Contraction of United States Real Private Fixed Investment with Swelling Undistributed Corporate Profits, Higher Growth of Deposits, Securities and Cash Assets than Loans in United States Commercial Banks and World Financial Turbulence and Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Contraction of United States Real Private Fixed Investment and Swelling of Undistributed Corporate Profits
IA Contraction of United States Real Private Fixed Investment and Swelling of Undistributed Corporate Profits
IB Collapse of United States Dynamism of Income Growth and Employment Creation
II United States Commercial Banks Assets and Liabilities
IIA Transmission of Monetary Policy
IIB Functions of Banks
IIBC 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/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment and unsustainable fiscal deficit/debt threatening prosperity; 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 Nov 16 and daily values throughout the week ending on Nov 23 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 Nov 16 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Nov 16, 2012”, first row “USD/EUR 1.2743 -0.3 %,” provides the information that the US dollar (USD) depreciated 0.3 percent to USD 1.2743/EUR in the week ending on Fri Nov 16 relative to the exchange rate on Fri Nov 9. 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 1.2743/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Nov 16, depreciating to USD 1.2813/EUR on Mon Nov 19, or by 0.5 percent. The dollar depreciated because more dollars, $1.2813, were required on Mon Nov 19 to buy one euro than $1.2743 on Nov 16. 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 1.2743/EUR on Nov 16; 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 Nov 16, to the last business day of the current week, in this case Fri Nov 23, such as depreciation by 1.8 percent to USD 1.2975/EUR by Nov 23; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 1.8 percent from the rate of USD 1.2743/EUR on Fri Nov 16 to the rate of USD 1.2975/EUR on Fri Nov 23 {[(1.2975/1.2743) – 1]100 = 1.8%} and depreciated (denoted by negative sign) by 0.7 percent from the rate of USD 1.2884 on Thu Nov 22 to USD 1.2975/EUR on Fri Nov 23 {[(1.2975/1.2884) -1]100 = 0.7%}. 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 Dec 26 to Dec 30, 2012
| Fri Nov 16, 2012 | M 19 | Tue 20 | W 21 | Thu 22 | Fr 23 |
| USD/EUR 1.2743 -0.3% | 1.2813 -0.5% -0.5% | 1.2818 -0.6% 0.0% | 1.2856 -0.9% -0.3% | 1.2884 -1.1% -0.2% | 1.2975 -1.8% -0.7% |
| JPY/ USD 81.31 -2.3 | 81.38 -0.1% -0.1% | 81.68 -0.5% -0.5% | 82.54 -1.5% -1.1% | 82.46 -1.4% 0.1% | 82.40 -1.3% 0.1% |
| CHF/ USD 0.9455 0.3% | 0.9401 0.6% 0.6% | 0.9400 0.6% 0.0% | 0.9371 0.9% 0.3% | 0.9350 1.1% 0.2% | 0.9281 1.8% 0.7% |
| CHF/ EUR 1.2047 0.1% | 1.2045 0.0% 0.0% | 1.2049 0.0% 0.0% | 1.2046 0.0% 0.0% | 1.2048 0.0% 0.0% | 1.2041 0.0% 0.1% |
| USD/ AUD 1.0341 0.9670 -0.4% | 1.0412 0.9604 0.7% 0.7% | 1.0390 0.9625 0.5% -0.2% | 1.0382 0.9632 0.4% -0.1% | 1.0390 0.9625 0.5% 0.1% | 1.0461 0.9559 1.1% 0.7% |
| 10 Year T Note 1.584 | 1.61 | 1.67 | 1.68 | 1.681 | 1.691 |
| 2 Year T Note 0.24 | 0.24 | 0.25 | 0.27 | 0.268 | 0.273 |
| German Bond 2Y -0.03 10Y 1.33 | 2Y -0.02 10Y 1.36 | 2Y -0.03 10Y 1.42 | 2Y 0.01% 10Y 1.43 | 2Y 0.00 10Y 1.44 | 2Y 0.00 10Y 1.44 |
| DJIA 12588.31 -1.8% | 12795.96 1.6% 1.6% | 12788.51 1.6% -0.1% | 12836.89 2.0% 0.4% | 12836.89 2.0% 0.4% | 13009.68 3.3% 1.3% |
| DJ Global 1848.57 -1.7% | 1889.14 2.2% 2.2% | 1886.99 2.1% -0.1% | 1893.15 2.4% 0.3% | 1893.15 2.4% 0.3% | 1925.54 4.2% 1.7% |
| DJ Asia Pacific 1221.23 -1.3% | 1233.81 1.0% 1.0% | 1232.07 0.9% -0.1% | 1231.54 0.8% -0.0% | 1231.54 0.8% 0.0% | 1249.39 2.3% 1.4% |
| Nikkei 9024.16 3.0% | 9153.20 1.4% 1.4% | 9142.64 1.3% -0.1% | 9222.52 2.2% 0.9% | 9366.80 3.8% 1.6% | 9366.80 3.8% 1.6% |
| Shanghai 2014.72 -2.6% | 2016.98 0.1% 0.1% | 2008.92 -0.3% -0.4% | 2030.32 0.8% 1.1% | 2015.61 0.0% -0.7% | 2027.38 0.6% 0.6% |
| DAX 6950.53 -3.0% | 7123.84 2.5% 2.5% | 7172.99 3.2% 0.7% | 7184.71 3.4% 0.2% | 7244.99 4.2% 0.8% | 7309.13 5.2% 0.9% |
| DJ UBS Comm. 140.95 0.1% | 142.70 1.2% 1.2% | 142.69 1.2% 0.0% | 143.11 1.5% 0.3% | 143.11 1.5% 0.3% | 144.08 2.2% 0.7% |
| WTI $ B 87.08 1.1% | 89.28 2.5% 2.5% | 87.28 0.2% -2.2% | 87.68 0.7% 0.5% | 87.10 0.0% -0.7% | 88.26 1.3% 1.3% |
| Brent $/B 109.11 -0.3% | 111.72 2.4% 2.4% | 110.36 1.1% -1.2% | 110.86 1.6% 0.5% | 110.40 1.2% -0.4% | 111.38 2.1% 0.9% |
| Gold $/OZ 1713.60 -1.0% | 1731.5 1.0% 1.0% | 1728.1 0.8% -0.2% | 1730.1 0.9% 0.1% | 1733.2 1.1% 0.2% | 1751.8 2.2% 1.1% |
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 statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. 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.
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 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. On Nov 2, the ten-year government bond of Spain traded at 5.649 percent, increasing to 5.820 percent on Nov 9 while the ten-year bond of Italy traded at 4.879 percent on Nov 2, increasing o 4.898 percent on Nov 9 under renewed concerns about Greece. The ten-year bond of Italy traded at 4.816 percent on Nov 16 while the yield of the ten-year bond of Spain traded at 5.864 percent. The ten-year yield of the government of Spain traded at 5.603 percent on Nov 23 while the ten-year yield of the government of Italy traded at 4.696 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. Mild risk aversion continued in the week of Nov 2 with declines in the yield of the ten-year Treasury note to 1.715 percent and of the ten-year government bond of Germany to 1.45 percent while the dollar appreciated to USD 1.2838/EUR. Risk aversion deepened in the week of Nov 9 with the two-year Treasury trading at 0.256 percent and the ten-year at 1.614 percent while the two-year government bond of Germany traded at minus 0.03 percent and the ten-year at 1.35 percent while the dollar strengthened to USD 1.2711/EUR. There is continuing risk aversion in the week of Nov 16, with the yields of the two-year Treasury at 0.24 percent and of the ten-year Treasury at 1.584, the yield of the two-year government bond at minus 0.03 percent and of the ten-year German government bond at 1.33 percent and the rate of USD 1.2743/EUR. Expectations of an agreement on US fiscal affairs and Greece’s bailout improved risk appetite in the holiday week of Nov 23 with the US two-year yield rising to 0.273 percent and the ten-year yield to 1.691, less pronounced improvement with the two-year yield of Germany at 0.00 percent and ten-year yield at 1.44 percent but depreciation of the dollar to USD 1.2975/EUR while stock markets soared. 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 below consumer price inflation of 2.2 percent in the 12 months ending in Oct (see Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.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 | |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 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.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-Nov 21, 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 Rτ is expected revenue in the time horizon from τ =1 to T; Cτ 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
![clip_image004[1]](http://lh4.ggpht.com/-gUtuhRutAFI/ULLrjdGso5I/AAAAAAAANnw/I5h3_bu8Bx0/s1600-h/clip_image004%25255B1%25255D%25255B2%25255D.gif "clip_image004[1]"){kind=small}
declines.
