, Industrial Production Rate of Change ∆%
| May 2012 | Month ∆% | 12-Month ∆% | Jan-May 12/Jan-May 11 ∆% |
| Total | 0.8 | -6.9 | -6.7 |
| Consumer Goods | -0.6 | -6.7 | -7.1 |
| Durable | -3.0 | -12.2 | -11.9 |
| Nondurable | -0.1 | -5.5 | -6.1 |
| Capital Goods | 0.3 | -5.7 | -4.2 |
| Intermediate Goods | 0.3 | -8.7 | -8.8 |
| Energy | 1.7 | -3.3 | -3.7 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/66461
VH United Kingdom. Revised annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of revised 4.0 percent in 2009 after dropping revised 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.
Table VH-UK, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.5 |
| 1999 | 3.2 |
| 2000 | 4.2 |
| 2001 | 2.9 |
| 2002 | 2.4 |
| 2003 | 3.8 |
| 2004 | 2.9 |
| 2005 | 2.8 |
| 2006 | 2.6 |
| 2007 | 3.6 |
| 2008 | -1.0 |
| 2009 | -4.0 |
| 2010 | 1.8 |
| 2011 | 0.8 |
| Average ∆% per Year | |
| 1948-2011 | 2.7 |
| 1948-1959 | 2.9 |
| 1960-1969 | 3.3 |
| 1970-1979 | 2.5 |
| 1980-1989 | 3.2 |
| 1990-1999 | 2.6 |
| 2000-2011 | 1.7 |
| 2000-2007 | 3.0 |
| 2009-2011 | 1.3 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q1-2012/index.html
http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
The Business Activity Index of the Markit/CIPS UK Services PMI® fell from 53.3 in May to 51.3 in Jun with growth during 18 months but at the weakest level since Oct 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). Chris Williamson, Chief Economist at Markit, finds that services grew only around 0.2 percent in IIQ2012, stagnating at the margin in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) increased from the three-year low of 45.9 in May to 48.6 in Jun with the average quarterly reading of 48.2 being the lowest since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds significant volatility from factors such as the jubilee holidays with production increase in Jun raising more favorable views but manufacturing output probably falling by around 0.5 percent in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748).
Table UK provides the country data table for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | May month ∆%: -0.1 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IQ2012 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: minus 0.2 |
| Industrial Production | May 2012/May 2011 NSA ∆%: Production Industries minus 1.6; Manufacturing minus 1.7 |
| Retail Sales | May month SA ∆%: +1.4 |
| Labor Market | Feb-Apr Unemployment Rate: 8.2%; Claimant Count 4.9%; Earnings Growth 1.4% |
| Trade Balance | Balance May minus ₤2717 million |
Links to blog comments in Table UK:
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
The UK Office for National Statistics provides the output of production industries with revisions. Table VH-1 incorporates the revisions released on Oct 11, 2011(http://www.ons.gov.uk/ons/rel/iop/index-of-production/august-2011/index.html) and the latest available data for May 2012. Manufacturing accounts for 66.6 percent of the production industries of the UK and decreased 1.7 percent in the 12 months ending in May. Capital goods industries grew at 2,8 percent in the 12 months ending in May 2012 and had been growing at very high rates during the current cyclical recovery but falling from the unsustainable high of 11.5 percent in the 12 months ending in Feb 2011. Mining and quarrying fell 9.6 percent in the 12 months ending in May 2012. The 12-month rates of growth of the entire index of production industries registered declines for all 12 months from Apr 2011 to May 2012. Energy and mining have been the drivers of decline. The lower part of Table VH-1 provides rates of change of yearly values. Manufacturing output fell 9.7 percent in 2009 after falling 2.5 percent in 2008 but grew at 3.8 percent in the initial phase of the recovery in 2010 and 2.1 percent in 2011.
Table VH-1, UK, Output of the Production Industries, Chained Volume Indices of Gross Value Added, 12-Month ∆%
| PROD | MNG | MFG | ENGY | CON | CON | CAP | |
| 2012 | |||||||
| May | -1.6 | -9.6 | -1.7 | -3.5 | -1.6 | -5.2 | 2.8 |
| Apr | -2.0 | -14.5 | -1.5 | -5.8 | 0.1 | -5.4 | 3.3 |
| Mar | -2.8 | -9.4 | -1.5 | -8.3 | -5.0 | -2.2 | 0.7 |
| Feb | -2.5 | -8.9 | -2.1 | -4.3 | -5.7 | -0.9 | -1.2 |
| Jan | -3.9 | -20.4 | -0.5 | -14.6 | -5.6 | 0.6 | 2.9 |
| 2011 | |||||||
| Dec | -2.7 | -14.2 | 0.6 | -14.4 | -3.9 | -0.6 | 6.0 |
| Nov | -3.1 | -13.4 | -1.2 | -11.5 | 0.3 | -1.4 | 4.4 |
