CMP Associates Regulation Blog: Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk: Part II

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Sunday, October 28, 2012

Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk: Part II

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Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Collapse of United States Dynamism of Income Growth and Employment Creation

II United States Housing Collapse and Commercial Banks Assets and Liabilities

IIA United States Housing Collapse

IIA1 United States New House Sales

IIA2 United States House Prices

IIA3 Factors of United States Housing Collapse

IIB United States Commercial Banks Assets and Liabilities

IIB1 Transmission of Monetary Policy

IIB2 Functions of Banks

IIB3 United States Commercial Banks Assets and Liabilities

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

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

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

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

III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings reduction in the US with high unemployment/underemployment, falling wages and hiring collapse; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.

IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Oct 19 and daily values throughout the week ending on Oct 26 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Oct 19 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Oct 19, 2012”, first row “USD/EUR 1.3023 0.5 %,” provides the information that the US dollar (USD) appreciated 0.5 percent to USD 1.3023/EUR in the week ending on Fri Oct 19 relative to the exchange rate on Fri Oct 12. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).

The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3023/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Oct 19, depreciating to USD 1.3060/EUR on Mon Oct 22, or by 0.3 percent. The dollar depreciated because more dollars, $1.3060, were required on Mon Oct 22 to buy one euro than $1.3023 on Oct 19. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3023/EUR on Oct 19; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Oct 19, to the last business day of the current week, in this case Fri Oct 26, such as appreciation by 0.6 percent to USD 1.2942/EUR by Oct 26; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 0.6 percent from the rate of USD 1.3023/EUR on Fri Oct 19 to the rate of USD 1.2942/EUR on Fri Oct 26 {[(1.2942/1.3023) – 1]100 = -0.6%} and depreciated (denoted by negative sign) by 0.1 percent from the rate of USD 1.2934 on Thu Oct 25 to USD 1.2942/EUR on Fri Oct 26 {[(1.2942/1.2934) -1]100 = 0.1%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.

Table III-I, Weekly Financial Risk Assets Oct 22 to Oct 26, 2012

Fri Oct 19, 2012

M 22

Tue 23

W 24

Thu 25

Fr 26

USD/EUR

1.3023

0.5%

1.3060

-0.3%

1.2986

0.3%

0.6%

1.2970

0.4%

0.1%

1.2934

0.7%

0.3%

1.2942

0.6%

-0.1%

JPY/ USD

79.32

-1.1%

79.96

-0.8%

79.87

-0.7%

0.1%

79.79

-0.6%

0.1%

80.36

-1.3%

-0.7%

79.65

-0.4%

0.9%

CHF/ USD

0.9284

0.5%

0.9270

0.2%

0.9325

-0.4%

-0.6%

0.9327

-0.5%

0.0%

0.9351

-0.7%

-0.3%

0.9347

-0.7%

0.0%

CHF/ EUR

1.2089

0.0%

1.2106

-0.1%

1.2108

-0.2%

0.0%

1.2098

-0.1%

0.1%

1.2099

-0.1%

0.0%

1.2096

-0.1%

0.0%

USD/ AUD

1.0334

0.9677

1.0%

1.0322

0.9688

-0.1%

1.0261

0.9746

-0.7%

-0.6%

1.0353

0.9659

0.2%

0.9%

1.0353

0.9659

0.2%

0.0%

1.0373

0.9640

0.4%

0.2%

10 Year T Note

1.766

1.82

1.76

1.79

1.82

1.748

2 Year T Note

0.296

0.30

0.29

0.31

0.299

German Bond

2Y 0.11 10Y 1.59

2Y 0.12 10Y 1.62

2Y 0.11 10Y 1.57

2Y 0.08 10Y 1.56

2Y 0.08 10Y 1.58

2Y 0.05 10Y 1.54

DJIA

13343.51

0.1%

13345.89

0.0%

13102.53

-1.8%

13077.34

-2.0%

-0.2%

13103.68

-1.8%

0.2%

13107.21

-1.8%

0.0%

DJ Global

1959.01

2.1%

1955.11

-0.2%

1924.24

-1.8%

-1.6%

1920.82

-1.9%

-0.2%

1922.49

-1.9%

0.1%

1915.30

-2.2%

-0.4%

DJ Asia Pacific

1259.28

2.1%

1256.30

-0.2%

1251.13

-0.6%

-0.4%

1246.48

-1.0%

-0.4%

1251.35

-0.6%

0.4%

1240.25

-1.5%

-0.9%

Nikkei

9002.68

5.5%

9010.71

0.1%

9014.25

0.1%

0.0%

8954.30

-0.5%

-0.7%

9055.20

0.6%

1.1%

8993.06

-0.1%

-1.4%

Shanghai

2128.30

1.1%

2132.76

0.2%

2114.45

-0.7%

-0.9%

2115.99

-0.6%

0.1%

2101.58

-1.3%

-0.7%

2066.21

-2.9%

-1.7%

DAX

7380.64

2.0%

7328.05

0.7%

-0.7%

7173.69

-2.8%

-2.1%

7192.85

-2.5%

0.3%

7200.23

-2.4%

0.1%

7231.85

-2.0%

0.4%

DJ UBS

Comm.

146.37

-0.4%

145.13

-0.8%

144.17

-1.5%

-0.7%

143.79

-1.8%

-0.3%

143.52

-1.9%

-0.2%

143.00

-2.3%

-0.4%

WTI $ B

90.05

-1.7%

89.16

-1.0%

86.51

-3.9%

-3.0%

85.63

-4.9%

-1.0%

86.05

-4.4%

0.5%

86.28

-4.1%

0.3%

Brent $/B

110.14

-3.9%

109.81

-0.3%

108.20

-1.8%

-1.5%

107.81

-2.1%

-0.4%

108.49

-1.5%

0.6%

109.55

-0.5%

1.0%

Gold $/OZ

1724.0

-1.8%

1729.3

0.3%

1708.4

-0.9%

-1.2%

1702.4

-1.3%

-0.4%

1713.0

-0.6%

0.6%

1711.9

-0.7%

-0.1%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources: http://www.bloomberg.com/markets/

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

Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate.

First, Risk-Determining Events. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:

“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”

Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.

There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):

“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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.

(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):

“6 September 2012 - Technical features of Outright Monetary Transactions

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

Conditionality

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

Coverage

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

Sterilisation

The liquidity created through Outright Monetary Transactions will be fully sterilised.

Transparency

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Securities Markets Programme

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”

Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.

Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”

Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).

Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24. On Aug 31, the yield of the 10-year sovereign bond of Italy rose to 5.787 percent and that of Spain to 6.832 percent. The announcement of the OMT of bond-buying by the ECB together with weak employment creation in the US created risk appetite with the yield of the ten-year government bond of Spain collapsing to 5.708 percent on Sep 7 and the yield of the ten-year government bond of Italy to 5.008 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The yield of the ten-year government bond of Spain traded at 5.770 percent on Sep 14 and at 5.739 percent on Sep 21 and ten-year government of Italy traded at 4.953 percent on Sep 14 and 4.982 on Sep 21. The imminence of a bailout of Spain drove the yield of the ten-year sovereign bond of Spain to 5.979 percent on Fri Sep 28 and that of Italy to 5.031 percent but both traded higher during the day. Sovereign yields continued to decline by Oct 5 with the yield of the ten-year sovereign bond of Spain trading at 5.663 percent and that of Italy at 4.922 percent. On Oct 12, 2012, the yield of the ten-year sovereign bond of Spain traded at 5.612 percent and that of Italy at 4.856 percent. Sovereign bonds continued to decline in the week of Oct 19 with the ten-year government bond Spain trading at 5.289 percent and that of Italy at 4.655 percent. On Oct 26, the yield of the ten-year government bond of Spain traded at 5.574 percent and that of Italy at 4.838 percent. Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. Under increasing risk appetite, the yield of the ten-year Treasury rose to 1.544 on Jul 27, 2012 and 1.569 percent on Aug 3, 2012, while the yield of the ten-year Government bond of Germany rose to 1.40 percent on Jul 27 and 1.42 percent on Aug 3. Yields moved on an increasing trend with the US ten-year note at 1.814 percent on Aug 17 and the German ten-year bond at 1.50 percent with sharp decline on Aug 24 to 1.684 percent for the yield of the US ten-year note and 1.35 for the yield of the German ten-year bond. The trend was interrupted with decline of the yield of the ten-year Treasury note to 1.543 percent on Aug 31, 2012, and of the ten-year German bond to 1.33 percent. The US dollar strengthened significantly from USD 1.450/EUR on Aug 26, 2011, to USD 1.2158 on Jul 20, 2012, or by 16.2 percent, but depreciated to USD 1.2320/EUR on Jul 27, 2012 and 1.2387 on Aug 3, 2012 in expectation of massive support of highly indebted euro zone members. Doubts returned at the end of the week of Aug 10, 2012 with appreciation to USD 1.2290/EUR and decline of the yields of the two-year government bond of Germany to -0.07 percent and of the ten-year to 1.38 percent. On Aug 17, the US dollar depreciated by 0.4 percent to USD 1.2335/EUR and the ten-year bond of Germany yielded -0.04 percent. Risk appetite returned in the week of Aug 24 with depreciation by 1.4 percent to USD 1.2512/EUR and lower yield of the German two-year bond to -0.01 percent and of the US two-year note to 0.266 percent. Further risk aversion is captured by decline of yield of the two-year Treasury note to 0.225 percent on Aug 31, 2012, and to -0.03 percent for the two-year sovereign bond of Germany while the USD moved in opposite direction, depreciating to USD 1.2575/EUR. The almost simultaneous announcement of the bond-buying OMT of the ECB on Sep 6 and the weak employment report on Sep 7 suggesting further easing by the FOMC caused risk appetite shown by the increase in yields of government bonds of the US on Sep 7 to 1.668 percent for the ten-year note and 0.252 percent for the two-year while the two-year yield of Germany rose from -0.03 percent to 0.03 percent and the ten-year yield from 1.33 percent to 1.52 percent. Risk aversion retreated again on Sep 14, 2012 because of the open-ended monetary policy of the FOMC with the dollar devaluing to USD 1.3130 and the ten-year yield of the US Treasury note increasing to 1.863 percent (also in part because of bond buying by the Fed at shorter maturities) and the yield of the ten-year German bond increasing to 1.71 percent. Risk aversions returned because of weak flash purchasing managers indices with appreciation to USD1.2981 in the week of Sep 21 and declines of the yield of the ten-year Treasury note to 1.753 percent and of the yield of the ten-year government bond to 1.60 percent. Risk aversion because of the potential bailout of Spain drove down the US ten-year yield to 1.631 and the ten-year yield of Germany to 1.44 percent while the dollar appreciated to USD 1.2859/EUR. Increasing risk appetite drove the yield of the ten-year Treasury to 1.737 percent on Oct 5, 2012 and depreciated the dollar to USD 1.3036 with more muted response in the yield of the ten-year bond of Germany rising to 1.52 percent and the two-year yield to 0.06 percent. There is indication of some risk aversion in the week of Oct 12, 2012, with decline of the yield of the ten-year Treasury to 1.663 percent and that of Germany to 1.45 percent, stability of the two-year Treasury yield at 0.264 percent and marginal decline of the yield of the two-year German bond to 0.04 percent while the dollar appreciated to USD 1.2953/EUR. Risk aversion fluctuated in the week of Oct 19 but the week ended with the increase of the yield of the two-year note of the US to 0.296 percent and of the ten-year note to 1.766 percent; there was similar increase of the yield of the two-year government bond of Germany to 0.11 percent and of the ten-year yield to 1.59 percent; and the dollar depreciated 0.5 percent to USD 1.3023 percent. Mild risk aversion returned in the week of Oct 26, with the 10-year Treasury yield declining marginally to 1.748 percent and that of Germany to 1.54 percent while the dollar appreciated to USD 1.2942/EUR. Under zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is still around consumer price inflation of 1.7 percent in the 12 months ending in Aug (see subsection II United States Inflation and earlier http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.

Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate

	US 2Y	US 10Y	DE 2Y	DE 10Y	USD/ EUR
10/26/12	0.299	1.748	0.05	1.54	1.2942
10/19/12	0.296	1.766	0.11	1.59	1.3023
10/12/12	0.264	1.663	0.04	1.45	1.2953
10/5/12	0.26	1.737	0.06	1.52	1.3036
9/28/12	0.236	1.631	0.02	1.44	1.2859
9/21/12	0.26	1.753	0.04	1.60	1.2981
9/14/12	0.252	1.863	0.10	1.71	1.3130
9/7/12	0.252	1.668	0.03	1.52	1.2816
8/31/12	0.225	1.543	-0.03	1.33	1.2575
8/24/12	0.266	1.684	-0.01	1.35	1.2512
8/17/12	0.288	1.814	-0.04	1.50	1.2335
8/10/12	0.267	1.658	-0.07	1.38	1.2290
8/3/12	0.242	1.569	-0.02	1.42	1.2387
7/27/12	0.244	1.544	-0.03	1.40	1.2320
7/20/12	0.207	1.459	-0.07	1.17	1.2158
7/13/12	0.24	1.49	-0.04	1.26	1.2248
7/6/12	0.272	1.548	-0.01	1.33	1.2288
6/29/12	0.305	1.648	0.12	1.58	1.2661
6/22/12	0.309	1.676	0.14	1.58	1.2570
6/15/12	0.272	1.584	0.07	1.44	1.2640
6/8/12	0.268	1.635	0.04	1.33	1.2517
6/1/12	0.248	1.454	0.01	1.17	1.2435
5/25/12	0.291	1.738	0.05	1.37	1.2518
5/18/12	0.292	1.714	0.05	1.43	1.2780
5/11/12	0.248	1.845	0.09	1.52	1.2917
5/4/12	0.256	1.876	0.08	1.58	1.3084
4/6/12	0.31	2.058	0.14	1.74	1.3096
3/30/12	0.335	2.214	0.21	1.79	1.3340
3/2/12	0.29	1.977	0.16	1.80	1.3190
2/24/12	0.307	1.977	0.24	1.88	1.3449
1/6/12	0.256	1.957	0.17	1.85	1.2720
12/30/11	0.239	1.871	0.14	1.83	1.2944
8/26/11	0.20	2.202	0.65	2.16	1.450
8/19/11	0.192	2.066	0.65	2.11	1.4390
6/7/10	0.74	3.17	0.49	2.56	1.192
3/5/09	0.89	2.83	1.19	3.01	1.254
12/17/08	0.73	2.20	1.94	3.00	1.442
10/27/08	1.57	3.79	2.61	3.76	1.246
7/14/08	2.47	3.88	4.38	4.40	1.5914
6/26/03	1.41	3.55	NA	3.62	1.1423

Note: DE: Germany

Source:

http://www.bloomberg.com/markets/

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

http://www.federalreserve.gov/releases/h15/data.htm

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/macro_economic_time_series_node.html?anker=GELDZINS

http://www.ecb.int/stats/money/long/html/index.en.html

Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year and two-year Treasury constant maturity yields. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe.

Chart III-1A, US, Ten-Year and Two-Year Treasury Constant Maturity Yields Jul 31, 2001-Oct 25, 2012

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines.

Equity indexes in Table III-1 were mostly weak in the week ending on Oct 26, 2012. Stagnating revenues are causing reevaluation of discounted net earnings. DJIA dropped 0.0 percent on Oct 26, declining 1.8 percent in the week mostly occurring on Oct 23 because of disappointment of reported earnings of companies. Germany’s Dax increased 0.4 percent on Fri Oct 26 and decreased 2.0 percent in the week. Dow Global decreased 0.4 percent on Oct 26 and lost 2.2 percent in the week. Japan’s Nikkei Average decreased 1.4 percent on Fri Oct 26 and decreased 0.1 percent in the week. Dow Asia Pacific TSM decreased 0.9 percent on Oct 26 and decreased 1.5 percent in the week while Shanghai Composite decreased 1.7 percent on Oct 26 and decreased 2.9 percent in the week. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations.

Commodities were mostly weak in the week of Oct 26, 2012. The DJ UBS Commodities Index decreased 0.4 percent on Fri Oct 26 and decreased 2.3 percent in the week, as shown in Table III-1. WTI decreased 4.1 percent in the week of Oct 26 while Brent decreased 0.5 percent in the week. Gold decreased 0.1 percent on Fri Oct 26 and decreased 0.7 percent in the week.

Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,150,496 million on Oct 19, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,744,580 million in the statement of Oct 19. There is high credit risk in these transactions with capital of only €85,551 million as analyzed by Cochrane (2012Aug31).

Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Oct 19, 2012
1 Gold and other Receivables	367,402	419,822	479,107
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	258,859
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	37,971
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	17,133
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,150,496
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	214,553
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	594,084
8 General Government Debt Denominated in Euro	34,954	33,928	30,010
9 Other Assets	278,719	336,574	264,356
TOTAL ASSETS	2,004, 432	2,733,235	3,046,569
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,744,580
Capital and Reserves	78,143	85,748	85,551

Source: European Central Bank

http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html

http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html

http://www.ecb.int/press/pr/wfs/2012/html/fs121023.en.html

IIIE Appendix Euro Zone survival risk. European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.7 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 10.3 percent in Jan-Aug 2012 relative to Jan-Aug 2011 while those to EMU are falling at 1.0 percent.

Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

Jul 2012	Exports % Share	∆% Jan-Aug 2012/ Jan-Aug 2011	Imports % Share	Imports ∆% Jan-Aug 2012/ Jan-Aug 2011
EU	56.0	0.3	53.3	-6.6
EMU 17	42.7	-1.0	43.2	-6.3
France	11.6	0.4	8.3	-4.5
Germany	13.1	0.5	15.6	-10.7
Spain	5.3	-8.0	4.5	-5.7
UK	4.7	10.5	2.7	-12.8
Non EU	44.0	10.3	46.7	-3.4
Europe non EU	13.3	11.5	11.1	-4.6
USA	6.1	18.7	3.3	3.7
China	2.7	-11.4	7.3	-16.2
OPEC	4.7	24.2	8.6	23.6
Total	100.0	8.4	100.0	-5.1

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/72548

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €674 million with the 17 countries of the euro zone (EMU 17) in Aug 2012 and deficit of €1375 million in Jan-Aug 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €7128 million in Jan-Aug with Europe non European Union and of €8973 million with the US. There is significant rigidity in the trade deficits in Jan-Aug of €11,378 million with China and €14,150 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.

Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro

Regions and Countries	Trade Balance Aug 2012 Millions of Euro	Trade Balance Cumulative Jan-Aug 2012 Millions of Euro
EU	374	8,176
EMU 17	-674	-1,375
France	637	7,926
Germany	-449	-3,600
Spain	-26	1,136
UK	683	6,300
Non EU	-972	-4,351
Europe non EU	534	7,128
USA	902	8,973
China	-1,345	-11,378
OPEC	-1,478	-14,150
Total	-598	3,825

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/72548

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Aug 2012 relative to Jan-Aug 2011. Growth rates in 12 months of imports are negative with the exception of 9.7 percent for energy. The higher rate of growth of exports of 5.9 percent in Jan-Aug 2012/Jan-Jul 2011 relative to imports of minus 2.6 percent may reflect weak demand in Italy with GDP declining during four consecutive quarters from IIIQ2011 through IIQ2012.

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

	Exports Share %	Exports ∆% Jan-Aug 2012/ Jan-Aug 2011	Imports Share %	Imports ∆% Jan-Aug 2012/ Jan-Aug 2011
Consumer Goods	28.9	5.9	25.0	-2.6
Durable	5.9	2.5	3.0	-6.2
Non Durable	23.0	6.8	22.0	-2.1
Capital Goods	32.2	3.1	20.8	-11.5
Inter- mediate Goods	34.3	3.3	34.5	-11.3
Energy	4.7	17.0	19.7	9.7
Total ex Energy	95.3	4.0	80.3	-8.7
Total	100.0	4.6	100.0	-5.1

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/72548

Table III-6 provides Italy’s trade balance by product categories in Aug 2012 and cumulative Jan-Aug 2012. Italy’s trade balance excluding energy generated surplus of €5163 million in Aug 2012 and €47,109 million in Jan-Aug 2012 but the energy trade balance created deficit of €5761 million in Aug 2012 and €43,284 million in Jan-Aug 2012. The overall deficit in Aug 2012 was €598 million with surplus of €3825 million in Jan-Aug 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

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

	Aug 2012	Cumulative Jan-Aug 2012
Consumer Goods	745	10,426
Durable	589	7,432
Nondurable	156	2,994
Capital Goods	3,808	32,763
Intermediate Goods	610	3,920
Energy	-5,761	-43,284
Total ex Energy	5,163	47,109
Total	-598	3,825

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/72548

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table III-7, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2012 USD Billions	Primary Net Lending Borrowing % GDP 2012	General Government Net Debt % GDP 2012
World	71,277
Euro Zone	12,065	-0.5	73.4
Portugal	211	-0.7	110.9
Ireland	205	-4.4	103.0
Greece	255	-1.7	170.7
Spain	1,340	-4.5	78.6
Major Advanced Economies G7	33,769	-5.1	89.0
United States	15,653	-6.5	83.8
UK	2,434	-5.6	83.7
Germany	3,367	1.4	58.4
France	2,580	-2.2	83.7
Japan	5,984	-9.1	135.4
Canada	1,770	-3.2	35.8
Italy	1,980	2.6	103.1
China	8,250	-1.3*	22.2**

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,855.7
B Germany	1,996.3		$8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4%
C France	2,159.5
B+C	4,155.8	GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7%
D Italy	2,041.4
E Spain	1,053.2
F Portugal	234.0
G Greece	435.3
H Ireland	211.2
Subtotal D+E+F+G+H	3,975.1

Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO

There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Aug 2012. German exports to other European Union (EU) members are 54.1 percent of total exports in Aug 2012 and 57.1 percent in Jan-Aug 2012. Exports to the euro area are 33.7 percent in Aug and 37.6 percent in Jan-Aug. Exports to third countries are 45.9 percent of the total in Aug and 42.8 percent in Jan-Aug. There is similar distribution for imports. Exports to non-euro countries are growing at 6.8 percent in Aug 2012 and 5.0 percent in Jan-Aug 2012 while exports to the euro area are decreasing 3.2 percent in Aug and decreasing 0.9 percent in Jan-Aug 2012. Price competitiveness through devaluation could improve export performance and growth. 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 high share in its 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 III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Aug 2012 € Billions	Aug 12-Month ∆%	Jan–Aug 2012 € Billions	Jan-Aug 2012/ Jan-Aug 2011 ∆%
Total Exports	90.1	5.8	734.1	5.5
A. EU Members	48.7 % 54.1	0.4	419.5 % 57.1	1.1
Euro Area	30.4 % 33.7	-3.1	276.3 % 37.6	-0.9
Non-euro Area	18.3 % 20.3	6.8	143.3 % 19.5	5.0
B. Third Countries	41.4 % 45.9	13.0	314.5 % 42.8	11.9
Total Imports	73.8	0.4	607.5	2.1
C. EU Members	45.0 % 61.0	0.7	385.0 % 63.4	2.3
Euro Area	31.5 % 42.7	1.1	270.9 % 44.6	2.1
Non-euro Area	13.5 % 18.3	-0.4	114.0 % 18.8	2.8
D. Third Countries	28.8 % 39.0	0.1	222.6 % 36.6	1.7

Notes: Total Exports = A+B; Total Imports = C+D

Source:

Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/10/PE12_347_51.html;jsessionid=044505258E3149E5E76FEC0D2365CE66.cae1

IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_t_{, t+τ})s_t_+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+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 R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.3	2.0	2.1	7.8
Japan	3.5	-0.3	-1.4	4.2
China	7.4	1.9	-3.6
UK	0.0	2.2* RPI 2.6	2.5* output 1.2** input -1.2*	7.9
Euro Zone	-0.4	2.6	2.7	11.4
Germany	1.0 CA	2.1	1.6	5.5
France	0.3	2.2	2.5	10.6
Nether-lands	-0.5	2.5	4.1	5.3
Finland	0.1	3.4	2.6	7.9
Belgium	-0.3	2.6	3.3	7.4
Portugal	-3.3	2.9	4.0	15.9
Ireland	-0.5	2.4	2.4	15.0
Italy	-2.6	3.4	3.0	10.7
Greece	NA	0.3	6.8	NA
Spain	-1.3	3.5	4.1	25.1

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

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/september-2012/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-prices-indices/september-2012/index.html

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.

Jon Hilsenrath, writing on “Bernanke letter defends Fed actions,” on Aug 24, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444358404577609231770784446.html?mod=WSJ_hp_LEFTWhatsNewsCollection#project%3Dissaletter082412%26articleTabs%3Darticle), finds support for FOMC policies and possible further actions in a letter by Chairman Bernanke (2012Aug22) in reply to inquiry by Representative Darrell Issa (2012Aug1), which were obtained and published by the WSJ on Aug 22, 2012 (http://online.wsj.com/public/resources/documents/Bernankeletter0812.pdf http://s3.documentcloud.org/documents/413447/issaletter0812.pdf). Issa (2012Aug1) inquired from Chairman Bernanke about analysis of monetary policy of various types, including by distinguished Professor Allan Meltzer (http://www.amazon.com/Allan-H.-Meltzer/e/B001H6MWPC/ref=ntt_dp_epwbk_0), the author of three scholarly analytical volumes on the history of the Federal Reserve (Meltzer 2004, 2010a, 2010b), who has emphasized the short-term nature of economic policy that could be more effective if focused on the long term. Chairman Bernanke (2012Aug22), who is also an eminent scholar, provided detailed answers to the queries by Issa (2012Aug1). The first sentence of the reply ignited positive risk taking in financial markets operating with low holiday volumes: “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.”

The statement of the FOMC at the conclusion of its meeting on Sep 13, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):

“Release Date: October 24, 2012

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.”

There are several important issues in this statement.

1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

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

2. Open-ended Quantitative Easing or QE_∞. Earlier programs are continued with an additional open-ended $40 billion of bond purchases per months: “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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

3. Advance Guidance on Accommodative Policy after Recovery Strengthening. Policy will be accommodative even after the economy recovers satisfactorily: “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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm): “The [Federal Open Market] Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the recovery strengthens.” The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Sep 13, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html) and the PCE inflation data from the report on personal income and outlays (Section IV at http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html). The Bureau of Economic Analysis (BEA) provides the first estimate of IIIQ2012 GDP with the second estimate of IIIQ2012 to be released on Nov 29 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in sections IB and IV in this blog for Aug 2012 (http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html). The next report on “Personal Income and Outlays” for Sep will be released at 8:30 AM on Oct 29, 2012 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Sep report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html, the Aug report is in Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Oct will be released on Fri Nov 2, 2012 (http://www.bls.gov/ces/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf).