Equity indexes in Table III-1 soared in the Thanksgiving week ending on Nov 23, 2012. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal unsustainability but investors were energized by expectations of a deal on legislated expenditure reductions and tax increases at the turn of year into 2013. DJIA increased 1.3 percent on Nov 23, increasing 3.3 percent in the week. Germany’s Dax increased 0.9 percent on Fri Nov 23 and increased 5.2 percent in the week. Dow Global increased 1.7 percent on Nov 23 and 4.2 percent in the week. Japan’s Nikkei Average increased 1.6 percent on Fri Nov 23 and increased 3.8 percent in the week as the yen continues to devalue and the stock market gain in expectations of fiscal stimulus by a new administration. Dow Asia Pacific TSM increased 1.4 percent on Nov 23 and increased 2.3 percent in the week while Shanghai Composite increased 0.6 percent on Nov 23 and increased 0.6 percent in the week. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were stronger in the week of Nov 23, 2012. The DJ UBS Commodities Index increased 0.7 percent on Fri Nov 23 and increased 2.2 percent in the week, as shown in Table III-1. WTI increased 1.3 percent in the week of Nov 23 while Brent increased 2.1 percent in the week with conflicts in the Middle East. Gold increased 1.1 percent on Fri Nov 23 and increased 2.2 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 €1,124,344 million on Nov 16, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,711,462 million in the statement of Nov 16. 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 | Nov 16, 2012 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 479,109 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 258,970 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 37,191 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 15,801 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 1,124,344 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 235,483 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 587,118 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 30,011 |
| 9 Other Assets | 278,719 | 336,574 | 273,278 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 3,041,305 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,711,462 |
| Capital and Reserves | 78,143 | 85,748 | 85,552 |
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/fs121120.en.html
IIIE Appendix Euro Zone survival risk. 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 42.6 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 9.1 percent in Jan-Sep 2012 relative to Jan-Sep 2011 while those to EMU are falling at 1.8 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Sep 2012 | Exports | ∆% Jan-Aug 2012/ Jan-Sep 2011 | Imports | Imports |
| EU | 56.0 | -0.7 | 53.7 | -8.1 |
| EMU 17 | 42.6 | -1.8 | 43.4 | -8.0 |
| France | 11.6 | -0.6 | 8.4 | -7.0 |
| Germany | 13.1 | -0.7 | 15.5 | -11.2 |
| Spain | 5.3 | -8.6 | 4.5 | -8.4 |
| UK | 4.7 | 9.2 | 2.7 | -14.5 |
| Non EU | 44.0 | 9.1 | 46.3 | -3.7 |
| Europe non EU | 13.3 | 9.3 | 10.8 | -3.0 |
| USA | 6.1 | 18.7 | 3.2 | 1.1 |
| China | 2.7 | -12.2 | 7.4 | -16.6 |
| OPEC | 4.7 | 23.2 | 8.5 | 22.7 |
| Total | 100.0 | 3.5 | 100.0 | -6.0 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/74537
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €156 million with the 17 countries of the euro zone (EMU 17) in Sep 2012 and deficit of €1283 million in Jan-Sep 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €8217 million in Jan-Sep with Europe non European Union and of €10124 million with the US and in reducing the deficit with non European Union of €688 million in Sep and €4577 million in Jan-Sep 2012. There is significant rigidity in the trade deficits in Jan-Sep of €12,923 million with China and €15,725 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 Sep 2012 Millions of Euro | Trade Balance Cumulative Jan-Sep 2012 Millions of Euro |
| EU | 1,002 | 8,652 |
| EMU 17 | -156 | -1,283 |
| France | 1,185 | 9,143 |
| Germany | -563 | -4,465 |
| Spain | 94 | 1,217 |
| UK | 839 | 7,076 |
| Non EU | -594 | -4,577 |
| Europe non EU | 688 | 8,217 |
| USA | 1,149 | 10,124 |
| China | -1,483 | -12,923 |
| OPEC | -1,607 | -15,725 |
| Total | 408 | 4,075 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/74537
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Sep 2012 relative to Jan-Sep 2011. Growth rates in 12 months of imports are negative with the exception of 9.8 percent for energy. The higher rate of growth of exports of 3.5 percent in Jan-Sep 2012/Jan-Sep 2011 relative to imports of minus 6.0 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.
Table III-5 Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 28.9 | 4.6 | 25.0 | -3.4 |
| Durable | 5.9 | 1.7 | 3.0 | -6.7 |
| Non | 23.0 | 5.3 | 22.0 | -3.0 |
| Capital Goods | 32.3 | 1.6 | 21.1 | -13.0 |
| Inter- | 34.2 | 2.5 | 34.3 | -12.5 |
| Energy | 4.7 | 18.1 | 19.6 | 9.8 |
| Total ex Energy | 95.3 | 2.8 | 80.4 | -9.8 |
| Total | 100.0 | 3.5 | 100.0 | -6.0 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/74537
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
| Sep 2012 | Cumulative Jan-Sep 2012 | |
| Consumer Goods | 1,292 | 11,563 |
| Durable | 885 | 8,296 |
| Nondurable | 407 | 3,267 |
| Capital Goods | 3,964 | 35,918 |
| Intermediate Goods | 163 | 5,110 |
| Energy | -5,011 | -48,517 |
| Total ex Energy | 5,419 | 52,591 |
| Total | 408 | 4,075 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/74537
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 | Primary Net Lending Borrowing | General Government Net Debt | |
| 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 Sep 2012. German exports to other European Union (EU) members are 57.4 percent of total exports in Sep 2012 and 57.2 percent in Jan-Sep 2012. Exports to the euro area are 37.6 percent in Sep and 37.6 percent in Jan-Sep. Exports to third countries are 42.8 percent of the total in Sep and 42.8 percent in Jan-Sep. There is similar distribution for imports. Exports to non-euro countries are decreasing at 2.7 percent in Sep 2012 and increasing 3.8 percent in Jan-Sep 2012 while exports to the euro area are decreasing 9.1 percent in Sep and decreasing 2.1 percent in Jan-Sep 2012. Exports to third countries, accounting for 42.8 percent of the total in Sep 2012, are increasing at 1.8 percent, and 10.4 percent in Jan-Sep, accounting for 42.8 percent of the cumulative total in Jan-Sep 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 ∆%
| Sep 2012 | Sep 12-Month | Jan–Sep 2012 € Billions | Jan-Sep 2012/ | |
| Total | 91.7 | -3.4 | 825.9 | 4.1 |
| A. EU | 52.6 % 57.4 | -7.0 | 472.2 % 57.2 | -0.2 |
| Euro Area | 34.5 % 37.6 | -9.1 | 310.7 % 37.6 | -2.1 |
| Non-euro Area | 18.1 % 19.7 | -2.7 | 161.4 % 19.5 | 3.8 |
| B. Third Countries | 39.2 % 42.8 | 1.8 | 353.7 % 42.8 | 10.4 |
| Total Imports | 74.9 | -3.6 | 682.4 | 1.2 |
| C. EU Members | 47.5 % 63.4 | -4.8 | 432.5 % 63.3 | 1.3 |
| Euro Area | 32.7 % 43.7 | -5.7 | 303.7 % 44.5 | 0.9 |
| Non-euro Area | 14.8 % 19.8 | -2.8 | 128.8 % 18.9 | 2.1 |
| D. Third Countries | 27.4 % 36.6 | -1.4 | 249.9 % 36.6 | 1.1 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_385_51.html;jsessionid=61633506F891355DDF446AAB5332A764.cae4 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
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:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (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 | 2.2 | 2.3 | 7.9 |
| Japan | 0.1 | -0.3 | -1.0 | 4.2 |
| China | 7.4 | 1.7 | -2.8 | |
| UK | 0.0 | 2.7* | 2.5* output | 7.8 |
| Euro Zone | -0.6 | 2.5 | 2.7 | 11.6 |
| Germany | 0.9 | 2.1 | 1.6 | 5.4 |
| France | 0.1 | 2.2 | 2.5 | 10.8 |
| Nether-lands | -1.4 | 3.3 | 4.1 | 5.4 |
| Finland | -0.8 | 3.5 | 2.6 | 7.9 |
| Belgium | -0.3 | 2.6 | 3.3 | 7.4 |
| Portugal | -3.4 | 2.1 | 4.0 | 15.7 |
| Ireland | -0.5 | 2.1 | 2.4 | 15.1 |
| Italy | -2.4 | 2.8 | 3.0 | 10.8 |
| Greece | -7.2 | 0.9 | 6.8 | NA |
| Spain | -1.6 | 3.5 | 4.1 | 25.8 |
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/october-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/october-2012/index.html
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.3 percent in IIIQ2012 relative to IIIQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf See I Mediocre and Decelerating United States Economic Growth http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html). Japan’s GDP fell 0.7 percent in IVQ2011 relative to IVQ2010 and contracted 1.8 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 9.5 percent in IIIQ2011, decreasing at the SAAR of 1.2 percent in IVQ 2011, increasing at the SAAR of 5.2 percent in IQ2012 and 0.3 percent in IIQ2012 but contracting at the SAAR of 3.5 percent in IIIQ2012 (see Section VB http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html); the UK grew at 1.0 percent in IIIQ2012 relative to IIQ2012 and GDP was unchanged in IIIQ2012 relative to IIIQ2011 (see Section VH at http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html); and the Euro Zone grew at minus 0.1 percent in IIIQ2012, minus 0.2 percent in IIQ2012, 0.0 percent in IQ2012 relative to IVQ2011 and fell 0.6 percent in IIIQ2012 relative to IIIQ2011 (see Section VD http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html and earlier http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.9 percent in the US but 17.4 percent for unemployment/underemployment or job stress of 28.1 million (see Table I-4 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ), 4.2 percent for Japan (see Section VB http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_192.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united_21.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 2.2 percent in the US, -0.3 percent for Japan, 1.7 percent for China, 2.5 percent for the Euro Zone and 2.7 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see IIC http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html and earlier 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 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html), weak hiring with the loss of 10 million full-time jobs (see http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Chairman Bernanke (2012Nov20) finds that potential output in the US may have diminished recently such that temporarily the rate of growth could be 2 percent per year:
“The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery. Output normally has to increase at about its longer-term trend just to create enough jobs to absorb new entrants to the labor market, and faster-than-trend growth is usually needed to reduce unemployment. So the fact that unemployment has declined in recent years despite economic growth at about 2 percent suggests that the growth rate of potential output must have recently been lower than the roughly 2-1/2 percent rate that appeared to be in place before the crisis.”
Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation).
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.
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 Oct 24, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121024a.htm):
“Release Date: October 24, 2012
For immediate release
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; see Shultz et al 2012), 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 at http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html 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 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or_4.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.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 IIA and IV in this blog for Sep 2012 at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html. The next report on “Personal Income and Outlays” for Oct will be released at 8:30 AM on Nov 30, 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 Oct report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html; 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 Nov will be released on Fri Dec 7, 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 | ||||
| 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 | 2.5 to 3.0 | 7.6 to 7.9 | 1.6 to 2.0 | 1.7 to 2.0 1.6 to 2.0 |
| 2014 | 3.0 to 3.8 | 6.7 to 7.3 | 1.6 to 2.0 | 1.8 to 2.0 |
| 2015 | 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 | 1.6 to 2.0 | 8.0 to 8.3 | 1.5 to 1.9 | 1.6 to 2.0 |
| 2013 | 2.3 to 3.5 | 7.0 to 8.1 | 1.5 to 2.1 | 1.6 to 2.0 |
| 2014 | 2.7 to 4.1 | 6.3 to 7.5 | 1.6 to 2.2 | 1.6 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
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2012 | 18 | 1 | ||||
| 2013 | 15 | 3 | 1 | |||
| 2014 | 13 | 4 | 2 | |||
| 2015 | 1 | 9 | 3 | 2 | 4 | |
| Longer Run | 19 |
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
The producer price index of Germany increased 0.1 percent in Oct 2012, calendar and seasonally adjusted (CSA) and increased 0.0 not seasonally adjusted (NS) in Oct 2012 and increased 1.5 percent in the 12 months ending in Oct, as shown in Table IV-5. The producer price index of Germany has similar waves of inflation as in many other countries (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). In the first wave from Jan to Apr 2011, the annual equivalent rate of producer price inflation was 10.4 percent NSA and 6.5 percent CSA, propelled by carry trades from zero interest rates to exposures in commodity futures in a mood of risk appetite. In the second wave in May and Jun 2011, the annual equivalent rate of producer price inflation was only 0.6 percent NSA because of the collapse of the carry trade in fear of risks of European sovereign debt but 3.7 percent CSA. In the third wave from Jul to Sep 2011, annual-equivalent producer price inflation in Germany was 2.8 percent NSA and 3.7 percent CSA with fluctuations in commodity prices resulting from perceptions of the sovereign risk crisis in Europe. In the fourth wave from Oct to Nov 2011, annual equivalent inflation was 1.8 percent NSA and 3.0 percent CSA as financial markets were shocked with strong risk aversion. In the fifth wave from Dec 2011 to Jan 2012, annual equivalent inflation was at 1.2 percent NSA and minus 0.6 percent CSA. In the sixth wave, annual equivalent inflation increased to 6.2 percent in Feb-Mar 2012 NSA and 4.9 percent in Feb-Apr and 1.2 percent CSA. In the seventh wave, annual equivalent inflation was minus 2.8 percent in May-Jul 2012 NSA and minus 0.8 percent SA. In the eighth wave, annual equivalent inflation was 4.9 percent in Aug-Sep 2012 NSA and 5.5 percent SA. In the ninth wave, renewed risk aversion resulted in annual equivalent inflation of 0.0 percent in Oct 2012 and 1.2 percent CSA. Annual data in the bottom of Table IV-7 show that the producer price index fell 5.2 percent in the 12 months ending in Dec 2009 as a result of the fall of commodity prices originating in risk aversion after the panic of 2008.