| Oct | -2.3 | -12.7 | -0.6 | -10.9 | -1.8 | -2.0 | 4.1 |
| Sep | -1.5 | -16.1 | 0.7 | -10.9 | -1.6 | -1.1 | 6.5 |
| Aug | -1.2 | -14.4 | 0.8 | -9.1 | -1.7 | 0.7 | 3.9 |
| Jul | -0.9 | -15.8 | 2.1 | -10.5 | 1.6 | 3.3 | 4.1 |
| Jun | -0.3 | -15.1 | 3.0 | -9.4 | 6.8 | 1.5 | 7.1 |
| May | -1.0 | -21.0 | 3.6 | -13.3 | 2.0 | 3.3 | 6.4 |
| Apr | -1.0 | -14.8 | 2.6 | -11.2 | 0.9 | 3.9 | 5.2 |
| Mar | 0.1 | -16.0 | 3.4 | -10.5 | 2.1 | 0.4 | 9.8 |
| Feb | 1.9 | -11.7 | 5.0 | -7.4 | 1.0 | 0.8 | 11.5 |
| Jan | 3.5 | -3.5 | 5.6 | -3.2 | 4.1 | -0.7 | 10.4 |
| 2011/ 2010 | -0.7 | -14.1 | 2.1 | -10.2 | 0.8 | 0.7 | 6.5 |
| 2010/ | 2.1 | -4.3 | 3.8 | -3.0 | -4.1 | -0.5 | 10.2 |
| 2009/ 2008 | -9.1 | -9.0 | -9.7 | -6.6 | -6.7 | -0.8 | -10.2 |
| 2008/ 2007 | -2.8 | -6.2 | -2.5 | -3.1 | -5.6 | -1.6 | -3.0 |
Notes: PROD IND: Production Industries; MNG: Mining; MFG: Manufacturing; ENGY: Energy; CON DUR: Consumer Durables; CONS NDUR: Consumer Nondurables; CAP: Capital Goods
Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/may-2012/stb-iop-may-2012.html
Percentage changes in the production industries and major components in a month relative to the prior month are shown in Table VH-2. Manufacturing fell in all months from Jun 2011 to Nov 2011 with the exception of no growth in Sep 2011. Manufacturing fell in four of the six months from Nov 2011 to Apr 2012. In Dec, manufacturing grew 1.0 percent but decreased 0.3 percent in Jan 2012 and 1.3 percent in Feb 2012, growing 0.9 percent in Mar 2012 and declining 0.8 percent in Apr 2012 but growing 1.2 percent in May 2012. Growth was stronger in the first five months to May 2011 with the exception of decline by 0.8 percent in Apr. Output of consumer durables fell sharply from Jul 2011 to Feb 2012 by cumulative 6.4 percent with growth only in Nov by 1.5 percent but jumped 1.8 percent in Jan 2012. Consumer durables grew 4.9 percent in Mar-Apr 2012, declining 0.5 percent in May 2012 relative to Apr 2012. Output of capital goods fell 1.9 percent cumulatively from July 2011 to Feb 2012 and then gained 3.3 percent from Mar to May 2012.
Table VH-2, UK, Output of the Production Industries, Chained Volume Indices of Gross Value Added, Latest Month on Previous Month ∆%
| PROD | MNG | MFG | ENGY | CON | CON | CAP | |
| 2012 | |||||||
| May | 1.0 | 0.0 | 1.2 | 0.9 | -0.5 | 2.2 | 0.8 |
| Apr | -0.4 | -5.5 | -0.8 | 0.9 | 3.3 | -2.6 | -0.4 |
| Mar | -0.2 | -1.7 | 0.9 | -4.7 | 1.5 | -0.4 | 2.9 |
| Feb | 0.1 | 3.3 | -1.3 | 4.8 | -1.5 | -0.8 | -2.3 |
| Jan | -0.6 | -2.8 | -0.3 | -1.7 | 1.8 | -0.3 | -1.1 |
| 2011 | |||||||
| Dec | 0.4 | -2.8 | 1.0 | -1.5 | -0.7 | 1.2 | 0.4 |
| Nov | -0.5 | -1.7 | -0.3 | -0.9 | 1.5 | -0.5 | 1.4 |
| Oct | -1.1 | -0.2 | -1.1 | -1.5 | -0.7 | -0.5 | -1.4 |
| Sep | -0.1 | -1.4 | 0.0 | -1.3 | -2.5 | -2.0 | 2.2 |
| Aug | 0.0 | 1.7 | -0.6 | 1.0 | -2.0 | -0.2 | -0.4 |
| Jul | -0.2 | 0.2 | -0.1 | -0.6 | -2.4 | 0.3 | -0.6 |
| Jun | 0.1 | 1.1 | -0.4 | 1.1 | 0.8 | -0.3 | 0.0 |
| May | 0.6 | -5.5 | 1.4 | -1.5 | 1.3 | 0.4 | 2.8 |
| Apr | -1.2 | 0.2 | -0.8 | -1.7 | -2.0 | 0.7 | -2.9 |
| Mar | 0.1 | -1.1 | 0.3 | -0.6 | 0.7 | 1.0 | 1.0 |
| Feb | -1.3 | -9.7 | 0.3 | -6.5 | -1.4 | 0.7 | 1.7 |
| Jan | 0.6 | 4.7 | 0.8 | -1.5 | 3.6 | -1.5 | 1.9 |
| 2010 | |||||||
| Dec | 0.1 | -1.9 | -0.8 | 1.9 | 3.6 | 0.4 | -1.2 |
Notes: PROD IND: Production Industries; MNG: Mining; MFG: Manufacturing; ENGY: Electricity, Gas and Water Supply; CON DUR: Consumer Durables; CONS NDUR: Consumer Nondurables; CAP: Capital Goods
Source:
http://www.ons.gov.uk/ons/rel/iop/index-of-production/may-2012/stb-iop-may-2012.html
The weights of components of the production index and contributions by components to the monthly and 12-month percentage changes of volume are provided in Table VH-3. The 12-month rate of output of the production industries of minus 1.6 percent was driven by negative contribution of 1.16 percentage points of the general component of mining with the subcomponent of oil and gas contributing negative 1.27 percentage points. Manufacturing deducted 1.20 percentage points to growth of the production industries index. The contribution of manufacturing is strong because of its share of 66.6 percent in the production index with growth of minus 1.7 percent in 12 months. The contributions do not add exactly because of rounding. Manufacturing increased 1.2 percent in May, contributing 0.84 percentage points. Decline of mining by 0.06 percent contributed minus 0.05 percentage points.