It is instructive to focus on 2012 and 2013 as 2014 and 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Sep 13, 2012 and the second row “PR” the projection of the Jun 20, 2012 meeting. There are three major changes in the view.

1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting and further to 1.7 to 2.0 percent at the Sep 13, 2012 meeting. GDP growth in 2013 has been increased to 2.5 to 3.0 percent at the meeting on Sep 13

2012 from 2.2 to 2.8 percent at the meeting on Jun 20, 2012. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting and did not change it at 8.0 to 8.2 at the meeting on Sep 13, 2012. The rate of unemployment for 2013 has been changed to 7.6 to 7.9 percent at the Sep 13 meeting compared with 7.5 to 8.0 percent at the Jun 20 meeting.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting. The interval was increased to 1.7 to 1.8 percent at the Sep 13, 2012 meeting.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting. The projection was virtually unchanged at 1.7 to 1.9 percent at the Sep 13 meeting. For 2013, the projection for core inflation was changed from 1.6 to 2.0 percent at the Jun 20, 2012 meeting to 1.7 to 2.0 percent at the Sep 13, 2012 meeting.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and Sep 2012

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2012 Jun PR	1.7 to 2.0 1.9 to 2.4	8.0 to 8.2 8.0 to 8.2	1.7 to 1.8 1.2 to 1.7	1.7 to 1.9 1.7 to 2.0
2013 Jun PR	2.5 to 3.0 2.2 to 2.8	7.6 to 7.9 7.5 to 8.0	1.6 to 2.0 1.5 to 2.0	1.7 to 2.0 1.6 to 2.0
2014 Jun PR	3.0 to 3.8 3.0 to 3.5	6.7 to 7.3 7.0 to 7.7	1.6 to 2.0 1.5 to 2.0	1.8 to 2.0 1.6 to 2.0
2015 Jun	3.0 to 3.8 NA	6.0 to 6.8 NA	1.8 to 2.0 NA	1.9 to 2.0 NA
Longer Run Jun PR	2.3 to 2.5 2.3 to 2.5	5.2 to 6.0 5.2 to 6.0	2.0 2.0
Range
2012 Jun PR	1.6 to 2.0 1.6 to 2.5	8.0 to 8.3 7.8 to 8.4	1.5 to 1.9 1.2 to 2.0	1.6 to 2.0 1.7 to 2.0
2013 Jun PR	2.3 to 3.5 2.2 to 3.5	7.0 to 8.1 7.0 to 8.1	1.5 to 2.1 1.5 to 2.1	1.6 to 2.0 1.4 to 2.1
2014 Jun PR	2.7 to 4.1 2.8 to 4.0	6.3 to 7.5 6.3 to 7.7	1.6 to 2.2 1.5 to 2.2	1.6 to 2.2 1.5 to 2.2
2015 Jun PR	2.5 to 4.2 NA	5.7 to 6.9 NA	1.8 to 2.3 NA	1.8 to 2.3 NA
Longer Run Jun PR	2.2 to 3.0 2.2 to 3.0	5.0 to 6.3 4.9 to 6.3	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf). There are 18 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only one to be higher. Not much change is expected in 2013 either with 15 participants anticipating the rate at the current target of 0 to ¼ percent and only four expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 13 participants with four expecting the rate to be in the range of 1.0 to 2.0 percent and two participants expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, ten participants expect rates to be below 1.0 percent while four expect rates from 3.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2012	1
2013	3
2014	2
2015	12
2016	1

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-5 provides the consumer price index of Japan, with inflation of minus 0.3 percent in 12 months ending in Sep, increase of 0.1 percent NSA (not-seasonally-adjusted) in Sep and increase of 0.1 percent SA (seasonally-adjusted) in the month of Sep. Inflation of consumer prices in the first four months of 2012 annualizes at 2.1 percent SA and 3.0 percent NSA. Annual equivalent inflation in the first three months of 2012 is 2.8 percent SA and 3.7 percent NSA. There are negative percentage changes in most of the 12-month rates in 2011 with the exception of Jul and Aug both with 0.2 percent and stability in Sep. All monthly and 12-month rates of inflation are nonnegative in the first four months of 2012. There are eight years of deflation and one of zero inflation in the 12-month rate of inflation in Dec from 1995 to 2010. This experience is entirely different from that of the US that shows long-term inflation. It is difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan.

Table IV-5, Japan, Consumer Price Index, All Items ∆%

	∆% Month SA	∆% Month NSA	∆% 12-Month NSA
Sep 2012	0.1	0.1	-0.3
Aug	-0.2	0.1	-0.4
Jul	0.0	-0.3	-0.4
Jun	-0.4	-0.5	-0.2
May	-0.4	-0.3	0.2
Apr	0.0	0.1	0.4
Mar	0.1	0.5	0.5
Feb	0.3	0.2	0.3
Jan	0.3	0.2	0.1
Dec 2011	0.1	0.0	-0.2
Nov	-0.1	-0.6	-0.5
Oct	0.0	0.1	-0.2
Sep	-0.1	0.0	0.0
Aug	-0.2	0.1	0.2
Jul	0.3	0.0	0.2
Jun	-0.1	-0.2	-0.4
May	-0.1	0.0	-0.4
Apr	-0.1	0.1	-0.4
Mar	0.0	0.3	-0.5
Feb	0.1	0.0	-0.5
Jan	0.0	-0.1	-0.6
Dec 2010	-0.2	–0.3	0.0
Dec 2009			-1.7
Dec 2008			0.4
Dec 2007			0.7
Dec 2006			0.3
Dec 2005			-0.1
Dec 2004			0.2
Dec 2003			-0.4
Dec 2002			-0.3
Dec 2001			-1.2
Dec 2000			-0.2
Dec 1999			-1.1
Dec 1998			0.6
Dec 1997			1.8
Dec 1996			0.6
Dec 1995			-0.3
Dec 1994			0.7
Dec 1993			1.0
Dec 1992			1.2
Dec 1991			2.7
Dec 1990			3.8
Dec 1989			2.6
Dec 1988			1.0
Dec 1987			0.8
Dec 1986			-0.3
Dec 1985			1.9
Dec 1984			2.6
Dec 1983			1.7
Dec 1982			2.0
Dec 1981			4.3
Dec 1980			6.9
Dec 1979			5.6
Dec 1978			3.9
Dec 1977			5.0
Dec 1976			10.5
Dec 1975			7.8
Dec 1974			21.0
Dec 1973			18.3
Dec 1972			5.7
Dec 1971			4.8

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

Chart IV-1 provides the US consumer price index NSA from 1913 to 2012. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart IV-1, US, Consumer Price Index, All Items, NSA, 1913-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-2 provides 12-month percentage changes of the US consumer price index from 1914 to 2012. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Table IV-5 provides similar inflation waves in the economy of Japan with 18.3 percent in 1973 and 21.0 percent in 1974. Inflation rates then stabilized in the US in a range with only two episodes above 5 percent. There are isolated cases of deflation concentrated over extended periods only during the 1930s.

Chart IV-2, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1914-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-3 provides the US consumer price index excluding food and energy from 1957 (when it first becomes available) to 2012. There is long-term inflation in the US without episodes of deflation.

IV-3, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-17 provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 (when it first becomes available) to 2012. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.

Chart IV-4, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

More detail on the consumer price index of Japan in Jul is shown in Table IV-5. Inflation in the 12 months ending in Sep 2012 has been driven by items rich in commodities such as 4.3 percent in fuel, light and water charges with increase of 1.4 percent in the month of Sep. There is similar behavior in the preliminary estimate for Sep for the Ku Area of Tokyo with increase of 3.8 percent of fuel, light and water charges and increase of 6.9 percent in 12 months. There is increase in several items in the consumer price index in Sep. There is mild deflation in the CPI excluding food, alcoholic beverages and energy with minus 0.6 percent in the 12 months ending in Sep and decrease of 0.1 percent in the month of Sep. The CPI excluding imputed rent increased 0.2 percent in Sep and decreased 0.1 percent in 12 months. The all-items CPI estimate for Oct of the Ku-Area of Tokyo increased 0.1 percent in Sep and declined 0.8 percent in 12 months.

Table IV-5, Japan, Consumer Price Index, ∆%

2012	Sep 2012/Aug 2012 ∆%	Year ∆%
CPI All Items	0.1	-0.3
CPI Excluding Fresh Food	0.2	-0.1
CPI Excluding Food, Alcoholic Beverages and Energy	-0.1	-0.6
CPI Goods	0.9	-0.4
CPI Services	-0.6	-0.2
CPI Excluding Imputed Rent	0.2	-0.3
CPI Fuel, Light, Water Charges	1.4	4.3
CPI Transport & Communications	0.2	0.3
CPI Ku-Area Tokyo All Items	0.1	-0.8
Fuel, Light, Water Charges Ku Area Tokyo	-0.1	6.9

Note: Ku-area Tokyo CPI data preliminary for Sep 2012

Sources: http://www.stat.go.jp/english/data/cpi/1581.htm

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/datamapper/index.php?db=WEO) to show GDP in dollars in 2011 and the growth rate of real GDP of the world and selected regional countries from 2012 to 2015. 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 3.3 percent in 2012 but accelerating to 3.6 percent in 2013, 4.2 percent in 2014 and 4.4 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,697 billion of world output of $69,899 billion, or 48.2 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2012 to 2015 in contrast with 3.9 percent for the world as a whole. While the world would grow 16.4 percent in the four years from 2012 to 2015, the G7 as a whole would grow 7.8 percent. The difference in dollars of 2011 is rather high: growing by 16.4 percent would add $11.5 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,867 but growing by 7.8 percent would add $5.2 trillion of output to the world, or somewhat below 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 $25,438 billion, or 36.4 percent of world output. The EMDEs would grow cumulatively 24.9 percent or at the average yearly rate of 5.7 percent, contributing $6.3 trillion from 2012 to 2015 or the equivalent of 86.8 percent of $7,298 billion of China in 2011. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,468 billion, or 19.3 percent of world output, which is equivalent to 39.9 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 ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World	69,899	3.3	3.6	4.2	4.4
G7	33,697	1.4	1.5	2.2	2.5
Canada	1,739	1.9	2.0	2.4	2.4
France	2,778	0.1	0.4	1.1	1.5
DE	3,607	0.9	0.9	1.4	1.4
Italy	2,199	-2.3	-0.7	0.5	1.2
Japan	5,867	2.2	1.2	1.1	1.2
UK	2,431	-0.4	1.1	2.2	2.6
US	15,076	2.2	2.1	2.9	3.4
Euro Area	13,114	-0.4	0.2	1.2	1.5
DE	3,607	0.9	0.9	1.4	1.4
France	2,778	0.1	0.4	1.1	1.5
Italy	2,199	-2.3	-0.7	0.5	1.2
POT	238	-3.0	-1.0	1.2	1.9
Ireland	221	0.4	1.4	2.5	2.9
Greece	299	-6.0	-4.0	0.0	2.8
Spain	1,480	-1.5	-1.3	1.0	1.6
EMDE	25,438	5.3	5.6	5.9	6.1
Brazil	2,493	1.5	3.9	4.2	4.2
Russia	1,850	3.7	3.8	3.9	3.9
India	1,827	4.9	6.0	6.4	6.7
China	7,298	7.8	8.2	8.5	8.5

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/datamapper/index.php?db=WEO). 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 V-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. Estimated rates of unemployment for 2012 are particularly high for the countries with sovereign debt difficulties in Europe: 15.5 percent for Portugal (POT), 14.8 percent for Ireland, 23.8 percent for Greece, 24.9 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is estimated at 7.5 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	7.5	7.5	7.3	6.9
Canada	7.5	7.3	7.3	7.1	6.9
France	9.6	10.1	10.5	10.3	9.8
DE	6.0	5.2	5.3	5.2	5.2
Italy	8.4	10.6	11.1	11.3	11.0
Japan	4.6	4.5	4.4	4.5	4.4
UK	8.0	8.1	8.1	7.9	7.6
US	8.9	8.2	8.1	7.7	7.1
Euro Area	10.2	11.2	11.5	11.2	10.8
DE	6.0	5.2	5.3	5.2	5.2
France	9.6	10.1	10.5	10.3	9.8
Italy	8.4	10.6	11.1	11.3	11.0
POT	12.7	15.5	16.0	15.3	14.7
Ireland	14.4	14.8	14.4	13.7	13.1
Greece	17.3	23.8	25.4	24.5	22.4
Spain	21.7	24.9	25.1	24.1	23.2
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	6.5	6.0	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.1	4.1	4.1	4.1

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IIIQ2012 available now for the United States, China and United Kingdom. Growth is weak throughout most of the world. Japan’s GDP increased 1.3 percent in IQ2012 and 2.9 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. Japan’s GDP grew 0.2 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of 0.7 percent, which is much lower than 5.3 percent in IQ2012. Growth of 3.2 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. China grew at 2.2 percent in IIIQ2012, which annualizes at 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 IIQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier and 7.4 percent in IIIQ2012 relative to IIIQ2011. GDP was flat in the euro area in IQ2012 and also in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.4 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.3 percent at SAAR and 2.1 percent relative to a year earlier. In IIIQ2012, GDP grew 0.5 percent, 2.0 percent at SAAR and 2.3 percent relative to IIIQ2011 (Section IA Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html) but with substantial unemployment and underemployment (Section I at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html) and weak hiring (Section I at http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html). UK GDP fell 0.4 percent in IIQ2012, declining 0.5 percent relative to IIQ2011. In IQ2012, UK GDP fell 0.3 percent, declining 0.1 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and 0.5 percent relative to a year earlier. UK GDP increased 1.0 percent in IIIQ2012 and was unchanged relative to a year earlier. Italy has experienced decline of GDP in four consecutive quarters from IIIQ2011 to IIQ2012. Italy’s GDP fell 0.8 percent in IIQ2012 and declined 2.6 percent relative to IIQ2011. France’s GDP stagnated in both IQ2012 and IIQ2012 and increased 0.3 percent relative to a year earlier in IIQ2012.

Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	QOQ: 0.5 SAAR: 2.0	2.4
Japan	QOQ: 1.3 SAAR: 5.3	2.9
China	1.8	8.1
Euro Area	0.0	0.0
Germany	0.5	1.7
France	0.0	0.4
Italy	-0.8	-1.4
United Kingdom	-0.3	-0.1
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3 SAAR: 1.3	2.1
Japan	QOQ: 0.2 SAAR: 0.7	3.2
China	1.8	7.6
Euro Area	-0.2	-0.4
Germany	0.3	0.5 1.0 CA
France	0.0	0.3
Italy	-0.8	-2.6
United Kingdom	-0.4	-0.5
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.5 SAAR: 2.0	2.3
China	2.2	7.4
United Kingdom	1.0	0.0

QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate

Source: Country Statistical Agencies

http://www.bea.gov/national/index.htm#gdp

There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of_23.html and for GDP http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html). Japan’s exports decreased 10.3 percent in the 12 months ending in Sep, 5.8 percent in the 12 months ending in Aug and 8.1 percent in 12 months ending in Jul while imports increased 4.1 in the 12 months ending in Sep, decreased 5.4 percent in the 12 months ending in Aug and increased 2.1 percent in the 12 months ending in Jul. The second part of Table V-4 shows that net trade deducted 0.3 percentage points from Japan’s growth of GDP in IIQ2012. China’s exports fell 1.8 percent in the month of Jul and increased 1.0 percent in 12 months. In Aug 2012, China’s exports increased 0.6 percent and increased 2.7 percent in 12 months. Trade rebounded in China in Sep with growth of exports of 9.9 percent in the 12 months ending in Sep and 2.4 percent for imports. Germany’s exports increased 2.4 percent in the month of Aug and increased 5.8 percent in the 12 months ending in Aug while imports increased 0.3 percent in the month of Aug and increased 0.4 percent in the 12 months ending in Aug. Net trade contributed 1.1 percentage points to growth of Germany’s GDP in IIQ2012. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, increased from 44.7 in Aug to 47.3 in Sep, which is the most moderate deterioration since Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10119). New export orders fell sharply but at a slower pace than in Aug when new export orders fell at a record in the past three and a half years. UK’s exports fell 2.4 percent in Aug and 1.3 percent in Jun-Aug 2012 relative to a year earlier while imports increased 3.4 percent in Aug and 0.8 percent in Jun-Aug 2012 relative to a year earlier. Net trade deducted 1.0 percentage points from UK GDP growth in IIQ2012. France’s exports increased 3.6 percent in Aug while imports increased 6.3 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012. US exports decreased 1.0 percent in Aug 2012 and increased 5.6 percent in Jan-Aug relative to a year earlier but net trade added 0.23 percentage points to GDP growth in IIQ2012. The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) declined to the weakest reading in three years to 51.1 in Sep from 51.5 in Aug, indicating moderate expansion of US manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10144). The PMI reading at 51.4 is lower than 54.2 for IIQ2012. New export orders declined at the highest rate in 11 months with the index of new exports orders falling from 48.8 in Aug to 48.0 in Sep while total new orders increased from 51.9 in Aug to 52.3 in Sep because of orders from the internal market. In the six months ending in Sep, United States national industrial production accumulated increase of 0.6 percent at the annual equivalent rate of 1.2 percent, which is much lower than 2.8 percent growth in 12 months. Capacity utilization for total industry in the United States fell 1.1 percentage points in Sep to 78.2 percent from 79.2 percent in Jul, which is 2.0 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.2 percent in Sep seasonally adjusted, increasing 3.2 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Sep or at the annual equivalent stagnating rate of 0.2 percent (Section VA). Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.

Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points

	Exports M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	-1.0 Aug	5.6 Jan-Aug	-0.1 Aug	4.7 Jan-Aug
Japan Sep Aug Jul		-10.3 -5.8 -8.1		4.1 -5.4 2.1
China	-1.8 Jul 0.6 Aug 4.7 Sep	1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4	2.2 Jul -0.3 Aug 4.9 Sep	4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep
Euro Area	10.4 12-M Aug	9.0 Jan-Aug	1.3 12-M Aug	2.5 Jan-Aug
Germany	2.4 Aug CSA	5.8 Aug	0.3 Aug CSA	0.4 Aug
France Aug	3.6	2.8	6.3	3.4
Italy Aug	3.9	8.4	4.4	-1.1
UK	-2.4 Aug	-1.3 Jun-Aug 12/Jun-Aug 11	3.4 Aug	0.8 Jun-Aug 12/Jun-Aug 11
Net Trade % Points GDP Growth	% Points
USA IIIQ2012	-0.18
Japan IIQ2012	-0.3
Germany IIQ2012	1.1
France IIQ2012	-0.4
UK IIQ2012	-1.0

Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm

http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html

http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp

http://www.insee.fr/en/

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

http://www.statistics.gov.uk/hub/index.html

The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-3 for Sep 2012. The share of Asia in Japan’s trade is more than one half, 54.9 percent of exports and 43.8 percent of imports. Within Asia, exports to China are 17.8 percent of total exports and imports from China 21.7 percent of total imports. The second largest export market for Japan in Aug 2012 is the US with share of 17.4 percent of total exports and share of imports from the US of 8.6 percent in total imports. Western Europe has share of 10.9 percent in Japan’s exports and of 9.7 percent in imports. Rates of growth of exports of Japan in Sep are sharply negative for all countries and regions with the exception of 0.9 percent for exports to the US. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 10.3 percent in Sep 2012 while imports increased by 4.1 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Sep are negative for some trading partners: minus 32.7 percent for the UK, minus 9.7 percent for Brazil, minus 7.9 percent for Germany and minus 3.0 percent for Western Europe. Imports from Asia increased 0.7 percent in the 12 months ending in Sep while imports from China increased 3.8 percent.

Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Sep 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,359,752	-10.3	5,918,307	4.1
Asia	2,944,304	-8.3	2,591,029	0.7
China	953,834	-14.1	1,283,316	3.8
USA	933,372	0.9	506,328	3.8
Canada	65,567	-5.6	76,417	-5.5
Brazil	41,698	-12.0	77,533	-9.7
Mexico	72,939	-11.0	28,427	9.4
Western Europe	585,936	-26.0	573,723	-3.0
Germany	144.224	-12.9	154,489	-7.9
France	43,882	-24.4	79,496	7.7
UK	101,960	-31.2	43,575	-32.7
Middle East	181,035	-0.3	1,242,800	20.8
Australia	121,160	-21.0	385,551	2.0

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

Table V-6 of the World Trade Organization provides actual volume of world trade from 2008 to 2011 and projections of the World Trade Organization Secretariat for 2012 and 2013. Trade was weak during the global recession, increasing 2.3 percent in 2008 and decreasing 12.5 percent in 2009. Trade growth was 13.8 percent in 2010 and 5.0 percent in 2011. The World Trade Organization has reduced its projection of growth of world trade in 2012 to 2.5 percent.

Table V-6, World Trade Organization Projections of Growth of Volume of World Merchandise Trade and GDP, ∆%, 2008-2013

	2008	2009	2010	2011	2012*	2013*
World Trade Volume	2.3	-12.5	13.9	5.0	2.5	4.5
Exports
DE	0.9	-15.2	13.0	4.6	1.5	3.3
DINGE	4.3	-7.8	15.3	5.3	3.5	5.7
Imports
DE	-1.1	-14.4	11.0	2.9	0.4	3.4
DINGE	8.6	-10.5	18.3	8.3	5.4	6.1
Real GDP**	1.3	-2.4	3.8	2.4	2.1	2.4
DE	0.0	-3.8	2.7	1.5	1.2	1.5
DINGE	5.6	2.2	7.3	5.3	4.9	5.2

Notes: World Trade Volume: average of exports and imports; *Projections; **At market exchange rates; DE: Developed economies; DINGE: developing economies

Source: World Trade Organization Secretariat for trade, Consensus estimates of GDP forecasts

http://www.wto.org/english/news_e/pres12_e/pr676_e.htm

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, increased to 52.5 in Sep from 50.9 in Aug, indicating expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10177). This index has remained above the contraction territory of 50.0 during 36 months. Both global manufacturing and services have slowed down considerably with services increasing marginally because of activity in the US while manufacturing deepened its decline. The average of the reading in IIIQ2012 at 51.7 was almost unchanged relative to 51.6 in IIQ2012, which is a thee-year low and below the trend started with recovery in Aug 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10177). Stronger service activity in the US supported expansion of global output with increases also in the UK, Brazil, Russia and Ireland. The employment index fell from 50.9 in Aug to 49.9 in Sep under constraint by sharp increases in input prices. The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased to 52.8 in Sep from 48.1 in Aug, which was higher than the 38-month low in Aug and four consecutive months below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10159). The PMI is at 48.5 in IIIQ2012, which is lower than 50.4 in IIQ2012 and the weakest reading since IIQ2009. New export orders declined for the fifth consecutive month. The HSBC Brazil Composite Output Index, compiled by Markit, increased away from contraction territory to 52.8 in Sep from 48.1 in Aug with stronger demand for services than for manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10159). Andre Loes, Chief Economist, Brazil, at HSBC, finds that increasing activity in services could signal the rebound of economic activity expected for the second half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10159). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) increased slightly to 49.8 in Sep from 49.3 in Aug, indicating marginal deterioration of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10135). Andre Loes, Chief Economist, Brazil at HSBC, finds recovery of Brazil’s manufacturing in IIIQ2012, improving the outlook for IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10005).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased marginally to 51.3 in Oct from 51.1 in Sep that was the third weakest reading since Oct 2009 in the beginning of the current recovery with the lowest in Dec 2010; the PMI average in the three months ending in Sep was 51.5, which is lower than 54.2 in the three months ending in Jun and the lowest quarterly reading since IIIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10213).

New export orders registered 48.1 in Oct still in contraction territory with 48.1 in Sep, which wass the fastest decline in new export orders since Oct 2011. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with the official indicators showing mild contraction of manufacturing that is restraining overall economic growth and weakening labor markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10213). The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) declined to the weakest reading in three years to 51.1 in Sep from 51.5 in Aug, indicating moderate expansion of US manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10144). The PMI reading at 51.4 is lower than 54.2 for IIQ2012. New export orders declined at the highest rate in 11 months with the index of new exports orders falling from 48.8 in Aug to 48.0 in Sep while total new orders increased from 51.9 in Aug to 52.3 in Sep because of orders from the internal market. Chris Williamson, Chief Economist at Markit, finds that the data suggest deterioration of manufacturing toward the end of Sep, which could result in further decline that could cause stagnation of the US economy or growth at a rate lower than 1.3 for GDP in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10144). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® increased 1.9 percentage points from 49.6 in Aug to 51.5 in Sep, (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 5.2 percentage points from 47.1 in Aug to 52.3 in Sep. The index of exports increased 1.5 percentage points from 47.0 in Aug to 48.5 in Sep, remaining in mild contraction territory. The Non-Manufacturing ISM Report on Business^® PMI increased 1.4 percentage points from 53.7 in Aug to 53.7 in Sep, indicating growth during 38 consecutive months, while the index of new orders increased 4.3 percentage points from 55.6 in Aug to 59.9 in Sep (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.