Table IV-5, Germany, Index of Producer Prices for Industrial Products ∆%
| 12 Months ∆% NSA | Month ∆% Calendar and SA | Month ∆% NSA | |
| Oct 2012 | 1.5 | 0.1 | 0.0 |
| AE ∆% Oct | 1.2 | 0.0 | |
| Sep | 1.7 | 0.3 | 0.3 |
| Aug | 1.6 | 0.6 | 0.5 |
| AE ∆% Aug-Sep | 5.5 | 4.9 | |
| Jul | 0.9 | -0.1 | 0.0 |
| Jun | 1.6 | -0.1 | -0.4 |
| May | 2.1 | 0.0 | -0.3 |
| AE ∆% May-Jul | -0.8 | -2.8 | |
| Apr | 2.4 | -0.2 | 0.2 |
| Mar | 3.3 | 0.4 | 0.6 |
| Feb | 3.2 | 0.2 | 0.4 |
| AE ∆% Feb-Apr | 1.2 | 4.9 | |
| Jan | 3.4 | 0.1 | 0.6 |
| Dec 2011 | 4.0 | -0.2 | -0.4 |
| AE ∆% Dec-Jan | -0.6 | 1.2 | |
| Nov | 5.2 | 0.3 | 0.1 |
| Oct | 5.3 | 0.2 | 0.2 |
| AE ∆% Oct-Nov | 3.0 | 1.8 | |
| Sep | 5.5 | 0.3 | 0.3 |
| Aug | 5.5 | 0.1 | -0.3 |
| Jul | 5.8 | 0.5 | 0.7 |
| AE ∆% Jul-Sep | 3.7 | 2.8 | |
| Jun | 5.6 | 0.3 | 0.1 |
| May | 6.1 | 0.3 | 0.0 |
| AE ∆% May-Jun | 3.7 | 0.6 | |
| Apr | 6.4 | 0.6 | 1.0 |
| Mar | 6.2 | 0.3 | 0.4 |
| Feb | 6.4 | 0.6 | 0.7 |
| Jan | 5.7 | 0.6 | 1.2 |
| AE ∆% Jan-Apr | 6.5 | 10.4 | |
| Dec 2010 | 5.3 | 0.8 | 0.7 |
| Nov | 4.4 | 0.4 | 0.2 |
| Oct | 4.3 | 0.4 | 0.4 |
| Sep | 3.9 | 0.5 | 0.3 |
| Aug | 3.2 | 0.2 | 0.0 |
| Jul | 3.7 | 0.6 | 0.5 |
| Jun | 1.7 | 0.5 | 0.6 |
| May | 0.9 | 0.3 | 0.3 |
| Apr | 0.6 | 0.5 | 0.8 |
| Mar | -1.5 | 0.6 | 0.7 |
| Feb | -2.9 | 0.1 | 0.0 |
| Jan | -3.4 | 0.4 | 0.8 |
| Dec 2009 | -5.2 | 0.2 | -0.1 |
| Dec 2008 | 4.0 | -0.2 | -0.8 |
| Dec 2007 | 1.9 | 0.4 | -0.1 |
| Dec 2006 | 4.2 | 0.2 | 0.1 |
| Dec 2005 | 4.8 | 0.2 | 0.3 |
| Dec 2004 | 2.9 | 0.2 | 0.1 |
| Dec 2003 | 1.8 | 0.0 | |
| Dec 2002 | 0.5 | 0.1 | |
| Dec 2001 | 0.1 | -0.2 |
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-1 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the producer price index of Germany from 2003 to 2012. Producer price inflation peaked in 2008 with the rise of commodity prices induced by the carry trade from zero interest rates to commodity futures. Prices then declined with the flight away from risk financial assets to government obligations after the financial panic in Sep 2008. With zero interest rates and no risk aversion, the carry trade pushed commodity future prices upwardly resulting in new rising trend of the producer price index. The right-hand side of the chart shows moderation and even decline in prices because of severe risk aversion frustrating carry trades from zero interest rates to commodity futures but then return of risk appetite with another surge of the index in annual equivalent rate at 6.2 percent in Feb-Mar 2012 and 4.9 percent annual equivalent in Feb-Apr 2012 but decline of 0.3 percent in May 2012 and 0.4 percent in Jun 2012 with flat prices in Jul 2012 with the pace at annual equivalent rate of minus 4.1 percent in May-Jun 2012 and flat prices in Jul 2012. Inflation returned in Aug and Sep 2012 with carry trades into commodity futures with 4.9 percent annual equivalent. Inflation then collapsed to zero in Oct 2012 NSA.
Chart IV-1, Germany, Index of Producer Prices for Industrial Products, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-2 of the US Bureau of Labor Statistics provides the US producer price index of finished goods from 2004 to 2012. Chart IV-7 of the US mirrors behavior in Chart IV-1 of Germany. Carry trades from zero interest rates to exposures in commodity futures and risk financial assets have synchronized worldwide inflation during periods of risk appetite and disinflation during periods of risk aversion.
Chart IV-2, US, Producer Price Index, Finished Goods, NSA, 2004-2012
Source: US Bureau of Labor Statstics
http://www.bls.gov/ppi/data.htm
Chart IV-3 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the unadjusted producer price index, trend and trend ends. There is a clear upward trend of prices after the end of risk aversion with zero interest rates in 2009. The actual curve fell below trend in the current episode of severe risk aversion but rose again in Feb-Apr 2012, falling in May-Jun 2012 with flat prices in Jul 2012, another increase in Aug-Sep 2012 and flat prices in Oct 2012.
Chart IV-3, Germany, Producer Price Index, Non-adjusted Value and Trend, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
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 ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| 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 all countries. 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 0.1 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of 0.3 percent, which is much lower than 5.2 percent in IQ2012. Growth of 3.3 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. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.5 percent and increased 0.1 percent relative to a year earlier. 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). There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.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. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.6 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. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. 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 (http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html) but with substantial unemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ) and weak hiring (http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html). 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 five consecutive quarters from IIIQ2011 to IIIQ2012. Italy’s GDP fell 0.8 percent in IQ2012 and declined 1.4 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.4 percent relative to a year earlier. France’s GDP stagnated in IQ2012 and increased 0.4 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.2 percent and increased 0.2 percent relative to a year earlier.
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: 5.2 | 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: 0.1 | 3.3 |
| China | 1.8 | 7.6 |
| Euro Area | -0.2 | -0.4 |
| Germany | 0.3 | 0.5 1.0 CA |
| France | -0.1 | 0.1 |
| Italy | -0.7 | -2.4 |
| United Kingdom | -0.4 | -0.5 |
| IIIQ2012/ IIQ2012 | IIIQ2012/ IIIQ2011 | |
| United States | QOQ: 0.5 | 2.3 |
| Japan | QOQ: –0.9 | 0.1 |
| China | 2.2 | 7.4 |
| Euro Area | -0.1 | -0.6 |
| Germany | 0.2 | 0.4 |
| France | 0.2 | 0.2 |
| Italy | -0.2 | -2.4 |
| 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 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states_28.html and for GDP Section VB http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ). Japan’s exports decreased 6.5 percent in the 12 months ending in Oct, 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 decreased 1.6 percent in the 12 months ending in Oct, 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 and deducted 2.9 percentage points from GDP growth in IIIQ2012. 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. There was further growth in China’s exports of 11.6 percent in the 12 months ending in Oct while imports increased 2.4 percent. Germany’s exports decreased 2.5 percent in the month of Sep and decreased 3.4 percent in the 12 months ending in Sep while imports decreased 1.6 percent in the month of Sep and decreased 3.6 percent in the 12 months ending in Sep. Net trade contributed 1.4 percentage points to growth of Germany’s GDP in IIQ2012 and contributed 1.4 percentage points in IIIQ2012. The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 47.4 in Sep to 46.0 in Oct for the eighth consecutive month in contraction territory below 50.0 and much lower than the long-term average of the index of 52.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278). New export orders fell for sixteen consecutive months at the fastest rate of decline since Apr 2009. UK’s exports increased 0.6 percent in Sep and decreased 0.7 percent in Jul-Sep 2012 relative to a year earlier while imports decreased 3.1 percent in Sep and 0.3 percent in Jul-Sep 2012 relative to a year earlier. Net trade deducted 1.0 percentage points from UK GDP growth in IIQ2012. France’s exports decreased 1.5 percent in Sep while imports decreased 1.9 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012. US exports increased 3.1 percent in Sep 2012 and goods exports increased 5.1 percent in Jan-Sep relative to a year earlier but net trade deducted 0.18 percentage points from GDP growth in IIIQ2012. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 52.4 in Nov from 51.0 in Oct, which was the sharpest improvement in five months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10327).