Table VH-3, UK, Weights of Components, Volume 12-Month and Month ∆% and Percentage Point Contributions of Production Industries by Components
| Weight % | Volume 12-Month ∆% Ending in May 2012 | % Point | Volume | % Point | |
| PROD | 100.0 | -1.6 | -1.60 | 1.0 | 1.02 |
| MNG | 15.4 | -9.6 | -1.16 | 0.0 | 0.00 |
| MNG 06 | 12.6 | -13.9 | -1.27 | -0.6 | -0.05 |
| MFG | 67.0 | -1.7 | -1.20 | 1.2 | 0.84 |
| ELEC | 9.6 | 6.5 | 0.61 | 2.4 | 0.24 |
| WATER | 8.0 | 2.0 | 0.16 | -0.7 | -0.06 |
Notes: Contrib: Contribution; PROD IND: Index of Production; MNG: Mining and Quarrying (of which 14.4 percent of the total weight in oil and gas extraction); MNG 06: Subdivision of Mining including oil and gas extraction; MFG: Manufacturing; ELEC: Electricity, gas, steam and air conditioning; WATER & SEW: water supply, sewerage and waste management
Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/may-2012/stb-iop-may-2012.html
Table VH-4 provides the breakdown of manufacturing 12-month and monthly growth and percentage contributions. The strongest negative contribution to 12-month growth was by CF basic pharmaceutical products and preparations (CF), deducting 0.66 percentage points with 12-month growth of minus 13.2 percent. Manufacture of food products, beverages and tobacco (CA) deducted 0.51 percentage points with 12-month growth of minus 3.9 percent. The highest positive contribution was 0.65 percentage points by transport equipment (CL), growing 8.8 percent. Electrical products (CJ) added 0.32 percentage points with growth of 14.8 percent.
Table VH-4, UK, Growth Rates of Manufacturing and Percentage Point Contributions to the Index of Production
| Sub-sector | % of production | Apr 2012 12-Month Growth % | Contribution to production (% points) | Apr 2012 Month on month growth (%) | Contribution to production (% points) |
| CA | 11.9 | -3.9 | -0.51 | 2.2 | 0.27 |
| CB | 2.0 | -0.3 | -0.01 | 2.2 | 0.05 |
| CC | 5.5 | -5.4 | -0.27 | -0.3 | -0.01 |
| CD | 0.8 | -3.3 | -0.03 | -0.9 | -0.01 |
| CE | 6.1 | -2.9 | -0.18 | -0.5 | -0.03 |
| CF | 6.1 | -13.2 | -0.66 | -3.9 | -0.18 |
| CG | 4.7 | -2.6 | -0.12 | 3.7 | 0.16 |
| CH | 8.6 | -0.5 | -0.05 | 1.4 | 0.13 |
| CI | 4.3 | 2.7 | 0.11 | -1.2 | -0.05 |
| CJ | 2.1 | 14.8 | 0.32 | 0.6 | 0.01 |
| CK | 4.8 | -0.1 | -0.01 | 1.3 | 0.08 |
| CL | 5.7 | 8.8 | 0.65 | 3.7 | 0.30 |
| CM | 4.5 | -9.1 | -0.45 | 2.6 | 0.12 |
Notes:
CA Manufacture of food products, beverages and tobacco; CB Textiles, wearing apparel and leather products; CC Wood and paper products and printing; CD Coke and refined petroleum products; CE Chemicals and chemical products; CF Basic pharmaceutical products and preparations; CG Rubber and plastic products and nonmetallic mineral products; CH Basic metals and metal products; CI Computer, electronic and optical products; CJ Electrical equipment; CK Machinery and equipment not elsewhere classified; CL Transport equipment; CM Other manufacturing and repair.
Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/may-2012/stb-iop-may-2012.html
The UK’s trade account is shown in Table VH-5. In May 2012, the UK ran a deficit in trade of goods and services (total trade) of ₤2717 million. The deficit in trade of goods was ₤8363 million and ₤7253 million in goods excluding oil. A surplus in services of ₤5646 million contributed to the smaller overall deficit in goods and services (-₤8363 million plus ₤5646 equal to -₤2717). Services have contributed to lower trade account deficits and also softened the impact of the global recession on the UK economy. Exports of goods and services increased 4.8 percent in May 2012 and rose 0.2 percent in the quarter Mar-May 2012 relative to the same quarter a year earlier with imports increasing 1.2 percent in May and rising 3.4 percent in Mar-May 2012 relative to the same quarter a year earlier. Excluding oil, UK exports of goods increased 7.4 percent in May and increased 2.8 percent in Mar-May 2012 relative to a year earlier while imports increased 0.8 percent in May and increased 2.7 percent in Mar-May 2012 relative to a year earlier. The great advantage of the UK similar to the US is the substantial surplus in services. Services exports increased 0.2 percent in May and fell 2.7 percent in Mar-May 2012 relative to a year earlier and imports were flat in May and increased 0.4 percent Mar-May 2012 relative to a year earlier.