Table USA, US Economic Indicators

Consumer Price Index	Sep 12 months NSA ∆%: 2.0; ex food and energy ∆%: 2.0 Sep month ∆%: 0.6; ex food and energy ∆%: 0.1 Blog10/21/12
Producer Price Index	Sep 12-month NSA ∆%: 2.1; ex food and energy ∆% 2.3 Sep month SA ∆% = 1.1; ex food and energy ∆%: 0.0 Blog 10/21/12
PCE Inflation	Aug 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.6 Blog 9/30/12
Employment Situation	Household Survey: Sep Unemployment Rate SA 7.8% Blog calculation People in Job Stress Sep: 28.7 million NSA, 17.8% of Labor Force Establishment Survey: Sep Nonfarm Jobs +114,000; Private +104,000 jobs created Aug 12-month Average Hourly Earnings Inflation Adjusted ∆%: 0.1 Blog 10/7/12
Nonfarm Hiring	Nonfarm Hiring fell from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million Private-Sector Hiring Aug 2012 4.345 million lower by 1.042 million than 5.387 million in Aug 2005 Blog 10/14/12
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2012 2.3 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 2.0 Blog 10/28/12
Personal Income and Consumption	Aug month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% -0.3 Real Personal Consumption Expenditures (RPCE): 0.1 12-month Aug NSA ∆%: RDPI: 1.8; RPCE ∆%: 2.0 Blog 9/30/2012
Quarterly Services Report	IQ12/IQ11 SA ∆%: Information 3.8 Professional 10.3 Administrative 4.9 Hospitals 5.2 Blog 6/10/12
Employment Cost Index	IIQ2012 SA ∆%: 0.5 Jun 12 months ∆%: 1.7 Blog 8/5/12
Industrial Production	Sep month SA ∆%: 0.4 Sep 12 months SA ∆%: 2.8 Manufacturing Sep SA ∆% 0.2 Sep 12 months SA ∆% 3.2, NSA 3.2 Capacity Utilization: 78.3 Blog 10/21/12
Productivity and Costs	Nonfarm Business Productivity IIQ2012∆% SAAE 2.2; IIQ2012/IIQ2011 ∆% 1.2; Unit Labor Costs SAAE IIQ2012 ∆% 1.5; IIQ2012/IIQ2011 ∆%: 0.9 Blog 9/9/2012
New York Fed Manufacturing Index	General Business Conditions From Sep -10.41 to Oct -6.16 New Orders: From Sep -14.03 to Oct -8.97 Blog 10/21/12
Philadelphia Fed Business Outlook Index	General Index from Sep minus 1.9 to Oct 5.7 New Orders from Sep 1.0 to Oct minus 0.6 Blog 10/21/12
Manufacturing Shipments and Orders	Sep New Orders SA ∆%: 9.9; ex transport ∆%: 2.0 Jan-Sep New Orders NSA ∆%: 4.8; ex transport ∆% 3.4 Blog 10/28/12
Durable Goods	Jul New Orders SA ∆%: 4.2; ex transport ∆%: -0.4 Jan-Jul 12/Jan-Jul 11 NSA New Orders ∆%: 7.5; ex transport ∆% : 5.5 Blog 10/28/12
Sales of New Motor Vehicles	Jan-Sep 2012 10,899,949; Jan-Sep 2011 9,518,172. Sep SAAR 14.94 million, Aug SAAR 14.52 million, Sep 2011 SAAR 13.4 million Blog 10/7/12
Sales of Merchant Wholesalers	Jan-Aug 2012/Jan-Aug 2011 NSA ∆%: Total 6.1; Durable Goods: 7.6; Nondurable Goods: 4.9 Blog 10/14/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Aug 12/Aug 11 NSA ∆%: Sales Total Business 3.2; Manufacturers 2.5 Retailers 5.7; Merchant Wholesalers 1.8 Blog 10/21/12
Sales for Retail and Food Services	Jan-Sep 2012/Jan-Sep 2011 ∆%: Retail and Food Services 5.6; Retail ∆% 5.3 Blog 10/21/12
Value of Construction Put in Place	Aug SAAR month SA ∆%: -0.6 Aug 12-month NSA: 6.5 Jan-Aug 2012 ∆% 9.0 Blog 10/7/12
Case-Shiller Home Prices	Jul 2012/Jul 2011 ∆% NSA: 10 Cities 0.6; 20 Cities: 1.2 ∆% Jul SA: 10 Cities 0.4 ; 20 Cities: 0.4 Blog 9/30/12
FHFA House Price Index Purchases Only	Aug SA ∆% 0.7; 12 month ∆%: 4.8 Blog 10/28/12
New House Sales	Sep 2012 month SAAR ∆%: +5.7 Jan-Sep 2012/Jan-Sep 2011 NSA ∆%: 21.8 Blog 10/28/12
Housing Starts and Permits	Sep Starts month SA ∆%: 15.0 ; Permits ∆%: -11.6 Jan-Sep 2012/Jan-Sep 2011 NSA ∆% Starts 26.7; Permits ∆% 31.5 Blog 10/21/12
Trade Balance	Balance Aug SA -$44217 million versus Jul -$42466 million Exports Aug SA ∆%: -1.0 Imports Aug SA ∆%: -0.1 Goods Exports Jan-Aug 2012/2011 NSA ∆%: 5.6 Goods Imports Jan-Aug 2012/2011 NSA ∆%: 4.7 Blog 10/14/12
Export and Import Prices	Sep 12-month NSA ∆%: Imports -0.6; Exports -0.5 Blog 10/14/12
Consumer Credit	Aug ∆% annual rate: 8.0 Blog 10/7/12
Net Foreign Purchases of Long-term Treasury Securities	Aug Net Foreign Purchases of Long-term Treasury Securities: $90.0 billion Major Holders of Treasury Securities: China $1154 billion; Japan $1122 billion; Total Foreign US Treasury Holdings Aug $5430 billion Blog 10/21/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 6.4; Outlays -1.7; Individual Income Taxes 3.7 Deficit Fiscal Year 2011 $1,300 billion Deficit Fiscal Year 2012 $1,089,353 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 10/14/2012
CBO Budget and Economic Outlook	2012 Deficit $1128 B 7.3% GDP Debt 11,318 B 72.8% GDP 2013 Deficit $614 B, Debt 12,064 B 76.1% GDP Blog 8/26/12
Commercial Banks Assets and Liabilities	Sep 2012 SAAR ∆%: Securities 6.7 Loans 2.2 Cash Assets -65.1 Deposits 7.7 Blog 10/28/12
Flow of Funds	IIQ2012 ∆ since 2007 Assets -$4193B Real estate -$4451B Financial $-157 MM Net Worth -$3389B Blog 9/23/12
Current Account Balance of Payments	IIQ2012 -$1285 B %GDP 3.0 Blog 9/23/12

Links to blog comments in Table USA:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

10/7/12 http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html

9/30/12 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html

Manufacturers’ shipments of durable goods increased 0.8 percent in Sep 2012 after declining 2.9 percent in Aug. New orders increased 9.9 percent in Sep after decreasing 13.1 percent in Aug, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by increase of orders for nondefense aircraft of 2640.7 percent in Sep after decrease of 97.2 percent in Aug and increase of 51.1 percent in Jul and 32.5 percent in Jun. New orders excluding transportation equipment increased 2.0 percent in Sep after decreasing 2.1 percent in Aug. Capital goods new orders, indicating investment, increased 25.6 percent in Sep after decreasing 26.0 percent in Aug. New orders of nondefense capital goods increased 23.7 percent in Sep after decreases of 24.0 percent in Aug. Excluding more volatile aircraft, capital goods orders were virtually unchanged in both Sep and Aug.

Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Sep 2012 ∆%	Aug 2012 ∆%	Jul 2012 ∆%
Total
S	0.8	-2.9	1.8
NO	9.9	-13.1	3.3
Excluding Transport
S	0.6	-0.7	-0.7
NO	2.0	-2.1	-2.1
Excluding Defense
S	0.9	-3.2	2.2
NO	9.1	-12.3	4.7
Machinery
S	-0.1	-1.1	-1.4
NO	9.2	-6.1	-6.1
Computers & Electronic Products
S	1.5	-3.7	-2.0
NO	-2.5	-4.8	-2.1
Computers
S	-2.2	-10.4	3.9
NO	-2.5	-5.7	0.3
Transport Equipment
S	1.3	-8.0	8.0
NO	31.7	-33.7	13.2
Motor Vehicles
S	-0.1	-11.6	12.1
NO	-0.4	-11.6	12.3
Nondefense Aircraft
S	12.7	-5.9	6.3
NO	2,640.7	-97.2	51.1
Capital Goods
S	1.7	-1.8	-0.8
NO	25.6	-26.0	1.8
Nondefense Capital Goods
S	1.4	-1.8	-0.3
NO	23.7	-24.0	4.4
Capital Goods ex Aircraft
S	-0.3	-1.2	-1.6
NO	0.0	0.2	-5.6

Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Sep 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Sep 2012 total $2015.4 billion and new orders total $1957.3 billion, growing respectively by 7.6 percent and 4.8 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 7.0 percent and new orders increased 4.5 percent. Excluding defense, shipments grew 6.2 percent and new orders grew 3.4 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $700.5 billion for shipments, growing 5.8 percent, and new orders $712.1 billion, growing 0.4 percent. Excluding aircraft, capital goods shipments reached $571.3 billion, growing by 5.6 percent, and new orders $570.6 billion, growing 0.8 percent. There is no suggestion in these data that the US economy is close to recession but performance at the margin appears somewhat weaker without enough data to discern trends

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars

Jan-Sep 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/ 2011
Total	2,015,405	7.6	1,957,299	4.8
Excluding Transport	1,443,248	6.2	1,376,742	3.4
Excluding Defense	1,919,174	8.3	1,862,512	6.0
Machinery	290,663	9.4	282,072	-2.9
Computers & Electronic Products	251,015	-0.8	193,807	0.5
Computers & Related Products	24,577	-8.1	24,631	-7.5
Transport Equipment	572,157	11.2	580,557	8.5
Motor Vehicles	390,592	12.7	389,081	12.5
Nondefense Aircraft	83,597	22.4	98,533	15.8
Capital Goods	700,525	5.8	712,099	0.4
Nondefense Capital Goods	625,953	7.8	638,665	2.9
Capital Goods ex Aircraft	571,278	5.6	570,569	0.8

Note: Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Output of durable manufacturing accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.

Chart VA-2, US, Output of Durable Manufacturing, 1972-2012

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

Manufacturing jobs fell by 16,000 in Sep 2012 relative to Aug 2012, seasonally adjusted, and fell 40,000 in Sep 2012 relative to Aug 2012, not seasonally adjusted, as shown in Table I-10 in the text at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html, because of the weaker economy and international trade. In the six months ending in Sep 2012, United States national industrial production accumulated growth of 0.6 percent at the annual equivalent rate of 1.2 percent, which is substantially lower than 2.8 percent growth in 12 months. Capacity utilization for total industry in the United States is 2.0 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.1 percent in the six months ending in Sep or at the annual equivalent rate of 0.2 percent. Table VA-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.5 percent in US national income in IQ2012 and 86.3 percent in IIQ2012. Most of US national income is in the form of services. In Sep 2012, there were 133.797 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 111.989 million NSA in Sep 2012 accounted for 83.7 percent of total nonfarm jobs of 133.797 million, of which 12.028 million, or 10.7 percent of total private jobs and 9.0 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.334 million NSA in Sep 2012, or 69.8 percent of total nonfarm jobs and 83.3 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IIQ2012, as shown in Table VA-3. Most income in the US originates in services. Subsidies and similar measures designed to increase artificially and temporarily manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IQ2012	% Total	SAAR IIQ2012	% Total
National Income WCCA	13,788.3	100.0	13,867.8	100.0
Domestic Industries	13,573.4	98.4	13,620.5	98.2
Private Industries	11,922.7	86.5	11,967.5	86.3
Agriculture	134.0	1.0	132.8	0.9
Mining	211.0	1.5	208.7	1.5
Utilities	211.9	1.5	214.7	1.6
Construction	585.6	4.3	585.8	4.2
Manufacturing	1521.9	11.0	1530.4	11.0
Durable Goods	865.2	6.3	877.3	6.3
Nondurable Goods	656.6	4.8	653.1	4.7
Wholesale Trade	831.6	6.0	852.8	6.2
Retail Trade	947.5	6.9	947.2	6.8
Transportation & WH	416.5	3.0	417.7	3.0
Information	486.7	3.5	497.0	3.6
Finance, insurance, RE	2301.3	16.7	2271.1	16.4
Professional, BS	1955.0	14.2	1983.5	14.3
Education, Health Care	1380.8	10.0	1382.7	10.0
Arts, Entertainment	541.1	3.9	542.7	3.9
Other Services	397.9	2.9	400.3	2.9
Government	1650.7	12.0	1653.0	11.9
Rest of the World	214.9	1.6	247.3	1.8

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis

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

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. These forecasts are biannual in Apr and Oct.

Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year

Fiscal Year Date of Forecast	Real GDP	Domestic CGPI	CPI All Items Less Fresh Food
2011
Apr 2012	-0.2 to –0.2 [-0.2]	+1.7	0.0
Jan 2012	-0.4 to –0.3 [-0.4]	+1.8 to +1.9 [+1.8]	-0.1 to 0.0 [-0.1]
2012
Apr 2012	+2.1 to +2.4 [+2.3]	+0.4 to +0.7 [+0.6]	+0.1 to +0.4 [+0.3]
Jan 2012	+1.8 to +2.1 [+2.0]	-0.1 to +0.2 [+0.1]	0.0 to +0.2 [+0.1]
2013
Apr 2012	+1.6 to +1.8 [+1.7]	+0.7 to +0.9 [+0.8]	+0.5 to +0.7 [+0.7]
Jan 2012	+1.4 to +1.7 [+1.6]	+0.6 to 1.0 [+0.8]	+0.4 to +0.5 [+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

http://www.boj.or.jp/en/mopo/outlook/index.htm/

Private-sector activity in Japan contracted at a moderate rate with the Markit Composite Output PMI^™ Index decreasing from 48.6 in Aug to 48.4 in Sep, which is still below 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10143). Paul Smith, economist at Markit and author of the report, finds that manufacturing and services data suggest stagnation of GDP in Japan in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10143). The Markit Business Activity Index of Services decreased from 49.3 in Aug to 48.9 in Sep, also showing contraction at slower pace, also declining in IIIQ2012 to the lowest level in a year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10143). The Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, increased from 47.7 in Aug to 48.0 in Aug, for more moderate contraction than in Aug, which registered the weakest private-sector manufacturing activity in 16 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10087). Paul Smith, economist at Markit and author of the report, finds the data consistent with quarterly contraction of industrial production with the significant weakness in export demand because of the slowing global economy and strength of the yen (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10087).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 Blog 8/9/11 Table 26
Corporate Goods Prices	Sep ∆% +0.3 12 months ∆% minus 1.4 Blog 10/14/12
Consumer Price Index	Sep NSA ∆% 0.1; Sep 12 months NSA ∆% -0.3 Blog 10/28/12
Real GDP Growth	IIQ2012 ∆%: 0.3 on IQ2012; IIQ2012 SAAR 0.7; ∆% from quarter a year earlier: 3.2 % Blog 9/16/12
Employment Report	Aug Unemployed 2.77 million Change in unemployed since last year: minus 180 thousand Unemployment rate: 4.2% Blog 10/14/12
All Industry Indices	Aug month SA ∆% 0.1 12-month NSA ∆% -0.1 Blog 10/21/12
Industrial Production	Aug SA month ∆%: -1.3 12-month NSA ∆% -4.3 Blog 9/30/12
Machine Orders	Total Aug ∆% -12.6 Private ∆%: -13.7 Jul ∆% Excluding Volatile Orders -3.3 Blog 10/14/12
Tertiary Index	Aug month SA ∆% 0.4 Aug 12 months NSA ∆% 0.8 Blog 10/14/12
Wholesale and Retail Sales	Aug 12 months: Total ∆%: -2.7 Wholesale ∆%: -4.3 Retail ∆%: 1.8 Blog 9/30/12
Family Income and Expenditure Survey	Aug 12-month ∆% total nominal consumption 1.4, real 1.8 Blog 9/30/12
Trade Balance	Exports Sep 12 months ∆%: -10.3 Imports Sep 12 months ∆% 4.1 Blog 10/28/12

Links to blog comments in Table JPY:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

The structure of exports and imports of Japan is in Table VB-1. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 36.3 percent of Japan’s imports and increased 18.2 percent in the 12 months ending in Sep 2012. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.0 percent of Japan’s exports with decrease of 5.7 percent in the 12 months ending in Sep. Machinery contributes 19.2 percent of Japan’s exports with decrease of 10.5 percent in the 12 months ending in Sep. Electrical machinery contributes 19.0 percent of Japan’s exports with decrease of 5.3 percent in the 12 months ending in Sep. Exports of transport equipment with share of 22.5 percent in total exports decreased 16.6 percent in the 12 months ending in Sep but had been increasing sharply largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows decrease of the major categories of motor vehicles of 14.6 percent: cars decreased 16.1 percent with decrease of 10.5 percent in the minor category of buses and trucks, decrease of 6.4 percent for parts of motor vehicles, decrease of 6.4 percent for motorcycles and decrease of 40.4 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversion of carry trades from zero interest rates to commodity prices.

Table VB-1, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Sep 2012	Value JPY Millions	% of Total	12 Months ∆%	Contribution Degree %
Exports	5,359,752	100.0	-10.3	-10.3
Foodstuffs	29,816	0.6	10.3	0.0
Raw Materials	81,200	1.5	-2.5	0.0
Mineral Fuels	104,207	1.9	-14.3	-0.3
Chemicals	527,058	9.8	-2.8	-0.3
Manufactured Goods	694,421	13.0	-5.7	-0.7
Machinery	1,028,723	19.2	-10.5	-2.0
Electrical Machinery	1,020,739	19.0	-5.3	-1.0
Transport Equipment	1,207,530	22.5	-16.6	-4.0
Motor Vehicles	737,354	13.8	-14.6	-2.1
Cars	611,546	11.4	-16.1	-2.0
Buses & Trucks	110,518	2.1	-10.5	-0.2
Parts of Motor Vehicles	278,528	5.2	-6.4	-0.3
Motorcycles	17,379	0.3	-5.2	0.0
Ships	130,805	2.4	-40.4	-1.5
Other	666,058	12.4	-15.5	-2.1
Imports	5,918,307	100.0	4.1	4.1
Foodstuffs	448,704	7.6	-3.4	-0.3
Raw Materials	332,310	5.6	-23.2	-1.8
Mineral Fuels	2,148,341	36.3	18.2	5.8
Chemicals	490,401	8.3	-6.8	-0.6
Manufactured Goods	437,706	7.4	-8.5	-0.7
Machinery	368,966	6.2	-8.2	-0.6
Electrical Machinery	704,442	11.9	10.2	1.1
Transport Equipment	195,233	3.3	23.8	0.7
Other	792,204	13.4	3.3	0.4

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

Table VB-2 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.4 percent while imports grew at 3.3 percent per year in the years from 1979 to 2011. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.

Table VB-2, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,546	68,111	-2,565

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

Table VB-3, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Sep 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,359,752	-10.3	5,918,307	4.1
Asia	2,944,304	-8.3	2,591,029	0.7
China	953,834	-14.1	1,283,316	3.8
USA	933,372	0.9	506,328	3.8
Canada	65,567	-5.6	76,417	-5.5
Brazil	41,698	-12.0	77,533	-9.7
Mexico	72,939	-11.0	28,427	9.4
Western Europe	585,936	-26.0	573,723	-3.0
Germany	144.224	-12.9	154,489	-7.9
France	43,882	-24.4	79,496	7.7
UK	101,960	-31.2	43,575	-32.7
Middle East	181,035	-0.3	1,242,800	20.8
Australia	121,160	-21.0	385,551	2.0

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

The geographical distribution of Japan’s trade balance is provided in Table VB-4. The combined trade surpluses with the US, UK and Mexico of JPY 529,941 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,326,156 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 329,482 million in Sep 2012.

Table VB-4, Japan, Trade Balance, Millions of Yen

Sep 2012	Millions of Yen
Total	-558,555
Asia	353,275
China	-329,482
USA	427,044
Canada	-10,850
Brazil	-35,835
Mexico	44,512
Western Europe	12,213
Germany	-10,265
France	-35,614
UK	58,385
Middle East	-1,061,765
Australia	-264,391

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

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/t20121009_402841094.htm). Table CIPMNM provides this index and components from Jan to Sep 2012. The index fell from 58.0 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. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug and 53.7 in Sep.

Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted

2012	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Sep	53.7	51.8	57.5	51.3	60.9
Aug	56.3	52.7	57.6	51.2	63.2
Jul	55.6	53.2	49.7	48.7	63.9
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/t20121009_402841094.htm

Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Sep 2011 to Sep 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 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 2012 and sharper drop to 53.7 in Sep 2012.

Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20121009_402841100.htm

Table CIPMMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul and to the contraction zone at 49.2 in Aug. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug. The index of employment also fell from 51.0 in Apr to 49.1 in Aug. There is mild rebounding to 49.8 in Sep 2012.

Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted

2012	IPM	PI	NOI	INV	EMP	SDEL
Sep	49.8	51.3	49.8	47.0	48.9	49.5
Aug	49.2	50.9	48.7	45.1	49.1	50.0
Jul	50.1	51.8	49.0	48.5	49.5	49.0
Jun	50.2	52.0	49.2	48.2	49.7	49.1
May	50.4	52.9	49.8	45.1	50.5	49.0
Apr	53.3	57.2	54.5	48.5	51.0	49.6
Mar	53.1	55.2	55.1	49.5	51.0	48.9
Feb	51.0	53.8	51.0	48.8	49.5	50.3
Jan	50.5	53.6	50.4	49.7	47.1	49.7

IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm

China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Chart CIPMMFG provides the index from Sep 2011 to Sep 2012. There is deceleration from 51.2 in Sep 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 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011. The index then fell to contraction at 49.2 in Aug 2012 and improved to 49.8 in Sep, closer to the neutral zone of 50.0.

Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm

The HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10204 ) is mildly improving. The overall Flash China Manufacturing PMI^™ increased marginally from 47.9 in Sep to 49.1 in Oct for a three-month high while the Flash China Manufacturing Output Index increased from 47.3 in Sep to 48.4 in Oct, both in contraction territory below 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that new easing policies implemented in recent weeks should help in improving the economy with initial manifestation in mild improvement in new orders but that continuing easing policy is required to ensure sound recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10204).The HSBC China Services PMI^™, compiled by Markit, shows improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 49.9 in Aug to 50.3 in Sep growth in services compensating decline in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10187). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds marginal improvement in business conditions in China but that increasing demand requires further easing measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10187). The HSBC Business Activity index increased from 52.0 in Aug to 54.3 in Sep with improving activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10187). The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, increased to 47.9 in Sep from 47.6 in Aug, indicating moderate reduction of activity and the eleventh monthly deterioration of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10116). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that accelerating contraction of export orders with pressure on employment suggest that China still requires further easing of policy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10116).

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	Sep 12-month ∆%: minus 3.6 Sep month ∆%: minus 0.1 Blog 10/21/12
Consumer Price Index	Sep month ∆%: 0.3 Sep 12 months ∆%: 1.9 Blog 10/21/12
Value Added of Industry	Sep month ∆%: 0.79 Jan-Sep 2012/Jan-Sep 2011 ∆%: 10.0 Blog 10/21/12
GDP Growth Rate	Year IIIQ2012 ∆%: 7.4 Quarter IIQ2012 ∆%: 2.2 Blog 10/21/12
Investment in Fixed Assets	Sep month ∆%: 1.63 Total Jan-Sep 2012 ∆%: 20.5 Real estate development: 15.4 Blog 10/21/12
Retail Sales	Sep month ∆%: 1.46 Sep 12 month ∆%: 14.2 Jan-Sep ∆%: 14.1 Blog 10/21/12
Trade Balance	Sep balance $27.67 billion Exports ∆% 9.9 Imports ∆% 2.4 Cumulative Sep: $148.43 billion Blog 10/14/12

Links to blog comments in Table CNY:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.4 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.3 percent in 2012 but growth of 1.0 percent in 2013.

Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, ∆%

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	3.2
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	10.1	1.4
2012*			-0.3
2013*			1.0

*EUROSTAT forecast Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, fell from 46.1 in Sep to 45.8 in Oct, for nine consecutive declines and thirteen drops in fourteen months, registering the lowest reading in 40 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10202). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index is consistent with decline of GDP of 0.5 percent in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10202). The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, decreased from 46.3 in Aug to 46.1 in Sep, which is the eighth consecutive contraction; the index average of 46.3 in IIIQ2012 is lower than 46.4 in IIQ2012 and the lowest reading since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10168). Chris Williamson, Chief Economist at Markit, finds that the data are consistent with likely decline of GDP at a higher rate in IIIQ2012 with the euro area falling again into recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10168). The Markit Eurozone Services Business Activity Index declined from 47.2 in Aug to 46.1 in Sep, which is the lowest reading since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10168). The Markit Eurozone Manufacturing PMI^® rose to 46.1 in Sep from 45.1 in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10110). The average PMI for IIIQ2012 was 45.1, which was the weakest reading since IIQ2009 and below 45.4 in IIQ2012. New export orders declined in Sep for a fifteenth consecutive month, with decline for all countries in the index, with the sharpest contractions in Greece, Austria and Germany. Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of possibly as high as 1 percent, exerting pressure on GDP and employment with the euro area falling into recession in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10110). Table EUR provides the regional data table for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IIQ2012 ∆% -0.2; IIQ2012/IIQ2011 ∆% -0.4 Blog 10/7/12
Unemployment	Aug 2012: 11.4% unemployment rate Aug 2012: 18.196 million unemployed Blog 10/7/12
HICP	Sep month ∆%: 0.7 12 months Sep ∆%: 2.6 Blog 10/21/12
Producer Prices	Euro Zone industrial producer prices Aug ∆%: 0.9 Aug 12-month ∆%: 2.7 Blog 10/7/12
Industrial Production	Aug month ∆%: 0.6; Aug 12 months ∆%: -2.9 Blog 10/14/12
Retail Sales	Aug month ∆%: 0.1 Aug 12 months ∆%: -1.3 Blog 10/7/12
Confidence and Economic Sentiment Indicator	Sentiment 85.0 Sep 2012 Confidence minus 25.9 Sep 2012 Blog 9/30/12
Trade	Jan-Aug 2012/Jan-Aug 2011 Exports ∆%: 9.0 Imports ∆%: 2.5 Aug 2012 12-month Exports ∆% 10.4 Imports ∆% 1.3 Blog 10/21/12

Links to blog comments in Table EUR:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

10/7/12 http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html

9/30/12 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html

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 Annual ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	4.2	4.0
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: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1

The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, decreased from 49.2 in Sep to 48.1 in Oct, which is the sixth consecutive reading below 50, indicating mild contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10203). Respondents to the survey mentioned weakness in export business, especially in southern Europe. The pace of decline of new export orders for manufacturing was at the second fastest rhythm since Apr 2009 and was only worst in Aug 2012. Tim Moore, Senior Economist at Markit, finds that output stabilization was attained by executing existing orders because of the lack of new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10203). The Markit Germany Composite Output Index of the Markit Germany Services PMI^®, combining manufacturing and services with close association with Germany’s GDP, increased from 47.0 in Aug to 49.2 in Sep, indicating only moderate reduction in output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10203). Tim Moore, Senior Economist at Markit and author of the report, finds that the economy of Germany lost strength in Oct, with declining manufacturing affected especially by weakness in automobiles and export orders from southern Europe (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10203). There was marginal improvement in the Germany Services Business Activity Index from 48.3 in Aug to 49.7 in Sep, which is the second worst reading in a year and significantly lower than the long-term average of 53.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10171). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, increased from 44.7 in Aug to 47.3 in Sep, which is the most moderate deterioration since Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10119). New export orders fell sharply but at a slower pace than in Aug when new export orders fell at a record in the past three and a half years. Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output and new orders supported the PMI index, suggesting that the bottom may have been reached (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10119).Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIQ2012 0.3 ∆%; II/Q2012/IIQ2011 ∆% 0.5 1.0 CA 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12
Consumer Price Index	Sep month NSA ∆%: 0.3 Sep 12-month NSA ∆%: 1.7 Blog 10/14/12
Producer Price Index	Sep month ∆%: 0.5 CSA, 0.6 NSA 12-month NSA ∆%: 1.6 Blog 10/21/12
Industrial Production	Mfg Jul month CSA ∆%: -0.4 12-month NSA: -1.7 Blog 10/14/12
Machine Orders	MFG Aug month ∆%: -1.3 Aug 12-month ∆%: -4.8 Blog 10/7/12
Retail Sales	Aug Month ∆% -0.8 12-Month ∆% 0.3 Blog 9/30/12
Employment Report	Unemployment Rate Jul 5.4% Blog 9/30/12
Trade Balance	Exports Aug 12-month NSA ∆%: 5.8 Imports Aug 12 months NSA ∆%: 0.4 Exports Aug month SA ∆%: 2.4; Imports Aug month SA 0.3 Blog 10/14/12

Links to blog comments in Table DE:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

10/7/12 http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html

9/30/12 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIQ1949 to IIQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.8 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using second quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.

Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012

Period	Average ∆%
1949-2012*	3.3
2000-2012*	1.1
2000-2011	1.1
2000-2007	1.7
1990-1999	1.9
1980-1989	2.6
1970-1979	3.8
1960-1969	5.7
1950-1959	4.2

*Second Quarter on Second Quarter

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

The Markit Flash France Composite Output Index increased marginally from 43.2 in Sep to 44.8 in Oct; the Sep reading at 43.2 was the lowest in 41 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10201). Jack Kennedy, Senior Economist at Markit and author of the report, finds weakness in IIIQ2012 GDP with possible contraction extending into IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10201).

The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, decreased from 48.0 in Aug to 43.2 in Sep, indicating significant contraction of private sector activity at the highest rate since mar 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10156). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds that combined manufacturing and services weakness suggests that the French GDP may have contracted in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10156). The Markit France Services Activity index fell from 49.2 in Aug to 45.0 in Sep for the lowest reading in eleven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10156). The Markit France Manufacturing Purchasing Managers’ Index^® fell to 42.7 in Sep from 46.0 in Aug, which was the sharpest decline of the manufacturing economy since Apr 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10129). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing deterioration in manufacturing with weakening new orders in home and foreign markets, indicating that manufacturing deducted from GDP growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10129). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Sep month ∆% -0.3 12 months ∆%: 1.9 10/14/12
PPI	Aug month ∆%: 1.2 Jun 12 months ∆%: 2.5 Blog 9/30/12
GDP Growth	IIQ2012/IQ2012 ∆%: 0.0 IIQ2012/IIQ2011 ∆%: 0.3 Blog 9/30/12
Industrial Production	Aug ∆%: Manufacturing 1.8 12-Month ∆%: Manufacturing -0.4 Blog 10/14/12
Consumer Spending	Aug Manufactured Goods ∆%: -1.0 Aug 12-Month Manufactured Goods ∆%: -0.9 Blog 9/30/12
Employment	IIQ2012 Unemployed 2.785 million Unemployment Rate: 9.7% Employment Rate: 63.9% Blog 9/9/12
Trade Balance	Aug Exports ∆%: month 3.6, 12 months 2.8 Aug Imports ∆%: month 6.3, 12 months 3.4 Blog 10/14/12
Confidence Indicators	Historical averages 100 Oct Mfg Business Climate 85 Blog 10/28/12

Links to blog comments in Table FR:

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

9/30/12 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

Table VF-1 shows the INSEE business climate manufacturing indicator. The headline synthetic index decreased from 91 in Jun to 89 in Jul but increased to 90 in both Aug and Sep, declining to 85 in Oct. The final row shows general production expectations deteriorating from minus 32 in Jun to minus 44 in Jul and Aug, minus 52 in Sep and minus 56 in Oct, well below the average since 1976 of minus 9. The indicator of demand and export order levels fell from minus 30 in Jun to minus 36 in Jul but then improved to minus 28 in Aug and minus 27 in Sep, declining to -36 in Oct which is still well below the average since 1976 of minus 12.

Table VF-1, France, Business Climate Indicators of INSEE

Mfg 2012	Average since 1976	Jul	Aug	Sep	Oct
Synthetic Index	100	89	90	90	85
Recent Changes in Output	5	-10	-9	-21	-24
Finished- Goods Inventory Level	13	12	13	7	15
Demand and Total Order Levels	-17	-30	-33	-28	-39
Demand and Export Order Levels	-12	-36	-28	-27	-36
Personal Production Expectations	5	-9	-7	-4	-7
General Production Expectations	-9	-44	-44	-52	-56

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121023

Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jul 2012 and a marginal upward move in Aug-Sep 2012 but new decline in Oct 2012.

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

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121023

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jul 2012 with new improvement in Aug 2012 followed by decline in Sep 2012.

Chart VF-2, INSEE Business Climate Manufacturing Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121023

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar followed by weakens in Apr through Jul 2012 and stability in Aug-Sep 2012 and new decline in Oct 2012.

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

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121023

VG Italy. Table VG-IT provides annual percentage changes of Italy’s GDP and expenditure components. Growth of Italy’s economy was relatively strong in 2007 with GDP growth of 1.7 percent, growth of Gross Domestic Investment (GDI) of 1.8 percent and growth of exports of 6.2 percent. There was sharp impact of the contraction on the economy of Italy with decline of GDP of 1.2 percent in 2008 followed by sharper decline of 5.5 percent in 2009. GDI fell sharply by 11.7 percent in 2009. Exports (EXP) also contracted sharply by 17.5 percent. Recovery was strong in 2010 with growth of GDP of 1.8 percent, GDI 2.1 percent and EXP 11.4 percent. Recovery stalled in 2011 with growth of GDP of 0.4 percent moving toward contraction at the end of the year and contraction of GDI of 1.8 percent while EXP grew 6.0 percent.

Table VG-IT, Italy, Gross Domestic Product and Expenditure Components, Annual ∆%

	2007	2008	2009	2010	2011
GDP	1.7	-1.2	-5.5	1.8	0.4
NCE	1.1	-0.5	-1.0	0.7	-0.1
GDI	1.8	-3.7	-11.7	2.1	-1.8
EXP	6.2	-2.8	-17.5	11.4	6.0
IMP	5.2	-3.0	-13.4	12.5	0.6

Notes: NCE: National Consumption Expenditures; GDI: Gross Domestic Investment; EXP: Exports; IMP: Imports

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71887

The Markit/ADACI Business Activity Index increased from 44.0 in Aug to 44.5 in Sep, indicating sharp contraction of output of Italy’s services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10167). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the data suggest contraction of GDP in Italy in IIIQ2012 at a rate close to the contraction in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10167). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), increased from 43.6 in Aug to 45.7 in Sep for 12 consecutive months of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10122). There was more moderate decline in new foreign orders than sharper decline in domestic new orders. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds slower contraction of employment, new orders and output, suggesting slower pace of deterioration of manufacturing in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10122). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Sep month ∆%: 0.0 Sep 12-month ∆%: 3.2 Blog 10/14/12
Producer Price Index	Aug month ∆%: 0.8 Aug 12-month ∆%: 3.0 Blog 9/30/12
GDP Growth	IIQ2012/IQ2012 SA ∆%: minus 0.8 IIQ2012/IIQ2011 NSA ∆%: minus 2.6 Blog 10/14/12
Labor Report	Jul 2012 Participation rate 64.0% Employment ratio 57.1% Unemployment rate 10.7% Blog 9/2/12
Industrial Production	Jul month ∆%: -0.2 12 months ∆%: minus 7.3 Blog 9/16/12
Retail Sales	Aug month ∆%: 0.0 Aug 12-month ∆%: -1.0 Blog 10/28/12
Business Confidence	Mfg Oct 87.6, Jun 88.8 Construction Oct 81.4, Jun 85.4 Blog 10/28/12
Trade Balance	Balance Aug SA €507 million versus Jul €708 Exports Aug month SA ∆%: 3.9; Imports Aug month ∆%: 4.4 Exports 12 months Aug NSA ∆%: +8.4 Imports 12 months NSA ∆%: minus 1.1 Blog 10/21/12

Links to blog comments in Table IT:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

9/30/12 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/2/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html

An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales decreased 0.0 percent in Aug 2012 relative to Jul 2012, decreased 0.1 percent in Jun-Aug 2012 relative to Mar-May 2012, decreased 1.0 percent in Aug 2012 relative to Aug 2011 and decreased 1.6 percent in Jan-Aug 2012 relative to Jan-Aug 2011.

Table VG-1, Italy, Retail Sales ∆%

	Aug 2012/ Jul 2012 SA	Jun-Aug 12/ Mar-May 12 SA	Aug 2012/ Aug 2011 NSA	Jan-Aug 2012/ Jan-Aug 2011
Total	0.0	-0.1	-1.0	-1.6
Food	0.0	0.0	0.2	-0.1
Non-food	-0.1	-0.3	-1.5	-2.4

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/73315

Chart VG-1 provides 12-month percentage changes of retail sales in Italy. There are only positive changes in Dec 2010 and Apr 2011. Retail sales fell relative to a year earlier in most months of 2011 with improvement in Feb and Mar 2012 but sharp decline in Apr 2012 followed by improvements in May and Jun 2012, another sharp drop in Jul 2012 and improvement in Aug 2012.

Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

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

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage changes in 2011 and Jan-Aug 2012 and annual rates from 2008 to 2011 in Table VG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but few monthly increases of 0.5 percent in Oct, 1.6 percent in Apr, 0.2 percent in May and 0.4 percent in Jun. There are negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr 2011 and 0.0 percent in Feb. There are only two months with positive 12-month percentage change in 2012, 1.5 percent in Mar 2012 and 0.5 percent in Feb 2012. Retail sales grew 1.2 percent in Jan 2012 and 0.8 percent in Feb 2012, reducing sharply the 12-month percentage change from minus 3.7 percent in Dec 2011 to only minus 1.1 percent in Jan 2012 and positive 0.5 percent in the 12 months ending in Feb 2012 and 1.5 percent in the 12 months ending in Mar 2012. Decline of the monthly rates in Mar 2012 of 0.8 percent and 1.6 percent in Apr 2012 pulled down the 12-month percentage change in Apr to minus 6.8 percent. Increase of 0.2 percent in May 2012 resulted in decrease of 1.7 percent in 12 months and growth of 0.4 percent in Jun 2012 further reduced the 12-month percentage change to minus 0.5 percent. Further decline of 0.2 percent in Jul 2012 resulted in decline of 3.2 percent in 12 months. Unchanged sales in Aug 2012 resulted in decline in twelve months of 1.0 percent.

Table VG-2, Italy, Retail Sales Month and 12-Month ∆%

	12-Month ∆% NSA	Month ∆% SA
Aug 2012	-1.0	0.0
Jul	-3.2	-0.2
Jun	-0.5	0.4
May	-1.7	0.2
Apr	-6.8	-1.6
Mar	1.5	-0.8
Feb	0.5	0.8
Jan	-1.1	1.2
Dec 2011	-3.7	-1.0
Nov	-1.8	-0.7
Oct	-1.4	0.5
Sep	-1.6	-0.4
Aug	-0.3	-0.3
July	-2.3	-0.1
Jun	-1.1	-0.7
May	-0.4	-0.4
Apr	2.2	1.3
Mar	-2.1	0.1
Feb	0.0	-0.7
Jan	-1.1	-1.0
Dec 2010	0.6	0.6
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/73315

Italy’s index of business confidence in manufacturing and construction is provided in Table VG-3. There has been improvement of manufacturing confidence below the historical average of 100 from 86.5 in May with reading of 88.3 in Sep, declining marginally to 87.6 in Oct 2012. Order books have improved from minus 42 in May to minus 40 in Sep with marginal decline to 42 in Oct 2012. There is mild improvement in construction with an increase of the index from 82.2 in May to 86.5 in Sep followed by decline to 81.4 in Oct.

Table VG-3, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Oct	Sep	Aug	Jul	Jun
Mfg Confidence	87.6	88.3	87.3	87.3	88.8
Order Books	-42	-40	-41	-42	-40
Stocks Finished Products	1	1	2	2	1
Production Expectation	-6	-7	-7	-6	-5
Construction Confidence	81.4	86.1	82.0	83.8	85.4
Order Books	-48	-47	-44	-44	-44
Employment	-18	-5	-17	-15	-12

Mfg: manufacturing

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/73379

VH United Kingdom. Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 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 0.9 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	0.9
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/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® decreased from 53.7 in Aug to 52.2 in Sep with growth during 21 consecutive months, decreasing at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10162). Chris Williamson, Chief Economist at Markit, finds that the UK economy could have grown at 0.1 in IIIQ2012 with moderate growth of services but marginal decline in construction and sharp decline in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10162). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) decreased from 49.6 in Aug to 48.4 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10013). The PMI registered average 47.7 in IIIQ2012, which is the lowest reading since IIQ2009. New export orders fell for a sixth consecutive month with slowing demand from the European Union and Asia. Chris Williamson, Chief Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that the PMI data suggest contraction of manufacturing output in the UK at a quarterly rate higher than 1 percent that could restrain growth, maintaining the economy in recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10125).