New export orders registered 48.9 in Nov nearly still in neutral territory with 47.2 in Oct, indicating stability after contraction during five consecutive months. The Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) declined to 51.0 in Oct from 51.1 in Sep, which is the weakest reading since Oct 2009 when recovery began (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10255). New export orders declined at the highest rate in 12 months with the index of new exports orders falling from 48.0 in Sep to 47.2 in Oct while total new orders decreased from 52.3 in Sep to 51.1 in Oct because of orders from the internal market. In the six months ending in Oct, United States national industrial production accumulated decrease of 0.6 percent at the annual equivalent rate of 1.2 percent, which is much lower than 1.7 percent growth in 12 months. Capacity utilization for total industry in the United States fell 0.4 percentage points in Oct to 77.8 percent from 78.2 percent in Sep, which is 2.5 percentage points lower than the long-run average from 1972 to 2011. Manufacturing decreased 0.9 percent in Oct seasonally adjusted, increasing 1.8 percent not seasonally adjusted in 12 months, and decreased 1.8 percent in the six months ending in Oct or at the annual equivalent rate of 3.6 percent (Section VA http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html and earlier http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united_21.html). The report on industry by the Board of Governors of the Federal Reserve System states estimates that hurricane Sandy could have “reduced the rate of change in total output by nearly 1 percentage points” (http://www.federalreserve.gov/releases/g17/current/). 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 | Exports 12 M ∆% | Imports | Imports 12 M ∆% | |
| USA | 3.1 Sep | 5.1 Jan-Sep | 1.5 Aug | 3.9 Jan-Sep |
| Japan | Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1 | Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1 | ||
| China | -1.8 Jul 0.6 Aug 4.7 Sep -5.7 Oct | 1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4 11.6 Oct 7.8 Jan-Oct | 2.2 Jul -0.3 Aug 4.9 Sep -9.4 Oct | 4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep 2.4 Oct 4.6 Jan-Oct |
| Euro Area | 10.4 12-M Aug | 9.0 Jan-Aug | 1.3 12-M Aug | 2.5 Jan-Aug |
| Germany | -2.5 Sep CSA | -3.4 Sep | -1.6 Sep CSA | -3.6 Sep |
| France Sep | -1.5 | 5.2 | -1.9 | 0.0 |
| Italy Sep | -2.0 | -4.2 | -4.2 | -10.6 |
| UK | 0.6 Sep | -0.7 Jul-Sep 12/Jul-Sep 11 | -3.1 Sep | -0.3 Jul-Sep 12/Jul-Sep 11 |
| Net Trade % Points GDP Growth | % Points | |||
| USA IIIQ2012 | -0.18 | |||
| Japan | -0.3 IIQ2012 -2.9 IIIQ2012 | |||
| Germany | 1.4 IIQ2012 1.4 IIIQ2012 | |||
| France | -0.4 IIQ2012 0.3 IIIQ2012 | |||
| 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.statistics.gov.uk/hub/index.html
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Oct 2012. The share of Asia in Japan’s trade is more than one half, 55.2 percent of exports and 47.1 percent of imports. Within Asia, exports to China are 18.4 percent of total exports and imports from China 23.8 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 17.9 percent of total exports and share of imports from the US of 8.9 percent in total imports. Western Europe has share of 10.2 percent in Japan’s exports and of 11.0 percent in imports. Rates of growth of exports of Japan in Oct are sharply negative for all countries and regions with the exception of 3.1 percent for exports to the US, 8.0 percent for Canada, 8.5 percent for Mexico and 0.1 percent for the Middle East. 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 6.5 percent in Oct 2012 while imports decreased by 1.6 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Oct are negative for some trading partners: minus 12.2 percent for Brazil, minus 14.0 percent for the Middle East and minus 0.9 percent for Australia. Imports from Asia increased 2.0 percent in the 12 months ending in Oct while imports from China increased 3.6 percent.
Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Oct 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 5,149,993 | -6.5 | 5,698,965 | -1.6 |
| Asia | 2,840,904 | -4.9 | 2,684,524 | 2.0 |
| China | 947,766 | -11.6 | 1,354,298 | 3.6 |
| USA | 921,094 | 3.1 | 504,661 | 0.1 |
| Canada | 68,425 | 8.0 | 95,185 | 3.7 |
| Brazil | 40,816 | -9.9 | 86,524 | -12.2 |
| Mexico | 72,546 | 8.5 | 33,040 | 27.5 |
| Western Europe | 526,663 | -23.5 | 628,625 | 5.7 |
| Germany | 132,834 | -17.2 | 169,561 | 6.2 |
| France | 40,252 | -28.3 | 89,505 | 11.6 |
| UK | 85,584 | -12.6 | 49,634 | 2.2 |
| Middle East | 189,249 | 0.1 | 870,364 | -14.0 |
| Australia | 109,197 | -25.5 | 369,236 | -0.9 |
Source: Japan, Ministry of Finance, 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 | 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, decreased to 51.3 in Oct from 52.4 in Sep, indicating expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10308). This index has remained above the contraction territory of 50.0 during 39 consecutive months. Both global manufacturing and services have slowed down considerably with services increasing marginally while manufacturing contracted for a fifth consecutive month. (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10177). Service activity continued in the US with increases also in the Brazil, China, India, Russia and Ireland. The employment index increased from 49.8 in Sep to 51.0 in Oct with continuing increases in input prices. David Hensley, Director of Global Economic Coordination at JP Morgan, finds growth below long-term trend with restrained growth in services and contraction in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10308). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased to 49.2 in Oct from 48.8 in Sep, for five consecutive months of contraction but at a milder rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10286). New export orders declined for the sixth consecutive month in Oct at a firm rate. The HSBC Brazil Composite Output Index, compiled by Markit, decreased 52.2 in Sep to 50.7 in Oct with continuing expansion at a marginal pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10284). Andre Loes, Chief Economist, Brazil, at HSBC, finds slower growth of services activity in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10284). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) increased slightly to 50.2 in Oct from 49.8 in Sep, indicating marginal improvement of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10252). Andre Loes, Chief Economist, Brazil at HSBC, finds recovery improving with gains in both output and new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10252).
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 52.4 in Nov from 51.0 in Oct, which was the sharpest improvement in five months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10327).
New export orders registered 48.9 in Nov nearly still in neutral territory with 47.2 in Oct, indicating stability after contraction during five consecutive months. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with that the index is consistent with output growth in Nov at an annual rate of 1.0 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10327). The Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) declined to 51.0 in Oct from 51.1 in Sep, which is the weakest reading since Oct 2009 when recovery began (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10255). New export orders declined at the highest rate in 12 months with the index of new exports orders falling from 48.0 in Sep to 47.2 in Oct while total new orders decreased from 52.3 in Sep to 51.1 in Oct because of orders from the internal market. Trevor Balchin, Senior Economist at Markit, finds that the index began IVQ2012 at a weak pace that can restrain overall economic growth with export orders being an important source of weakness in the private goods-producing sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10255). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 0.2 percentage points from 51.5 in Sep to 51.7 in Oct, (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 1.9 percentage points from 52.3 in Sep to 54.2 in Oct. The index of exports decreased 0.5 percentage points from 48.5 in Sep to 48.0 in Oct, remaining in mild contraction territory. The Non-Manufacturing ISM Report on Business® PMI decreased 0.9 percentage points from 55.1 in Sep to 54.2 in Oct, indicating growth during 39 consecutive months, while the index of new orders decreased 2.9 percentage points from 57.7 in Sep to 54.8 in Oct (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 | Oct 12 months NSA ∆%: 2.2; ex food and energy ∆%: 2.0 Oct month ∆%: 0.1; ex food and energy ∆%: 0.2 |
| Producer Price Index | Oct 12-month NSA ∆%: 2.3; ex food and energy ∆% 2.1 |
| PCE Inflation | Sep 12-month NSA ∆%: headline 1.7; ex food and energy ∆% 1.7 |
| Employment Situation | Household Survey: Oct Unemployment Rate SA 7.9% |
| Nonfarm Hiring | Nonfarm Hiring fell from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2012 2.3 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 2.0 |
| Real Private Fixed Investment | SAAR IIIQ2012 1.5 ∆% IVQ2007 to IIIQ2012: minus 12.5% Blog 11/25/12 |
| Personal Income and Consumption | Sep month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.0 |
| Quarterly Services Report | IQ12/IQ11 SA ∆%: |
| Employment Cost Index | Compensation Private IIIQ2012 SA ∆%: 0.5 |
| Industrial Production | Oct month SA ∆%: minus 0.4 Manufacturing Oct SA ∆% minus 0.9 Oct 12 months SA ∆% 1.8, NSA 3.2 |
| Productivity and Costs | Nonfarm Business Productivity IIIQ2012∆% SAAE 1.9; IIIQ2012/IIIQ2011 ∆% 1.5; Unit Labor Costs SAAE IIQ2012 ∆% -0.1; IIIQ2012/IIIQ2011 ∆%: 1.1 Blog 11/4/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Oct -6.16 to Nov -5.22 |
| Philadelphia Fed Business Outlook Index | General Index from Oct 5.7 to Nov minus Oct 10.7 |
| Manufacturing Shipments and Orders | New Orders SA Sep ∆% 4.8 Ex Transport 1.4 Jan-Sep NSA New Orders 3.3 Ex transport 2.5 |
| Durable Goods | Sep New Orders SA ∆%: 9.9; ex transport ∆%: 2.0 |
| Sales of New Motor Vehicles | Jan-Oct 2012 11,992,114; Jan-Oct 2011 10,539,485. Oct SAAR 14.29 million, Sep SAAR 14.94 million, Oct 2011 SAAR 13.34 million Blog 11/4/12 |
| Sales of Merchant Wholesalers | Jan-Sep 2012/Jan-Sep 2011 NSA ∆%: Total 5.2; Durable Goods: 6.2; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Sep 12/Sep 11 NSA ∆%: Sales Total Business 0.9; Manufacturers 1.6 |
| Sales for Retail and Food Services | Jan-Oct 2012/Jan-Oct 2011 ∆%: Retail and Food Services 5.5; Retail ∆% 5.3 |
| Value of Construction Put in Place | Sep SAAR month SA ∆%: 0.6 Sep 12-month NSA: 6.1 Jan-Sep 2012 ∆% 8.9 |
| Case-Shiller Home Prices | Aug 2012/Aug 2011 ∆% NSA: 10 Cities 1.3; 20 Cities: 2.0 |
| FHFA House Price Index Purchases Only | Aug SA ∆% 0.7; |
| New House Sales | Sep 2012 month SAAR ∆%: |
| Housing Starts and Permits | Oct Starts month SA ∆%: 3.6 ; Permits ∆%: -2.7 |
| Trade Balance | Balance Sep SA -$44217 million versus Aug -$42790 million |
| Export and Import Prices | Oct 12-month NSA ∆%: Imports 0.4; Exports 1.4 |
| Consumer Credit | Sep ∆% annual rate: 5.0 |
| Net Foreign Purchases of Long-term Treasury Securities | Sep Net Foreign Purchases of Long-term Treasury Securities: $3.3 billion |
| Treasury Budget | Fiscal Year 2013/2012 ∆% Oct: Receipts 13.0; Outlays 16.4; Individual Income Taxes 17.6 Deficit Fiscal Year 2012 $1,089,353 million Blog 11/18/2012 |
| 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 11/18/12 |
| Commercial Banks Assets and Liabilities | Oct 2012 SAAR ∆%: Securities 8.3 Loans 4.4 Cash Assets -66.6 Deposits 7.3 Blog 11/25/12 |
| 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:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
10/28/12 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html
9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-1. Housing starts increased 3.6 percent in Oct 2012 after increasing 15.1 percent in Sep 2012. Housing permits, indicating future activity, decreased 2.7 percent in Oct 2012 but increased 11.1 percent in Sep 2012. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-1.