Table VH-5, Value of UK Trade in Goods and Services, Balance of Payments Basis, ₤ Million and ∆%
| ₤ Million SA May 2012 | Month ∆% | Mar-May 2012 ∆% Mar-May 2011 | |
| Total Trade | |||
| Exports | 41,188 | 4.8 | 0.2 |
| Imports | 43,905 | 1.2 | 3.4 |
| Balance | -2,717 | ||
| Trade in Goods | |||
| Exports | 25,678 | 7.8 | 2.1 |
| Imports | 34,041 | 1.5 | 4.3 |
| Balance | -8,363 | ||
| Trade in Goods Excluding Oil | |||
| Exports | 22,052 | 7.4 | 2.8 |
| Imports | 29,305 | 0.8 | 2.7 |
| Balance | -7,253 | ||
| Trade in Services | |||
| Exports | 15,510 | 0.2 | -2.7 |
| Imports | 9,864 | 0.0 | 0.4 |
| Balance | 5,646 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/may-2012/index.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 2.8 percent by Fri Jul 13, 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 | 7/13/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2248 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 7/13/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3868 |
| 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 1.2248/EUR on Jul 13, 2012 or by 2.8 percent {[(1.2248/1.192)-1]100 = 2.8%}. 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. Risk aversion erodes devaluation of the dollar. 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 6.3868/USD on Fri Jul 13, 2012, or by an additional 6.4 percent, for cumulative revaluation of 22.8 percent.
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 | 7/13/ |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2248 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 7/13/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3868 |
| Weekly Rates | 6/22/2012 | 6/29/2012 | 7/6/2012 | 7/13/ 2012 |
| CNY/USD | 6.3650 | 6.3552 | 6.3658 | 6.3868 |
| ∆% from Earlier Week* | 0.0 | 0.2 | -0.2 | -0.3 |
*Negative sign is depreciation, positive sign is 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
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). Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Jul 13, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. After depreciation of 0.5 percent in the week of Jun 5 and 0.1 percent in the week of Jun 8 but appreciation of 0.1 percent in the week of Jun 15 and no change in the week of Jun 22 but revaluation of 0.2 percent in the week of Jun 29 (see Table VI-2), the CNY has appreciated 0.1 percent relative to Oct 28, 2011, as shown in Table VI-2A. The CNY devalued by 0.2 percent relative to the USD in the week of Jul 6, 2012 and an additional 0.3 percent in the week of Jul 13, 2012, such that, as shown in Table VI-2A, there is marginal devaluation of 0.4 percent of the CNY relative to the USD by Jul 13, 2012. 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-2A, Renminbi Yuan US Dollar Rate
| CNY/USD | ∆% from 10/28/2011 | |
| 7/13/12 | 6.3868 | -0.4 |
| 7/6/12 | 6.3658 | -0.1% |
| 6/29/12 | 6.3552 | 0.1 |
| 6/22/12 | 6.3650 | -0.1 |
| 6/15/12 | 6.3678 | -0.1 |
| 6/8/2012 | 6.3752 | -0.3 |
| 6/1/2012 | 6.3708 | -0.2 |
| 4/27/2012 | 6.3016 | 0.9 |
| 3/23/2012 | 6.3008 | 0.9 |
| 2/3/2012 | 6.3030 | 0.9 |
| 12/30/2011 | 6.2940 | 1.0 |
| 11/25/2011 | 6.3816 | -0.4 |
| 10/28/2011 | 6.3588 | - |
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 the CNY/USD exchange rate from 2009 to 2012. China fixed the CNY/USD rate until Jun 7, 2010, to avoid adverse effects on its economy from the global recession, which is shown as a horizontal segment from 2009 until mid 2010. China then continued the policy of appreciation of the CNY relative to the USD with oscillations until the beginning of 2012 when the rate began to move sideways followed by a final upward slope of devaluation that is measured in Table VI-2A. Revaluation of the CNY relative to the USD by 22.8 percent by Jul 13, 2012 has not reduced the trade surplus of China but reversal of the policy of revaluation could result in international confrontation.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (USD) 2009-2012
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
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 current account of the US balance of payments is provided in Table VI-A for IQ2011 and IQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $119.9 billion in IQ2011, or 3.2 percent of GDP to $137.3 billion in IQ2012, or 3.6 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table VI-3A, US Balance of Payments, Millions of Dollars NSA
| IQ2011 | IQ2012 | Difference | |
| Goods Balance | -181,358 | -194,462 | -13,104 |
| X Goods | 360,917 | 388,501 | 11.0 ∆% |
| M Goods | -542,276 | -582.963 | 12.9 ∆% |
| Services Balance | 44,133 | 43,465 | -668 |
| X Services | 147,894 | 154,420 | 9.1 ∆% |
| M Services | -103,761 | -110,955 | 8.0 ∆% |
| Balance Goods and Services | -137,225 | -150,997 | -13,772 |
| Balance Income | 52,451 | 47,571 | -4,880 |
| Unilateral Transfers | -35,223 | -33,887 | 1,336 |
| Current Account Balance | -119,997 | -137,313 | -17,316 |
| % GDP | IQ2011 | IVQ2011 | IQ2012 |
| 3.2 | 3.1 | 3.6 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: Bureau of Economic Analysis
http://www.bea.gov/international/index.htm#bop
In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.
This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.