Table UK, UK Economic Indicators


CPI	Sep month ∆%: 0.4 Sep 12-month ∆%: 2.2 Blog 10/21/12
Output/Input Prices	Output Prices: Sep 12-month NSA ∆%: 2.5; excluding food, petroleum ∆%: 1.2 Input Prices: Sep 12-month NSA ∆%: -1.2 Excluding ∆%: -1.3 Blog 10/21/12
GDP Growth	IIIQ2012 prior quarter ∆% minus 1.0; year earlier same quarter ∆%: 0.0 Blog 10/28/12
Industrial Production	Aug 2012/Jul 2011 NSA ∆%: Production Industries minus 1.2; Manufacturing minus 1.2 Blog 10/14/12
Retail Sales	Sep month ∆%: 0.6 Sep 12-month ∆%: +2.5 Blog 10/21/12
Labor Market	Jun-Aug Unemployment Rate: 7.9%; Claimant Count 4.8%; Earnings Growth 1.7% Blog 10/21/12
Trade Balance	Balance Aug minus ₤4169 million Exports Aug ∆%: -2.4; Jun-Aug ∆%: -1.3 Imports Aug ∆%: 3.4 Jun-Aug ∆%: 0.8 Blog 10/14/12

Links to blog comments in Table UK:

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

10/14/12 http://cmpassocregulationblog.blogspot.com/2012/10/recovery-without-hiring-imf-view-united.html

Annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 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 0.9 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-1, 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	0.9
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/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 1998. Growth in IIQ2011 was reduced to 0.1 percent. The estimate for IIIQ2011 is at 0.5 percent. The estimate for IVQ2011 is contraction of 0.4 percent. The GDP of the UK contracted in a second consecutive quarter by 0.3 percent in the latest estimate for IQ2012. The third estimate for IIQ2012 is contraction of 0.4 percent. The first estimate for IIIQ2012 is growth of 1.0 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

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

	IQ	IIQ	IIIQ	IV
2012	-0.3	-0.4	1.0
2011	0.5	0.1	0.5	-0.4
2010	0.6	0.7	0.6	-0.4
2009	-1.5	-0.2	0.4	0.4
2008	0.1	-0.9	-1.8	-2.1
2007	1.1	1.2	1.2	0.2
2006	0.5	0.3	0.2	0.9
2005	0.6	1.2	0.8	1.1
2004	0.7	0.2	0.0	0.6
2003	0.6	1.2	1.2	1.2
2002	0.4	0.8	0.8	0.9
2001	1.3	0.7	0.5	0.4
2000	1.0	1.4	0.3	0.2
1999	0.5	0.3	1.7	1.3
1998	0.8	0.7	0.6	0.9

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six consecutive quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 4.6 percent in IVQ2008, 6.1 percent in IQ2009, 5.4 percent in IIQ2009 and 3.3 percent in IIIQ2009. (3) The economy bounced strongly with 2.1 percent in IIQ2010, 2.4 percent in IIIQ2010 and 1.5 percent in IVQ2010. (4) Recovery in 2011 did not continue at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.5 percent in IVQ2010 to 1.4 percent in IQ2011, 0.7 percent in IIQ2011, 0.6 percent in IIIQ2011 and 0.7 percent in IVQ2011 but contraction of 0.1 percent in IQ2012 relative to IQ2011, contraction of 0.5 percent in IIQ2012 relative to IIQ2011 and 0.0 percent in IIIQ2012 relative to IIIQ2011. In IQ2012, GDP fell 0.3 percent for a second consecutive quarter and fell 0.1 percent relative to a year earlier. In IIQ2012, GDP fell 0.4 percent relative to IQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, GDP increased 1.0 percent but was unchanged relative to the same quarter a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

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

	IQ	IIQ	IIIQ	IV
2012	-0.1	-0.5	0.0
2011	1.4	0.7	0.6	0.7
2010	1.2	2.1	2.4	1.5
2009	-6.1	-5.4	-3.3	-0.9
2008	2.7	0.5	-2.4	-4.6
2007	2.6	3.6	4.6	3.8
2006	3.7	2.7	2.1	2.0
2005	1.5	2.5	3.3	3.8
2004	4.4	3.4	2.2	1.6
2003	3.3	3.6	4.0	4.3
2002	2.0	2.2	2.5	3.1
2001	3.3	2.5	2.8	2.9
2000	4.4	5.6	4.1	2.9
1999	2.8	2.4	3.5	4.0
1998	4.0	3.7	3.3	3.1

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Growth rates of GDP and components of gross value added in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Growth of GDP in IIIQ2012 resulted from sharp contraction of construction by 2.5 percent with total production increasing 1.1 percent and manufacturing 1.0 percent while services increased 0.1 percent. Contraction of GDP of 0.4 percent in IIQ2012 resulted from sharp contraction of 3.0 percent of construction with decline of total production by 0.7 percent and of manufacturing by 0.8 percent while services contracted 0.1 percent. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 5.9 percent and contraction of total production by 0.2 percent with manufacturing unchanged while services crawled 0.2 percent. Contraction of GDP of 0.4 percent in IVQ2011 resulted from sharp contraction of 1.4 percent in total production, with manufacturing declining 1.0 percent. Even services fell by 0.1 percent in IVQ2011. Growth of 0.5 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components. Growth in 2011 originated mostly in services. GDP contracted 0.4 percent in IVQ2010, 0.4 percent in IVQ2011, 0.3 percent in IQ2012 and 0.4 percent in IIQ2012. All components are negative in IVQ2011 with exception of 0.2 percent for construction and services fell 0.1 percent while all components are negative in IQ2012 with meager growth of services of 0.2 percent and unchanged manufacturing. All components are negative in IIQ2012 with output falling 0.7 percent, construction 3.0 percent and services 0.1 percent. In contrast, all components are positive in IIIQ2012 with exception of contraction of construction by 2.5 percent.

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

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	156	105	68	770
IIIQ3	1.0	1.1	1.0	-2.5	1.3
IIQ12	-0.4	-0.7	-0.8	-3.0	-0.1
IQ12	-0.3	-0.2	0.0	-5.9	0.2
IVQ11	-0.4	-1.4	-1.0	0.2	-0.1
IIIQ11	0.5	-0.2	-0.4	-0.5	0.8
IIQ11	0.1	-1.1	0.2	1.6	0.3
IQ11	0.5	-0.1	0.7	0.0	0.6
IVQ10	-0.4	0.1	0.5	-1.8	-0.4
IIIQ10	0.6	0.4	1.6	2.9	0.4
IIQ10	0.7	1.4	1.9	6.3	0.2
IQ10	0.6	1.1	0.8	2.3	0.2
IV09	0.4	0.3	1.1	0.5	0.6
III09	0.4	-1.1	-0.4	-0.1	0.5
II09	-0.2	0.0	0.2	-2.6	0.0
I09	-1.5	-4.3	-5.2	-5.8	-0.5
IV08	-2.1	-4.9	-5.2	-5.8	-1.4
III08	-1.8	-1.1	-1.3	-3.0	-1.6
II08	-0.9	-1.1	-1.6	-2.0	-0.6
I08	0.1	-0.3	0.4	1.6	0.0

Note: CONS: construction’ MFG: manufacturing

*Weights (2009) may not add because of rounding and exclusion of Agriculture, Forestry and Fishing with weight of 6. Output components are valued at basic prices while GDP is valued at market prices. The preliminary estimate places GDP next to gross value added by components because it is the only contribution to change in GDP.

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production increased 1.1 percent in IIIQ2012 with growth of manufacturing of 1.0 percent. Government and other services grew 1.6 percent. Total production fell 0.7 percent in IIQ2012 with manufacturing falling 0.8 percent and construction dropping 3.0 percent. Total production fell 0.2 percent in IQ2012 with manufacturing unchanged while construction fell 5.9 percent and services increased 0.2 percent. Total production fell 1.4 percent in IVQ2011 with manufacturing declining 1.0 percent. Services fell 0.1 percent in IVQ2011 and grew 0.2 percent in IQ2012, reducing the support of economic activity in prior quarters.

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

Component	2011Q3	2011Q4	2012Q1	2012Q2	2012Q3
Agriculture, forestry & fishing	-0.7	-2.4	-2.3	-2.6	2.2
Total Production	-0.2	-1.4	-0.2	-0.7	1.1
Mining & quarrying (Extraction)	-1.0	-2.7	-3.0	-3.3	2.3
Manufacturing	-0.4	-1.0	0.0	-0.8	1.0
Electricity, gas, steam & air (Utilities)	1.9	-3.9	1.2	5.1	-2.2
Water supply, sewerage etc.	0.2	0.4	1.1	-3.2	4.1
Construction	-0.5	0.2	-5.9	-3.0	-2.5
Total Services	0.8	-0.1	0.2	-0.1	1.3
Distribution, hotels & restaurants	0.2	-0.7	0.1	0.0	1.6
Transport, storage & communication	0.9	-0.7	0.9	-1.3	0.8
Business services & finance	1.3	0.0	0.0	0.0	1.0
Government & other services	0.4	0.3	0.3	0.3	1.6

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IIIQ2012, growth of services contributed 1.0 percent, which is the driver of growth of GDP of 1.0 percent. In IIQ2012, total production deducted 0.1 percentage points with manufacturing deducting 0.1 percentage points, construction deducting 0.2 percentage points and total services deducted 0.1 percentage points. In IQ2012, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.4 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government.

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

Component	2011Q3	2011Q4	2012Q1	2012Q2	2012Q3
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	0.0	-0.2	0.0	-0.1	0.2
Mining & quarrying (Extraction)	0.0	-0.1	-0.1	-0.1	0.0
Manufacturing	0.0	-0.1	0.0	-0.1	0.1
Electricity, gas, steam & air (Utilities)	0.0	-0.1	0.0	0.1	0.0
Water supply, sewerage etc.	0.0	0.0	0.0	0.0	0.1
Construction	0.0	0.0	-0.4	-0.2	-0.2
Total Services	0.6	-0.1	0.2	-0.1	1.0
Distribution, hotels & restaurants	0.0	-0.1	0.0	0.0	0.2
Transport, storage & communication	0.1	-0.1	0.1	-0.1	0.1
Business services & finance	0.4	0.0	0.0	0.0	0.3
Government & other services	0.1	0.1	0.1	0.1	0.4

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Table VH-7 provides UK growth of value added by components relative to a year earlier for 2011. There was significant deceleration in growth of total production from 2.1 percent in 2010 to minus 0.7 percent in 2011. Manufacturing growth fell from 3.8 percent in 2010 to 2.0 percent in 2011. Construction growth fell from 7.9 percent in 2010 to 2.6 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.7 percent in 2007 to decline 0.2 percent in 2008 and 2.1 percent in 2009. Growth of services in 2010 and 2011 has been more moderate at 1.1 percent and 1.2 percent, respectively.

Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	-2.6	6.1	-6.3	-1.5	-2.3
Total Production	0.5	-2.8	-9.1	2.1	-0.7
Mining & quarrying (Extraction)	-2.7	-6.2	-9.0	-4.3	-14.2
Manufacturing	0.9	-2.5	-9.7	3.8	2.0
Electricity, gas, steam & air (Utilities)	0.5	0.3	-4.7	3.2	-4.6
Water supply, sewerage etc.	3.4	-1.6	-8.5	-0.9	4.9
Construction	2.1	-2.7	-13.5	7.9	2.6
Total Services	4.7	-0.2	-2.1	1.1	1.2
Distribution, hotels & restaurants	5.2	-2.6	-4.1	1.4	0.6
Transport, storage & communication	5.4	-0.5	-5.7	2.8	0.7
Business services & finance	6.8	0.8	-3.5	0.8	1.7
Government & other services	1.4	0.0	2.8	0.6	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Total production subtracted 0.1 percentage points from value added in the UK in 2011, as shown in Table VH-8, compared with addition of 0.3 percentage points in 2010. Total services added 0.9 percentage points in 2010 and 0.9 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.4 percent in the final quarter of 2011, 0.3 percent in the first quarter of 2012 and 0.4 percent in the second quarter of 2012.

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

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	0.1	-0.5	-1.5	0.3	-0.1
Mining & quarrying (Extraction)	-0.1	-0.2	-0.2	-0.1	-0.3
Manufacturing	0.1	-0.3	-1.1	0.4	0.2
Electricity, gas, steam & air (Utilities)	0.0	0.0	-0.1	0.0	-0.1
Water supply, sewerage etc.	0.0	0.0	-0.1	0.0	0.1
Construction	0.2	-0.2	-1.0	0.6	0.2
Total Services	3.5	-0.2	-1.6	0.9	0.9
Distribution, hotels & restaurants	0.7	-0.4	-0.6	0.2	0.1
Transport, storage & communication	0.6	-0.1	-0.6	0.3	0.1
Business services & finance	1.8	0.2	-1.0	0.2	0.5
Government & other services	0.3	0.0	0.6	0.1	0.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2012/stb-gross-domestic-product-preliminary-estimate--q3-2012.html

Longer Run