Table VA-1, US, Housing Starts and Permits SSAR Month ∆%
| Housing | Month ∆% | Housing | Month ∆% | |
| Oct 2012 | 894 | 3.6 | 866 | -2.7 |
| Sep | 863 | 15.1 | 890 | 11.1 |
| Aug | 750 | 3.0 | 801 | -1.2 |
| Jul | 728 | -3.4 | 811 | 6.7 |
| Jun | 754 | 6.8 | 760 | -3.1 |
| May | 706 | -5.5 | 784 | 8.4 |
| Apr | 747 | 5.8 | 723 | -6.0 |
| Mar | 706 | -1.7 | 769 | 8.8 |
| Feb | 718 | -0.3 | 707 | 3.4 |
| Jan | 720 | 3.3 | 684 | -2.4 |
| Dec 2011 | 697 | -1.6 | 701 | -1.1 |
| Nov | 708 | 12.4 | 709 | 6.3 |
| Oct | 630 | -2.6 | 667 | 8.3 |
| Sep | 647 | 11.4 | 616 | -4.5 |
| Aug | 581 | -5.4 | 645 | 2.9 |
| Jul | 614 | -0.2 | 627 | -0.9 |
| Jun | 615 | 11.6 | 633 | 1.4 |
| May | 551 | -0.2 | 624 | 7.9 |
| Apr | 552 | -8.0 | 578 | -2.0 |
| Mar | 600 | 15.8 | 590 | 10.1 |
| Feb | 518 | -18.0 | 536 | -5.3 |
| Jan | 632 | 17.3 | 566 | -10.4 |
| Dec 2010 | 539 | -1.1 | 632 | 12.9 |
| Nov | 545 | 0.4 | 560 | 0.4 |
| Oct | 543 | -8.6 | 558 | -0.9 |
| Sep | 594 | -0.8 | 563 | -2.9 |
SAAR: Seasonally Adjusted Annual Rate
Source: US Census Bureau http://www.census.gov/construction/nrc/
Housing starts and permits in Jan-Oct not-seasonally adjusted are provided in Table VA-2. Housing starts increased 28.2 percent in Jan-Oct 2012 relative to Jan-Oct 2011 and in the same period new permits increased 33.2 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 58.2 percent in Jan-Oct 2012 relative to Jan-Oct 2006 and fell 62.9 percent relative to Jan-Oct 2005. Housing permits fell 57.9 percent in Jan-Oct 2012 relative to Jan-Oct 2006 and fell 63.0 percent in Jan-Oct 2012 from Jan-Oct 2005.
Table VA-2, US, Housing Starts and New Permits, Thousands of Units, NSA, and %
| Housing Starts | New Permits | |
| Jan-Oct 2012 | 658.0 | 680.6 |
| Jan-Oct 2011 | 513.1 | 510.9 |
| ∆% Jan-Oct 2012/Jan-Oct 2011 | 28.2 | 33.2 |
| Jan-Oct 2006 | 1573.3 | 1616.0 |
| ∆% Jan-Oct 2012/ | -58.2 | -57.9 |
| Jan-Oct 2005 | 1771.5 | 1841.7 |
| ∆%/ Jan-Oct 2012 | -62.9 | -63.0 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-1 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-1 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in recent months.
Chart VA-1, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)
Source: US Census Bureau http://www.census.gov/briefrm/esbr/www/esbr020.html
Table VA-3 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) from Apr to Oct of the year from 2000 to 2012. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 706,000 to 894,000 in Apr-Oct 2012, which is an improvement over the range of 551,000 to 647,000 in Apr-Oct 2011.
Table VA-3, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units
| Apr | May | Jun | Jul | Aug | Sep | Oct | |
| 2000 | 1,626 | 1,575 | 1,559 | 1,463 | 1,541 | 1,507 | 1,549 |
| 2001 | 1,649 | 1,605 | 1,636 | 1,670 | 1,567 | 1,562 | 1,540 |
| 2002 | 1,592 | 1,764 | 1,717 | 1,655 | 1,633 | 1,804 | 1,648 |
| 2003 | 1,643 | 1,751 | 1,867 | 1,897 | 1,833 | 1,939 | 1,967 |
| 2004 | 2,003 | 1,981 | 1,828 | 2,002 | 2,024 | 1,905 | 2,072 |
| 2005 | 2,061 | 2,025 | 2,068 | 2,054 | 2,095 | 2,151 | 2,065 |
| 2006 | 1,821 | 1,942 | 1,802 | 1,737 | 1,650 | 1,720 | 1,491 |
| 2007 | 1,490 | 1,415 | 1,448 | 1,354 | 1,330 | 1,183 | 1,264 |
| 2008 | 1,013 | 973 | 1,046 | 923 | 844 | 820 | 777 |
| 2009 | 478 | 540 | 585 | 594 | 586 | 585 | 534 |
| 2010 | 687 | 583 | 536 | 546 | 599 | 594 | 543 |
| 2011 | 552 | 551 | 615 | 614 | 581 | 647 | 630 |
| 2012 | 747 | 706 | 754 | 728 | 750 | 863 | 894 |
Source: US Census Bureau
http://www.census.gov/construction/nrc/
Chart VA-2 of the US Census Bureau provides construction of new housing units started in the US at seasonally adjusted annual rate (SAAR) from Jan 1959 to Oct 2012 that help to analyze in historical perspective the debacle of US new house construction. There are three periods in the series. (1) There is stationary behavior with wide fluctuations from 1959 to the beginning of the decade of the 1970s. (2) There is sharp upward trend from the 1990s to 2006 propelled by the US housing subsidy, politics of Fannie Mae and Freddie Mac and unconventional monetary policy of near zero interest rates from Jun 2003 to Jun 2004 and suspension of the auction of 30-year Treasury bonds. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html . (3) Housing construction dropped vertically during the global recession. There was initial stability followed by some recovery in recent months.
Chart VA-2, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate), Thousands of Units, Jan 1959-Oct 2012
Source: US Census Bureau
http://www.census.gov/construction/nrc/
Table VA-4 provides actual new housing units started in the US, or not seasonally adjusted, in Feb-Oct from 2000 to 2012. The number of housing units started fell from the peak of 197.9 thousand in May 2005 to 67.8 thousand in May 2012 or 65.7 percent. The number of housing units started fell from 180.4 thousand in Oct 2005 to 77.9 thousand in Oct 2012 or by 56.8 percent. The number of housing units started jumped from 53.2 thousand in Oct 2011 to 77.9 thousand in Oct 2012 or by 46.4 percent.
Table VA-4, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units
| Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | |
| 2000 | 119.7 | 133.4 | 149.5 | 152.9 | 146.3 | 135.0 | 141.4 | 128.9 | 139.7 |
| 2001 | 108.2 | 133.2 | 151.3 | 154.0 | 155.2 | 154.6 | 141.5 | 133.1 | 139.8 |
| 2002 | 120.4 | 138.2 | 148.8 | 165.5 | 160.3 | 155.9 | 147.0 | 155.6 | 146.8 |
| 2003 | 109.7 | 147.2 | 151.2 | 165.0 | 174.5 | 175.8 | 163.8 | 171.3 | 173.5 |
| 2004 | 126.4 | 173.8 | 179.5 | 187.6 | 172.3 | 182.0 | 185.9 | 164.0 | 181.3 |
| 2005 | 149.1 | 156.2 | 184.6 | 197.9 | 192.8 | 187.6 | 192.0 | 187.9 | 180.4 |
| 2006 | 145.1 | 165.9 | 160.5 | 190.2 | 170.2 | 160.9 | 146.8 | 150.1 | 130.6 |
| 2007 | 103.1 | 123.8 | 135.6 | 136.5 | 137.8 | 127.9 | 121.2 | 101.5 | 115.0 |
| 2008 | 78.4 | 82.2 | 89.5 | 91.7 | 102.5 | 86.7 | 76.4 | 73.9 | 68.2 |
| 2009 | 39.8 | 42.7 | 42.5 | 52.2 | 59.1 | 56.8 | 52.9 | 52.6 | 44.5 |
| 2010 | 40.7 | 54.7 | 62.0 | 56.2 | 53.8 | 51.5 | 56.3 | 53.0 | 45.4 |
| 2011 | 35.4 | 49.9 | 49.0 | 54.0 | 60.5 | 57.6 | 54.5 | 58.8 | 53.2 |
| 2012 | 49.7 | 58.0 | 66.8 | 67.8 | 74.7 | 69.2 | 69.0 | 77.8 | 77.9 |
Source: US Census Bureau
http://www.census.gov/construction/nrc/
Chart VA-3 of the US Census Bureau provides new housing units started in the US not seasonally adjusted (NSA) from Jan 1959 to Oct 2012. There is the same behavior as in Chart VA-2 SA but with sharper fluctuations in the original series without seasonal adjustment. There are the same three periods. (1) The series is virtually stationary with wide fluctuations from 1959 to the late 1980s. (2) There is downward trend during the savings and loans crisis of the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. (3) There is vertical drop of new housing construction in the US during the global recession from (Dec) IVQ2007 to (Jun) IIQ2009 (http://www.nber.org/cycles/cyclesmain.html). The final segment shows upward trend but it could be simply part of yet another fluctuation. Marginal improvement in housing in the US should not obscure the current depressed levels relative to earlier periods.
Chart VA-3, US, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units, Jan 1959-Oct 2012
Source: US Census Bureau
http://www.census.gov/construction/nrc/
A longer perspective on residential construction in the US is provided by Table VA-5 with annual data from 1960 to 2011. Housing starts fell 70.6 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.4 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 60.8 percent from 2000 to 2011 and 37.4 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.