The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):
“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”
The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table VI-3B provides data on US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012MarBEO, 2) estimates the federal deficit in 2012 at $1171 billion or 7.6 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5178 billion or 33 percent of the estimate of GDP of $15,508 billion for 2012 by the CBO (2012MarBEO, 2). Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5178 billion, and corresponded to 36.3 percent of GDP. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 73.2 percent of GDP in 2012 (CBO2012MarBEO, 2). This situation may worsen in the future (CBO 2012LTBO):
“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”
Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Goods & | -377 | -697 | -698 | -379 | -495 | -559 |
| Income | 19 | 101 | 147 | 119 | 184 | 227 |
| UT | -58 | -115 | -126 | -122 | -131 | -133 |
| Current Account | -416 | -710 | -677 | -382 | -442 | -466 |
| NGDP | 9951 | 14028 | 14291 | 13939 | 14526 | 15094 |
| Current Account % GDP | -3.8 | -5.0 | -4.9 | -2.7 | -3.4 | -3.7 |
| NIIP | -1337 | -1796 | -3260 | -2396 | -2471 | NA |
| NIIP % GDP | -13.4 | -12.8 | -22.8 | -17.2 | -17.0 | NA |
| Exports | 1425 | 2488 | 2657 | 2181 | 2519 | 2848 |
| NIIP % | -94 | -72 | -123 | -110 | -98 | NA |
| DIA MV | 2694 | 5274 | 3102 | 4331 | 4843 | NA |
| DIUS MV | 2783 | 3551 | 2486 | 3027 | 3451 | NA |
| Fiscal Balance | +236 | -161 | -459 | -1413 | -1294 | -1300 |
| Fiscal Balance % GDP | +2.4 | -1.2 | -3.2 | -9.9 | -8.9 | -8.7 |
| Federal Debt | 3410 | 5035 | 5803 | 7545 | 9019 | 10128 |
| Federal Debt % GDP | 34.7 | 36.3 | 40.5 | 54.1 | 62.8 | 67.7 |
| Federal Outlays | 1789 | 2729 | 2983 | 3518 | 3456 | 3598 |
| ∆% | 5.1 | 2.8 | 9.3 | 17.9 | -1.8 | 4.1 |
| % GDP | 18.2 | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 |
| Federal Revenue | 2052 | 2568 | 2524 | 2105 | 2162 | 2303 |
| ∆% | 10.8 | 6.7 | -1.7 | -16.6 | 2.7 | 6.5 |
| % GDP | 20.6 | 18.5 | 17.6 | 15.1 | 15.1 | 15.4 |
Sources:
Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which they original number of the CBO source is maintained. These discrepancies do not alter conclusions.
Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop
Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/national/index.htm#gdp
Federal Outlays, Revenues and Debt, Congressional Budget Office (CBO) http://www.cbo.gov/publication/42911
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 IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.5 percent, which is the lowest since the global recession (see subsection VC and earlier 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. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm).
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.7 percent in 2011, 1.7 percent in annual equivalent in the five quarters from IQ2011 to IQ2012 and 2.0 percent in IQ2012 relative to IQ2011 (http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html). (ii) The labor market continues fractured with 28.4 million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). There are over 10 million fewer full-time jobs and hiring has collapsed (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5178 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (see Section VA http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 67.7 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012MarBEO, 2) at 73.2 percent in 2012. The CBO (2012MarBEO) 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 but grew 2.8 percent in IQ2012 relative to a year earlier and 1.2 percent in IQ2012 relative to IVQ2011. The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012, falling 0.1 percent relative to a year earlier in IQ2011; Germany’s GDP fell 0.2 percent in IVQ2011 but grew 0.5 percent in IQ2012; and the UK’s GDP fell 0.4 percent in IVQ2011 and 0.3 percent in IQ2012 and declined 0.2 percent in IQ2012 relative to IQ2011. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and 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 31.9 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 32.7 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 Jun 20, 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 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.” (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.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. 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.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ), 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 and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). 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/2011/01/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 7/13/12,” 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, 2011, 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 [(1.018)4], which was repeated in IIQ2012. 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. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China. The highest valuations in column “∆% Trough to 7/13/12” are by US equities indexes: DJIA 31.9 percent and S&P 500 32.7 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 13,331.77 in intraday trading 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 7/13/12” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations of equity indexes show increase of less than 10 percent: China’s Shanghai Composite is 8.3 percent below the trough; STOXX 50 of Europe is 6.2 percent above the trough; Japan’s Nikkei Average is 1.3 percent below the trough; DJ Asia Pacific TSM is 3.1 percent above the trough; Dow Global is 5.6 percent above the trough; and NYSE Financial is 4.6 percent above the trough. DJ UBS Commodities is 13.2 percent above the trough. DAX is 15.6 percent above the trough. Japan’s Nikkei Average is 1.3 percent below the trough on Aug 31, 2010 and 23.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8724.12 on Fri Jul 13, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 14.9 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 2.8 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 7/13/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Jul 13, 2012 such as 0.5 for New York Stock Exchange Financial, 0.7 percent for STOXX 50 of European equities and 2.3 percent for DAX of German equities. DJ UBS Commodities increased 2.5 percent. Other valuations decreased such as 0.9 percent for Dow Global, 2.6 percent for DJ Asia Pacific, 3.3 percent for Nikkei Average and 1.7 percent for Shanghai Composite. The DJIA was flat and S&P 500 increased 0.2 percent. There are still high uncertainties on European sovereign risks and banking soundness, 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 7/13/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jul 13, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 7/13/12” but also relative to the peak in column “∆% Peak to 7/13/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 14.0 percent, S&P 500 11.5 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 16.7 percent, Nikkei Average by 23.4 percent, Shanghai Composite by 30.9 percent, DJ Asia Pacific by 9.8 percent, STOXX 50 by 10.0 percent and Dow Global by 13.8 percent. DJ UBS Commodities Index is now 3.2 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 2010 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 7/13 /12 | ∆% Week 7/6/13 | ∆% Trough to 7/13 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 14.0 | 0.0 | 31.9 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 11.5 | 0.2 | 32.7 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -16.7 | 0.5 | 4.6 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -13.8 | -0.9 | 5.6 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -9.8 | -2.6 | 3.1 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -23.4 | -3.3 | -1.3 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -30.9 | -1.7 | -8.3 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -10.0 | 0.7 | 6.2 |
| DAX | 4/26/ | 5/25/ | -10.5 | 3.6 | 2.3 | 15.6 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 19.0 | 0.3 | -2.8 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -3.2 | 2.5 | 13.2 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.49 |
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 Jul 13, 2012, shows that the S&P 500 is now 11.9 percent above the Apr 26, 2010 level and the DJIA is 14.0 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded 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 |
| May 11 | -1.7 | 14.4 | -1.1 | 11.7 |
| May 18 | -3.5 | 10.4 | -4.3 | 6.4 |
| May 25 | 0.7 | 11.2 | 1.7 | 8.7 |
| Jun 1 | -2.7 | 8.2 | -3.0 | 5.4 |
| Jun 8 | 3.6 | 12.0 | 3.7 | 9.4 |
| Jun 15 | 1.7 | 13.9 | 1.3 | 10.8 |
| Jun 22 | -1.0 | 12.8 | -0.6 | 10.1 |
| Jun 29 | 1.9 | 14.9 | 2.0 | 12.4 |
| Jul 6 | -0.8 | 14.0 | -0.5 | 11.8 |
| Jul 13 | 0.0 | 14.0 | 0.2 | 11.9 |
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 14.2 percent to ZAR 8.2687/USD on Jul 13, 2012, which is still 28.6 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 6.2 percent stronger at SGD 1.2648/USD on Jul 13, 2012 relative to the trough of depreciation but still stronger by 18.6 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 17.3 percent relative to the trough to BRL 2.0380/USD on Jul 13, 2012 but still stronger by 16.1 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 50 basis points for the seventh consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3613&IDPAI=NEWS):
“Copom reduces the Selic rate to 8.0 percent
11/07/2012 8:35:00 PM
Brasília - Continuing the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 8.00 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 | Jul 13, 2012 | ∆% T Jul 13, 2012 | ∆% P Jul 13, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 7/13 2012 | |||
| Rate | 1.59 | 1.192 | 1.2248 | |||
| ∆% | -33.4 | 2.7 | -29.8 | |||
| JPY USD | 8/18 | 9/15 | 7/13 2012 | |||
| Rate | 110.19 | 83.07 | 79.2 | |||
| ∆% | 24.6 | 4.7 | 28.1 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 7/13 2012 | |||
| Rate | 1.225 | 1.025 | 0.9805 | |||
| ∆% | 16.3 | 4.3 | 19.9 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 7/13 2012 | |||
| Rate | 2.006 | 1.388 | 1.5574 | |||
| ∆% | -44.5 | 10.9 | -28.8 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 7/13 | |||
| Rate | 1.0215 | 1.6639 | 1.0227 | |||
| ∆% | -62.9 | 41.2 | 4.3 | |||
| ZAR USD | 10/22 2008 | 8/15 | 7/13 2012 | |||
| Rate | 11.578 | 7.238 | 8.2687 | |||
| ∆% | 37.5 | -14.2 | 28.6 | |||
| SGD USD | 3/3 | 8/9 | 7/13 | |||
| Rate | 1.553 | 1.348 | 1.2648 | |||
| ∆% | 13.2 | 6.2 | 18.6 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 7/13 | |||
| Rate | 7.813 | 7.752 | 7.7577 | |||
| ∆% | 0.8 | -0.1 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 7/13 2012 | |||
| Rate | 2.43 | 1.737 | 2.0380 | |||
| ∆% | 28.5 | -17.3 | 16.1 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 7/13 | |||
| Rate | 22.19 | 18.693 | 20.762 | |||
| ∆% | 15.7 | -11.1 | 6.4 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 7/13 2012 | |||
| Rate | 9.313 | 7.108 | 7.0324 | |||
| ∆% | 23.7 | 1.1 | 24.5 | |||
| CNY USD | 7/20 2005 | 7/15 | 7/13 | |||
| Rate | 8.2765 | 6.8211 | 6.3868 | |||
| ∆% | 17.6 | 6.4 | 22.8 |
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-2, 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-3, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Chart VI-4 of the Bank of Japan provides the end of month JPY/USD rate from 1980 to 2012. There is major appreciation of the JPY relative to the USD from the 1980s into the 1990s and typical stationary behavior until just before the global recession. There is significant appreciation of the yen through the global recession and during the current expansion. The yen has become safe haven from international financial risks, eroding the international competitiveness of Japan.
Chart VI-4, Japanese Yen JPY per US Dollars USD, End of Month 1980-2012
Source: Bank of Japan
http://www.boj.or.jp/en/statistics/market/forex/fxdaily/index.htm/
Finer detail on the JPY/USD is provided by Chart VI-5 of the Bank of Japan with the end of month JPY/USD from 2007 to 2012. The JPY began to appreciate relative to the USD during the international financial stress beginning in Mar 2007 when Chinese equities declined sharply followed by a global financial crisis and recession. Japan did not experience stress in its financial markets similar to those in Europe and the US such as in assets backed by mortgages with high default risk. The JPY has continued to appreciate with oscillations, creating various difficulties for the Japanese economy (see Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a), 70-5 and Section IIIB Appendix on Safe Haven Currencies).
Chart VI-5, Japanese Yen JPY per US Dollars USD, End of Month 2007-2012
Source: Bank of Japan
http://www.boj.or.jp/en/statistics/market/forex/fxdaily/index.htm/
Chart IV-6 of the Bank of Japan provides the rate of USD/EUR from 2000 to 2012. The EUR strengthened relative to the USD throughout the period before the financial crisis, reaching a peak of USD 1.59/EUR on Jul 15, 2008 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The USD then strengthened sharply in 2008 and early 2008 after the event of toxic assets in banks to be withdrawn by TARP, which caused flight to the USD and US government obligations (Cochrane and Zingales 2009). After risk aversion diminished the dollar depreciated again relative to the EUR by carry trades of short positions in US debt instruments and the USD together with long positions in commodities and multiple risk financial assets. The USD appreciated again to USD 1.192/EUR on Jun 7, 2010 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata) when the sovereign debt crisis in Europe caused flight into the USD and government obligations of the US. With zero fed funds rates and risk appetite the USD depreciates relative to the EUR and with zero fed funds rates and risk aversion the USD appreciates relative to the EUR. In fact, Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports to promote growth of GDP.
Chart VI-6, US Dollars USD per Euro EUR, Daily Closing Japanese Standard Time 2000-2012
Source: Bank of Japan
http://www.boj.or.jp/en/statistics/market/forex/fxdaily/index.htm/
The exchange rate of the Brazilian Real (BRL) relative to the USD is provided in Chart VI-7 of the Board of Governors of the Federal Reserve System for the period from 2009 to 2012. The BRL appreciated sharply relative to the USD along a trend with oscillations until the final part of 2011 when it began a trend of depreciation also with oscillations. Excessive appreciation of the BRL deteriorates the international competitiveness of Brazil’s economic activities as well as in competition with imports in the domestic market.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD) 2009-2012
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
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 1.49 percent at the close of market on Fri Jul 13, 2012 would be equivalent to price of 110.5086 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 9.1 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 Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. 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. These losses defy annualizing. 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 Jul 11, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2849 billion, or $2.8 trillion, with portfolio of long-term securities of $2584 billion, or $2.6 trillion, consisting of $1569 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $91 billion Federal agency debt securities and $855 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1526 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 |
| 05/11/12 | 1.845 | 107.0930 | 5.8 |
| 05/18/12 | 1.714 | 108.3393 | 7.0 |
| 05/25/12 | 1.738 | 108.1098 | 6.8 |
| 06/01/12 | 1.454 | 110.8618 | 9.5 |
| 06/08/12 | 1.635 | 109.0989 | 7.7 |
| 06/15/12 | 1.584 | 109.5924 | 8.2 |
| 06/22/12 | 1.676 | 108.7039 | 7.4 |
| 06/29/12 | 1.648 | 108.9734 | 7.6 |
| 07/06/12 | 1.548 | 109.9423 | 8.6 |
| 07/13/12 | 1.49 | 110.5086 | 9.1 |
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
Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury. There was sharp reduction of the yields until they reached a low point just above 3 percent in mid 2003. Yields rose again to a range of 4 to 5 percent until the financial crisis in 2007 when they declined sharply. There has been a trend of decline of yields with oscillations. During periods of risk aversion investor seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities.
Chart VI-8, US, Ten-Year Treasury Constant Maturity Yield 2001-2012
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
VII Economic Indicators. Crude oil input in refineries increased 0.2 percent to 15,665 thousand barrels per day on average in the four weeks ending on Jul 6, 2012 from 15,626 thousand barrels per day in the four weeks ending on Jun 29, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 92.3 percent on Jul 6, 2012, which is higher than 88.4 percent on Jul 8, 2011 and higher than 92.1 percent on Jun 29, 2012. Imports of crude oil decreased 1.4 percent from 9,075 thousand barrels per day on average in the four weeks ending on Jun 29 to 8,952 thousand barrels per day in the week of Jul 6. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.6 million barrels per day last week, down by 148 thousand barrels per day from the previous week [Jun 29]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Increasing utilization in refineries with decreasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 4.7 million barrels from 382.9 million barrels on Jun 29 to 378.2 million barrels on Jul 6. Motor gasoline production decreased 0.6 percent to 9,252 thousand barrels per day in the week of Jul 6 from 9,310 thousand barrels per day on average in the week of Jun 29. Gasoline stocks increased 2.7 million barrels and stocks of fuel oil increased 3.1 million barrels. Supply of gasoline decreased from 9,226 thousand barrels per day on Jul 8, 2011, to 8,864 thousand barrels per day on Jul 6, 2012, or by 3.9 percent, while fuel oil supply increased 2.7 percent. Part of the fall in consumption of gasoline is due to high prices and part to the growth recession. WTI crude oil price traded at $84.37/barrel on Jul 6, 2012, decreasing 12.3 percent relative to $96.20/barrel on Jul 8, 2011. Gasoline prices fell 6.3 percent from Jul 11, 2011 to Jul 9, 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 | 7/6/12 | 6/29/12 | 7/8/11 |
| Crude Oil Refineries Input | 15,665 Week ∆%: 0.2 | 15,626 | 15,265 |
| Refinery Capacity Utilization % | 92.3 | 92.1 | 88.4 |
| Motor Gasoline Production | 9,252 Week ∆%: -0.6 | 9,310 | 9,266 |
| Distillate Fuel Oil Production | 4,664 Week ∆%: -0.1 | 4,668 | 4,405 |
| Crude Oil Imports | 8,952 Week ∆%: -1.4 | 9,075 | 9,185 |
| Motor Gasoline Supplied | 8,864 ∆% 2012/2011= -3.9% | 8,918 | 9,226 |
| Distillate Fuel Oil Supplied | 3,606 ∆% 2012/2011 = 2.7% | 3,717 | 3,510 |
| 7/6//12 | 6/29/12 | 7/8/11 | |
| Crude Oil Stocks | 378.2 ∆= -4.7 MB | 382.9 | 355.5 |
| Motor Gasoline Million B | 207.7 ∆= +2.7 MB | 205.0 | 211.7 |
| Distillate Fuel Oil Million B | 120.9 | 117.8 | 145.0 |
| WTI Crude Oil Price $/B | 84.37 ∆% 2012/2011 -12.3 | 85.04 | 96.20 |
| 7/9/12 | 7/2/12 | 7/11/11 | |
| Regular Motor Gasoline $/G | 3.411 ∆% 2012/2011 | 3.356 | 3.641 |
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 and more recent declines.
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 provides the evolution of crude oil stocks in the US since 2007. There have been oscillations around an upward trend followed by recent declines.
Chart VII-2, US, Crude 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. Risk aversion resulted in another drop in recent weeks.
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 typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 26,000 from 376,000 on Jun 30, 2012, to 350,000 on Jul 7. Claims not adjusted for seasonality increased 69,971 from 369,772 on Jun 30, 2012 to 439,743 on Jul 7. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Jul 7, 12 | 350,000 | 439,743 | 376,500 |
| June 30, 12 | 376,000 | 369,772 | 386,250 |
| Change | -26,000 | +69,971 | -9,750 |
| Jun 23, 12 | 388,000 | 370,460 | 387,250 |
| Prior Year | 410,000 | 473,963 | 420,250 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 26,000 from 376,000 on Jun 30, 2012, to 350,000 on Jul 7. Claims not adjusted for seasonality increased 69,971 from 369,772 on Jun 30, 2012 to 439,743 on Jul 7. Strong seasonality is preventing clear analysis of labor markets.
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 585,963 on Jul 4, 2009 to 425,640 on Jul 2, 2011, and 439,743 on Jul 7, 2012. There is strong indication of significant decline in the level of layoffs in the US but some doubts at the margin after the high increase in unadjusted claims in the weeks of Jun 9, 2012 and Jul 7, 2012. Hiring has not recovered (see Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Jul 7, 2001 | 526,826 | 401,000 |
| Jul 6, 2002 | 456,716 | 391,00 |
| Jul 5, 2003 | 483,401 | 433,000 |
| Jul 3, 2004 | 349,920 | 326,000 |
| Jul 2, 2005 | 327,268 | 327,000 |
| Jul 1, 2006 | 304,638 | 316,000 |
| Jul 7, 2007 | 417,554 | 321,000 |
| Jul 5, 2008 | 401,762 | 372,000 |
| Jul 4, 2009 | 585,963 | 576,000 |
| Jul 3, 2010 | 470,366 | 457,000 |
| Jul 2, 2011 | 425,640 | 422,000 |
| Jul 7, 2012 | 439,743 | 350,000 |
Source: http://workforcesecurity.doleta.gov/unemploy/wkclaims/report.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 four months Jan to May 2012, CPI inflation for all items seasonally adjusted was 1.4 percent in annual equivalent, that is, compounding inflation in Jan-May 2012 and assuming it would be repeated for a full year. In the 12 months ending in May, CPI inflation of all items not seasonally adjusted was 1.7 percent. Inflation in May 2012 not seasonally adjusted was minus 0.1 percent relative to Apr 2012 and minus 0.3 percent seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.2 percent in annual equivalent Jan-May 2012. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.08 percent for three months, 0.14 percent for six months, 0.17 percent for 12 months, 0.24 percent for two years, 0.34 percent for three years, 0.62 percent for five years, 0.97 percent for seven years, 1.49 percent for ten years and 2.57 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. May inflation is low because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. 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 May 2012/May | ∆% Annual Equivalent Jan-May 2012 SA | |
| CPI All Items | 1.7 | 1.4 |
| CPI ex Food and Energy | 2.3 | 2.2 |
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/
IX Conclusion. Table IX-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 11 quarters of the current cyclical expansion from IIIQ2009 to IQ2012, GDP increased 6.7 percent at the annual equivalent rate of 2.4 percent; real disposable personal income (RDPI) increased 2.5 percent at the annual equivalent rate of 0.9 percent; RDPI per capita increased 0.4 percent at the annual equivalent rate of 0.1 percent; and population increased 2.1 percent at the annual equivalent rate of 0.8 percent. Third, since the beginning of the recession in IVQ2007 to IQ2012, GDP increased 1.2 percent, or barely above the level before the recession; real disposable personal income increased 2.7 percent; population increased 3.5 percent; and real disposable personal income per capita is 0.8 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing.
Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %
| # Quarters | ∆% | ∆% Annual Equivalent | |
| IQ1983 to IVQ1985 | 13 | ||
| GDP | 19.6 | 5.7 | |
| RDPI | 14.5 | 4.3 | |
| RDPI Per Capita | 11.5 | 3.4 | |
| Population | 2.7 | 0.8 | |
| IIIQ2009 to IQ2012 | 11 | ||
| GDP | 6.7 | 2.4 | |
| RDPI | 2.5 | 0.9 | |
| RDPI per Capita | 0.4 | 0.1 | |
| Population | 2.1 | 0.8 | |
| IVQ2007 to IQ2012 | 18 | ||
| GDP | 1.2 | ||
| RDPI | 2.7 | ||
| RDPI per Capita | -0.8 | ||
| Population | 3.5 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
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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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