Table VA-5, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands
| Starts | Permits | |
| 2011 | 608.8 | 624.1 |
| ∆% 2011/2010 | 3.7 | 3.2 |
| ∆% 2011/2005 | -70.6 | -71.0 |
| ∆% 2011/2000 | -61.2 | -60.8 |
| ∆% 2011/1960 | -51.4 | -37.4 |
| 2010 | 586.9 | 604.6 |
| ∆% 2010/2005 | -71.6 | -71.9 |
| ∆% 2010/2000 | -62.6 | -62.0 |
| ∆% 2010/1960 | -53.1 | -39.4 |
| 2009 | 554,0 | 583.0 |
| 2008 | 905.5 | 905.4 |
| 2007 | 1,355,0 | 1,398.4 |
| 2006 | 1,800.9 | 1,838.9 |
| 2005 | 2,068.3 | 2,155.3 |
| ∆% 2005/2000 | 31.8 | 35.4 |
| 2004 | 1,955.8 | 2,070.1 |
| 2003 | 1,847.7 | 1,889,2 |
| 2002 | 1,704.9 | 1,747.2 |
| 2001 | 1,602.7 | 1,636.7 |
| 2000 | 1,568.7 | 1,592.3 |
| ∆% 2000/1990 | 31.5 | 43.3 |
| 1990 | 1,192,7 | 1,110.8 |
| 1980 | 1,292.2 | 1,190.6 |
| 1970 | 1,433.6 | 1,351.5 |
| 1960 | 1,252.2 | 997.6 |
Source: US Census Bureau
http://www.census.gov/construction/nrc/
B 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/gor1210a.pdf). For fiscal 2013, the forecast is of growth of GDP between 1.3 and 1.8 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.1 to 0.7 percent and the all items CPI less fresh food of 0.2 to 0.6 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 | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Oct 2012 | +1.4 to +1.6 [+1.5] | -1.2 to -0.9 [-1.1] | -0.1 to -0.1 [-0.1] |
| Jul 2012 | +2.2 to +2.4 [+2.2] | -0.3 to 0.0 [-0.2] | +0.1 to +0.3 [+0.2] |
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Oct 2012 | +1.3 to +1.8 [+1.6] | +0.1 to +0.7 [+0.5] | +0.2 to +0.6 [+0.4] |
| Jul 2012 | +1.6 to +1.8 [+1.7] | +0.6 to +0.8 [+0.6] | +0.5 to +0.7 [+0.7] |
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +0.5 |
| 2014 | |||
| Oct 2012 | +0.2 to +0.7] [+0.6] | +3.7 to +4.4 [+4.2] | +2.4 to +3.0 [+2.8] |
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/gor1210a.pdf
Private-sector activity in Japan contracted at a moderate rate with the Markit Composite Output PMI™ Index increasing from 48.4 in Sep to 48.9 in Oct, which is still below 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10238). Paul Smith, economist at Markit and author of the report, finds that weak manufacturing and unchanged services data suggest unchanged GDP in the beginning of IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10238). The Markit Business Activity Index of Services increased from 48.9 in Sep to 50.0 in Oct, showing no change relative to the prior month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10238). The Markit/JMMA Purchasing Managers’ Index™ (PMI™), seasonally adjusted, decreased from 48.0 in Sep to 46.9 in Oct for the lowest reading in 18 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10214). Foreign orders fell for the seventh consecutive months. Paul Smith, economist at Markit and author of the report, finds the data consistent with quarterly contraction of manufacturing output at a quarterly rate in excess of 3 percent with shipments overseas falling at a quarterly rate of about 4 percent because of weak world growth especially in export markets including China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10214).Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Oct ∆% minus 0.3 |
| Consumer Price Index | Sep NSA ∆% 0.1; Sep 12 months NSA ∆% -0.3 |
| Real GDP Growth | IIIQ2012 ∆%: minus 0.9 on IIQ2012; IIIQ2012 SAAR minus 3.5; |
| Employment Report | Sep Unemployed 2.75 million Change in unemployed since last year: minus 20 thousand |
| All Industry Indices | Sep month SA ∆% -0.3 Blog 11/25/12 |
| Industrial Production | Sep SA month ∆%: -4.1 |
| Machine Orders | Total Sep ∆% 9.6 Private ∆%: 15.4 |
| Tertiary Index | Sep month SA ∆% 0.3 |
| Wholesale and Retail Sales | Sep 12 months: |
| Family Income and Expenditure Survey | Sep 12-month ∆% total nominal consumption -1.2, real -0.9 Blog 11/4/12 |
| Trade Balance | Exports Oct 12 months ∆%: minus 6.5 Imports Oct 12 months ∆% minus 1.6 Blog 11/25/12 |
Links to blog comments in Table JPY:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
10/28/12 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP decreased 0.9 percent in IIIQ2012 (Table VB-1 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html), industry decreased 4.2 percent, the tertiary sector increased 0.1 percent, government was unchanged and construction increased 1.6 percent. The report shows that the all industry index decreased 0.5 percent in IIIQ2012. Industry deducted 0.75 percentage points from growth of the all industry index and the tertiary index contributed 0.07 percentage points. Japan had already experienced a very weak quarter in IVQ2010, with decline of the all industry index of 0.2 percent and decline of GDP of 0.3 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html), when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 2.1 percent (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html Table VB-1).
Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| 2012 | ||||||
| IIIQ | 1.6 | -4.2 | 0.1 | 0.0 | -0.5 | -0.9 |
| Cont to IIIQ % Change | 0.07 | -0.75 | 0.07 | 0.00 | ||
| IIQ | -1.5 | -2.0 | 0.0 | -0.1 | -0.1 | 0.1 |
| IQ | 5.7 | 1.3 | 0.0 | 0.1 | -0.1 | 1.3 |
| 2011 | ||||||
| IVQ | -1.5 | 0.4 | 0.5 | 0.2 | 0.5 | -0.3 |
| IIIQ | 3.3 | 5.4 | 1.5 | 0.2 | 2.1 | 2.3 |
| IIQ | -7.5 | -4.2 | -0.5 | 0.1 | -0.9 | -0.5 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html
There are more details in Table VB-2. The all industry activity index decreased 0.3 percent in Sep 2012 relative to Aug 2012 with increase of 0.3 percent of the tertiary or services sector and decrease of industry of 4.1 percent while construction increased 2.5 percent and government decreased 0.8 percent. Industry deducted 0.71 percentage points to growth in Sep while the tertiary sector added 0.20 percentage points, construction added 0.11 percentage points and government deducted 0.10 percentage points. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec 2011 that was interrupted in Jan-Mar 2012 with modest growth in Apr, new decline in May 2012, moderate increase in Jun 2012 and new decline of 0.5 percent in Jul 2012, nil growth in Aug 2012 and decline of 0.3 percent in Sep 2012. The highest risk to Japan is if weakening world growth would affect Japanese exports.
Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Sep 2012 | 2.5 | -4.1 | 0.3 | -0.8 | -0.3 |
| Cont to Aug % Change | 0.11 | -0.71 | 0.20 | -0.10 | |
| Aug | -0.3 | -1.6 | 0.3 | 0.3 | 0.0 |
| Jul | -2.7 | -1.0 | -0.6 | 0.0 | -0.5 |
| Jun | 1.0 | 0.4 | 0.1 | 0.2 | 0.3 |
| May | 9.5 | -3.4 | 0.9 | -0.1 | -0.2 |
| Apr | -5.5 | -0.2 | -0.2 | 0.1 | 0.1 |
| Mar | -5.4 | 1.3 | -0.6 | -0.1 | -0.3 |
| Feb | 4.2 | -1.6 | 0.0 | -0.4 | -0.1 |
| Jan | 5.6 | 0.9 | -0.6 | 0.5 | -0.7 |
| Dec 2011 | -1.4 | 2.3 | 1.6 | -0.2 | 1.7 |
| Nov | 0.3 | -1.7 | -0.8 | 0.1 | -0.9 |
| Oct | -2.6 | 1.8 | 0.6 | 0.1 | 0.6 |
| Sep | 1.6 | -1.9 | -0.2 | 0.2 | -0.1 |
| Aug | 1.1 | 0.9 | 0.1 | -0.1 | 0.2 |
| Jul | 0.1 | 1.1 | 0.4 | -0.2 | 0.5 |
| Jun | -0.1 | 3.8 | 1.2 | 0.2 | 1.5 |
| May | 6.5 | 5.8 | 0.9 | 0.7 | 1.6 |
| Apr | -5.1 | 2.4 | 2.1 | -0.9 | 2.0 |
| Mar | -10.6 | -16.2 | -5.4 | 0.7 | -6.6 |
| Feb | 2.3 | 1.1 | 0.3 | 0.0 | 0.1 |
| Jan | 6.3 | 1.2 | 0.5 | -0.5 | 0.6 |
| Dec 2010 | -0.5 | 2.4 | -0.2 | 0.3 | 0.1 |
| Nov | -1.4 | 1.6 | 0.6 | -0.4 | 0.3 |
| Oct | 0.1 | -1.4 | 0.2 | -0.1 | 0.0 |
| Sep | -1.9 | -0.8 | -0.4 | -0.1 | -0.4 |
| Aug | 1.6 | -0.1 | 0.1 | 0.1 | -0.5 |
| Jul | 0.8 | 0.3 | 0.7 | 0.1 | 1.1 |
| Jun | -2.1 | -1.5 | 0.1 | -0.1 | 0.2 |
| May | 6.3 | -0.1 | -0.3 | 0.0 | 0.0 |
| Apr | -3.1 | 0.6 | 1.6 | -0.2 | 0.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Sources: http://www.meti.go.jp/english/statistics/index.html
Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier of the all industry activity indices are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The all industry activity index decreased 0.2 percent in IIIQ2012 and GDP increased 0.1 percent relative to a year earlier. Industry decreased 4.6 percent relative to a year earlier while the tertiary sector increased 0.6 percent, deducting combined 0.44 percentage points to growth of the all industry activity index of minus 0.2 percent while construction added 0.18 percentage points and government 0.05 percentage points. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.5 percent in 2011, almost equal to the revised decline of 0.7 percent in GDP. Industry fell 2.3 percent, deducting 0.42 percentage points, while the tertiary sector increased 0.1 percent, adding 0.07 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.
Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| Calendar Year | ||||||
| 2011 | -2.0 | -2.3 | 0.1 | -0.2 | -0.5 | -0.7 |
| Cont to 2011 % Change | -0.09 | -0.42 | 0.07 | -0.02 | ||
| 2010 | -7.0 | 16.4 | 1.3 | -0.7 | 3.1 | 4.5 |
| 2009 | -5.6 | -21.9 | -5.2 | 0.1 | -7.7 | -5.5 |
| 2008 | -7.6 | -3.4 | -1.0 | -1.4 | -1.9 | -1.0 |
| 2012 | ||||||
| IIIQ | 4.1 | -4.6 | 0.6 | 0.4 | -0.2 | 0.1 |
| Cont to IIIQ % Change | 0.18 | -0.84 | 0.40 | 0.05 | ||
| IIQ | 5.8 | 5.3 | 2.2 | 0.4 | 2.6 | 3.3 |
| IQ | -0.3 | 4.8 | 2.4 | 0.1 | 2.4 | 2.9 |
| 2011 | ||||||
| IVQ | -2.8 | -1.6 | 0.6 | 0.6 | 0.0 | -0.7 |
| IIIQ | -3.2 | -0.9 | 0.3 | -0.1 | -0.1 | -0.6 |
| IIQ | -5.1 | -5.8 | -0.5 | -0.4 | -1.6 | -1.8 |
| IQ | 2.3 | -1.3 | -0.3 | -1.0 | -0.5 | 0.0 |
| 2010 | ||||||
| IV Q | -0.6 | 5.9 | 1.6 | -0.8 | 2.1 | 3.2 |
| III Q | -3.2 | 14.0 | 1.8 | -0.6 | 3.2 | 5.6 |
| IIQ | -11.3 | 21.3 | 1.4 | -0.7 | 3.5 | 4.5 |
| IQ | -12.4 | 28.0 | 0.8 | -0.5 | 3.9 | 4.8 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html
Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index decreased 1.1 percent in Sep 2012 relative to Sep 2011. Industry fell 8.1 percent in Sep 2012 relative to a year earlier, subtracting 1.53 percentage points to growth of the all industry activity index. The tertiary sector increased 0.2 percent, adding 0.13 percentage points. Construction added 0.18 percentage points to the index and government added 0.11 percentage points.
Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Sep 2012 | 3.9 | -8.1 | 0.2 | 0.9 | -1.1 |
| Cont to Aug % Change | 0.18 | -1.53 | 0.13 | 0.11 | |
| Aug 2012 | 3.5 | -4.6 | 0.6 | 0.7 | -0.1 |
| Jul | 4.9 | -0.8 | 0.9 | -0.3 | 0.6 |
| Jun | 7.6 | -1.5 | 0.8 | 0.8 | 0.6 |
| May | 6.4 | 6.0 | 3.2 | -0.6 | 3.3 |
| Apr | 3.7 | 12.9 | 2.6 | 0.8 | 4.1 |
| Mar | 4.1 | 14.2 | 4.2 | 0.6 | 5.5 |
| Feb | -1.6 | 1.5 | 2.4 | -0.7 | 1.6 |
| Jan | -3.4 | -1.6 | 0.4 | 0.4 | -0.1 |
| Dec 2011 | -3.0 | -3.0 | 1.2 | 0.8 | 0.2 |
| Nov | -1.2 | -2.9 | -0.3 | 0.8 | -0.7 |
| Oct | -4.0 | 0.9 | 0.9 | 0.2 | 0.5 |
| Sep | -0.4 | -2.4 | 0.1 | 0.1 | -0.3 |
| Aug | -4.3 | 1.6 | 0.8 | -1.1 | 0.4 |
| Jul | -4.8 | -1.7 | 0.1 | 0.5 | -0.4 |
| Jun | -4.6 | -0.6 | 1.0 | 0.3 | 0.4 |
| May | -6.5 | -4.6 | -0.2 | -0.8 | -1.3 |
| Apr | -4.1 | -12.7 | -2.3 | -0.6 | -4.0 |
| Mar | -2.8 | -12.4 | -3.4 | 0.0 | -4.6 |
| Feb | 4.4 | 4.5 | 2.0 | -1.4 | 2.1 |
| Jan | 5.9 | 6.1 | 1.0 | -1.4 | 1.8 |
| Dec 2010 | -0.5 | 5.9 | 1.8 | -0.7 | 2.1 |
| Nov | -0.5 | 7.0 | 2.5 | -1.9 | 2.7 |
| Oct | -1.1 | 5.0 | 0.5 | 0.3 | 1.3 |
| Sep | -2.8 | 12.1 | 1.3 | -0.6 | 2.7 |
| Aug | -1.7 | 15.5 | 2.3 | -1.1 | 3.8 |
| Jul | -5.3 | 14.6 | 1.6 | -0.1 | 3.3 |
| Jun | -8.3 | 16.6 | 1.0 | -0.7 | 3.0 |
| May | -8.1 | 20.7 | 1.2 | -0.9 | 3.4 |
| Apr | -17.0 | 27.0 | 1.9 | -0.4 | - |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html
The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 27.7 percent of Japan’s imports and decreased 10.9 percent in the 12 months ending in Oct 2012 because of unwinding carry trades into commodity futures in another round or risk aversion. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.0 percent of Japan’s exports with decrease of 7.2 percent in the 12 months ending in Oct 2012. Machinery contributes 19.0 percent of Japan’s exports with decrease of 11.3 percent in the 12 months ending in Oct. Electrical machinery contributes 18.4 percent of Japan’s exports with decrease of 2.4 percent in the 12 months ending in Oct. Exports of transport equipment with share of 22.8 percent in total exports decreased 7.2 percent in the 12 months ending in Oct 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 12.3 percent: cars decreased 13.1 percent with decrease of 12.3 percent in the minor category of buses and trucks, decrease of 0.8 percent for parts of motor vehicles, decrease of 1.0 percent for motorcycles and decrease of 7.4 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-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens
| Oct 2012 | Value JPY Millions | % of Total | 12 Months ∆% | Contribution Degree % |
| Exports | 5,149,993 | 100.0 | -6.5 | -6.5 |
| Foodstuffs | 30,565 | 0.6 | 10.9 | 0.1 |
| Raw Materials | 90,846 | 1.8 | 22.7 | 0.3 |
| Mineral Fuels | 82,859 | 1.6 | -31.1 | -0.7 |
| Chemicals | 541,273 | 10.5 | -1.7 | -0.2 |
| Manufactured Goods | 670,440 | 13.0 | -7.2 | -0.9 |
| Machinery | 977,297 | 19.0 | -11.3 | -2.3 |
| Electrical Machinery | 948,231 | 18.4 | -2.4 | -0.4 |
| Transport Equipment | 1,172,275 | 22.8 | -7.2 | -1.7 |
| Motor Vehicles | 728,050 | 14.1 | -12.3 | -1.9 |
| Cars | 616,354 | 12.0 | -13.1 | -1.7 |
| Buses & Trucks | 97,543 | 1.9 | -12.3 | -0.2 |
| Parts of Motor Vehicles | 266,744 | 5.2 | -0.8 | 0.0 |
| Motorcycles | 20,110 | 0.4 | -1.0 | 0.0 |
| Ships | 98,105 | 1.9 | -7.4 | -0.1 |
| Other | 636,206 | 12.4 | -5.8 | -0.7 |
| Imports | 5,698,965 | 100.0 | -1.6 | -1.6 |
| Foodstuffs | 513,256 | 9.0 | 7.9 | 0.6 |
| Raw Materials | 418,924 | 7.4 | -7.6 | -0.6 |
| Mineral Fuels | 1,577,628 | 27.7 | -10.9 | -3.3 |
| Chemicals | 515,574 | 9.0 | -0.4 | 0.0 |
| Manufactured Goods | 469,378 | 8.2 | -9.7 | -0.9 |
| Machinery | 424,190 | 7.4 | 2.3 | 0.2 |
| Electrical Machinery | 758,722 | 13.3 | 5.4 | 0.7 |
| Transport Equipment | 197,078 | 3.5 | 16.1 | 0.5 |
| Other | 824,216 | 14.5 | 10.0 | 1.3 |
Source: Japan, Ministry of Finance, http://www.customs.go.jp/toukei/latest/index_e.htm
Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.4 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-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens
| Years | Exports | Imports | Balance |
| 1950 | 298 | 348 | -50 |
| 1955 | 723 | 889 | -166 |
| 1960 | 1,459 | 1,616 | -157 |
| 1965 | 3,042 | 2,940 | 102 |
| 1970 | 6,954 | 6,797 | 157 |
| 1975 | 16,545 | 17,170 | -625 |
| 1979 | 22,531 | 24,245 | -1,714 |
| 1980 | 29,382 | 31,995 | -2,613 |
| 1981 | 33,468 | 31,464 | 2,004 |
| 1982 | 34,432 | 32,656 | 1,776 |
| 1983 | 34,909 | 30,014 | 4,895 |
| 1984 | 40,325 | 32,321 | 8,004 |
| 1985 | 41,955 | 31,084 | 10,871 |
| 1986 | 35,289 | 21,550 | 13,739 |
| 1987 | 33,315 | 21,736 | 11,579 |
| 1988 | 33,939 | 24,006 | 9,933 |
| 1989 | 37,822 | 28,978 | 8,844 |
| 1990 | 41,456 | 33,855 | 7,601 |
| 1991 | 42,359 | 31,900 | 10,459 |
| 1992 | 43,012 | 29,527 | 13,485 |
| 1993 | 40,202 | 26,826 | 13,376 |
| 1994 | 40,497 | 28,104 | 12,393 |
| 1995 | 41,530 | 31,548 | 9,982 |
| 1996 | 44,731 | 37,993 | 6,738 |
| 1997 | 50,937 | 40,956 | 9,981 |
| 1998 | 50,645 | 36,653 | 13,992 |
| 1999 | 47,547 | 35,268 | 12,279 |
| 2000 | 51,654 | 40,938 | 10,716 |
| 2001 | 48,979 | 42,415 | 6,564 |
| 2002 | 52,108 | 42,227 | 9,881 |
| 2003 | 54,548 | 44,362 | 10,186 |
| 2004 | 61,169 | 49,216 | 11,953 |
| 2005 | 65,656 | 56,949 | 8,707 |
| 2006 | 75,246 | 67,344 | 7,902 |
| 2007 | 83,931 | 73,135 | 10,796 |
| 2008 | 81,018 | 78,954 | 2,424 |
| 2009 | 54,170 | 51,499 | 2,671 |
| 2010 | 67,399 | 60,764 | 6,635 |
| 2011 | 65,546 | 68,111 | -2,565 |
Source: Japan, Ministry of Finance, http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table VB-7 for Oct 2012. The share of Asia in Japan’s trade is more than one half, 55.2 percent of exports and 47.1 percent of imports. Within Asia, exports to China are 18.4 percent of total exports and imports from China 23.8 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 17.9 percent of total exports and share of imports from the US of 8.9 percent in total imports. Western Europe has share of 10.2 percent in Japan’s exports and of 11.0 percent in imports. Rates of growth of exports of Japan in Oct are sharply negative for all countries and regions with the exception of 3.1 percent for exports to the US, 8.0 percent for Canada, 8.5 percent for Mexico and 0.1 percent for the Middle East. 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 6.5 percent in Oct 2012 while imports decreased by 1.6 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Oct are negative for some trading partners: minus 12.2 percent for Brazil, minus 14.0 percent for the Middle East and minus 0.9 percent for Australia. Imports from Asia increased 2.0 percent in the 12 months ending in Oct while imports from China increased 3.6 percent.
Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Oct 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 5,149,993 | -6.5 | 5,698,965 | -1.6 |
| Asia | 2,840,904 | -4.9 | 2,684,524 | 2.0 |
| China | 947,766 | -11.6 | 1,354,298 | 3.6 |
| USA | 921,094 | 3.1 | 504,661 | 0.1 |
| Canada | 68,425 | 8.0 | 95,185 | 3.7 |
| Brazil | 40,816 | -9.9 | 86,524 | -12.2 |
| Mexico | 72,546 | 8.5 | 33,040 | 27.5 |
| Western Europe | 526,663 | -23.5 | 628,625 | 5.7 |
| Germany | 132,834 | -17.2 | 169,561 | 6.2 |
| France | 40,252 | -28.3 | 89,505 | 11.6 |
| UK | 85,584 | -12.6 | 49,634 | 2.2 |
| Middle East | 189,249 | 0.1 | 870,364 | -14.0 |
| Australia | 109,197 | -25.5 | 369,236 | -0.9 |
Source: Japan, Ministry of Finance, http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical distribution of Japan’s trade balance is provided in Table VB-8. The combined trade surpluses with the US, UK and Mexico of JPY 491,889 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 941,154 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 406,532 million in Sep 2012.
Table VB-8, Japan, Trade Balance, Millions of Yen
| Oct 2012 | Millions of Yen |
| Total | -548,972 |
| Asia | 156,380 |
| China | -406,532 |
| USA | 416,433 |
| Canada | -26,760 |
| Brazil | -45,708 |
| Mexico | 39,506 |
| Western Europe | -101,962 |
| Germany | -36,727 |
| France | -49,253 |
| UK | 35,950 |
| Middle East | -681,115 |
| Australia | -260,039 |
Source: Japan, Ministry of Finance, 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 Oct 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 but rebounded to 56.5 in Oct.
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| 2012 | Total Index | New Orders | Interm. | Subs Prices | Exp |
| Oct | 56.5 | 51.6 | 58.1 | 50.5 | 63.4 |
| 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/
Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Oct 2011 to Oct 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, rebounding to 55.5 in Oct 2012.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
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 and movement to 50.2 in Oct 2012 into positive territory.
Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| 2012 | IPM | PI | NOI | INV | EMP | SDEL |
| Oct | 50.2 | 52.1 | 50.4 | 47.3 | 49.2 | 50.1 |
| 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/t20121102_402847908.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 with movement to 50.2 in Oct 2012 above 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 World Economic Outlook (WEO) of the International Monetary Fund (IMF) estimates China’s GDP in current US dollars (USD) at $8250.2 billion in 2012 (http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx). Table VC-GDP provides the estimate of current value of China’s GDP at CNY 35.3 trillion in IIIQ2012. Cumulative growth in the first three quarters of 2012 relative to the same period in 2011 was 7.7 percent. Secondary industry accounts for 46.8 percent of GDP of which industry alone for 40.1 percent and construction with the remaining 6.7 percent. Tertiary industry accounts for 43.8 percent of GDP and primary industry for 9.4 percent. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-GDP provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012 and 9.1 percent in IIIQ2012.
Table VC-GDP, China, Cumulative and Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%
| Cumulative GDP | Value Current CNY 100 Million | Cumulative Three First Quarters of 2012 Relative to Cumulative Three First Quarters of 2012 ∆% Inflation Adjusted |
| GDP | 353,480.0 | 7.7 |
| Primary Industry | 33,088.0 | 4.2 |
| Farming | 33,088.0 | 4.2 |
| Secondary Industry | 165,428.5 | 8.1 |
| Industry | 141,641.5 | 7.9 |
| Construction | 23,787.0 | 9.2 |
| Tertiary Industry | 154,963.5 | 7.9 |
| Transport, Storage, Post | 18,941.0 | 6.7 |
| Wholesale, Retail Trades | 31,651.2 | 11.8 |
| Hotel & Catering Services | 7,015.6 | 7.6 |
| Financial Intermediation | 22,465.2 | 9.5 |
| Real Estate | 20,789.6 | 2.7 |
| Other | 54,101.0 | 7.7 |
| Growth in Quarter Relative to Prior Quarter | ∆% on Prior Quarter | ∆% Annual Equivalent |
| 2012 | ||
| IIIQ2012 | 2.2 | 9.1 |
| IIQ2012 | 2.0 | 8.2 |
| IQ2012 | 1.5 | 6.1 |
| 2011 | ||
| IVQ2011 | 1.7 | 7.0 |
| IIIQ2011 | 2.4 | 9.9 |
| IIQ2011 | 2.5 | 10.4 |
| IQ2011 | 2.2 | 9.1 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Table VD-GDPb provides growth of GDP in China relative to a year earlier and relative to prior quarter. Growth of GDP relative to a year earlier decelerated from 12.1 percent in IQ2010 to 7.4 percent in IIIQ2012. Growth of secondary industry decelerated from 14.5 percent in IQ2010 to 7.9 percent in IIIQ2012.
Table VC-GDPb, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2011 | IIQ 2011 | IIIQ 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | |
| GDP | 9.7 | 9.5 | 9.1 | 8.9 | 8.1 | 7.6 | 7.4 |
| Primary Industry | 3.5 | 3.2 | 3.8 | 4.5 | 3.8 | 4.3 | 4.2 |
| Secondary Industry | 11.1 | 11.0 | 10.8 | 10.6 | 9.1 | 8.3 | 8.1 |
| Tertiary Industry | 9.1 | 9.2 | 9.0 | 8.9 | 7.5 | 7.7 | 7.9 |
| GDP ∆% Relative to a Prior Quarter | 2.2 | 2.3 | 2.4 | 1.9 | 1.8 | 1.8 | 2.2 |
| IQ 2010 | IIQ 2010 | IIIQ 2010 | IVQ 2010 | ||||
| GDP | 12.1 | 11.2 | 10.7 | 12.1 | |||
| Primary Industry | 3.8 | 3.6 | 4.0 | 3.8 | |||
| Secondary Industry | 14.5 | 13.3 | 12.6 | 14.5 | |||
| Tertiary Industry | 10.5 | 9.9 | 9.7 | 10.5 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH
The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10326) is improving. The overall Flash China Manufacturing PMI™ increased marginally from 49.5 in Oct to 50.4 in Nov for a thirteen-month high high while the Flash China Manufacturing Output Index increased from 48.2 in Oct to 51.3 in Nov, both expansion territory above 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the movement of the HSBC into expansion territory for the first time in 12 months verifies improving recovery but stimulus policies should continue because of the fragility of world economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10326).The HSBC China Services PMI™, compiled by Markit, shows marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 50.3 in Sep to 50.5 in Oct for second consecutive month of increasing output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10289). 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 to sustain recovery in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10289). The HSBC Business Activity index decreased from 54.3 in Sep to 53.5 in Oct with continuing growth in services at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10289). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, increased to 49.5 in Oct from 47.9 in Sep, indicating moderate reduction of activity and the twelfth monthly deterioration of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10259). New exports orders registered declines for the sixth consecutive month at a slower but strong rate of decline. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilization of the decline with increase in new orders but weak exports, requiring further stimulus measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10259).
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.
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 0.4 percent in 2012 and 0.1 percent in 2013 but 1.4 percent in 2014.
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* | -0.4 | ||
| 2013* | 0.1 | ||
| 2014* | 1.4 |
*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, increased from 45.7 in Oct to 45.8 in Nov, for ten consecutive declines and fourteen drops in fifteen months, with Oct registering the lowest reading since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10329). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index is consistent with significant worsening of economic activity with GDP declining even by 0.5 percent in IVQ2012 compared with contraction of 0.1 percent in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10329). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, decreased from 46.1 in Sep to 45.7 in Oct, which is the ninth consecutive contraction; contraction spread in manufacturing and services throughout the four largest economies of Germany, France, Italy and Spain (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10267). Rob Robson, Senior Economist at Markit, finds that the data are historically consistent with likely decline of GDP at a rate of 0.5 percent per quarter with companies concerned about weakness in both the internal economy and the world economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10267). The Markit Eurozone Services Business Activity Index declined from 46.1 in Sep to 46.0 in Oct, which is the lowest reading since Jul 2009 with service providers concerned about the internal market and those in the United States and Asia (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10267). The Markit Eurozone Manufacturing PMI® fell to 45.4 in Oct from 46.1 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10253). New export orders declined in Oct for sixteenth consecutive month, with declines for the two largest economies of France and Germany. Rob Dobson, Chief Economist at Markit, finds that manufacturing output declined through all sectors of consumer, intermediate and investment goods with constraint of demand by internally and from abroad, including trade within the euro area and with third regions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10253). Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IIIQ2012 ∆% -0.1; IIIQ2012/IIIQ2011 ∆% -0.6 Blog 11/18/12 |
| Unemployment | Sep 2012: 11.6% unemployment rate Sep 2012: 18.490 million unemployed Blog 11/4/12 |
| HICP | Oct month ∆%: 0.2 12 months Oct ∆%: 2.5 |
| Producer Prices | Euro Zone industrial producer prices Sep ∆%: 0.2 |
| Industrial Production | Sep month ∆%: -2.5; Sep 12 months ∆%: -2.3 |
| Retail Sales | Sep month ∆%: minus 0.2 |
| Confidence and Economic Sentiment Indicator | Sentiment 84.5 Oct 2012 Consumer minus 25.7 Oct 2012 Blog 11/4/12 |
| Trade | Jan-Sep 2012/Jan-Sep 2011 Exports ∆%: 8.0 Sep 2012 12-month Exports ∆% 1.4 Imports ∆% -4.1 |
Links to blog comments in Table EUR:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.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, increased from 49.7 in Oct to 47.9 in Nov, which is the seventh consecutive reading below 50, indicating mild contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10331). The pace of decline of new export orders for manufacturing was at the lowest in six months, with some respondents finding enhanced demand in China. Tim Moore, Senior Economist at Markit, finds that difficult short-term output for manufacturing and services firms because of decline at the sharpest rate in three years of stocks of purchases (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10331). The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, decreased from 49.2 in Sep to 47.7 in Oct, indicating a level below the neutral zone of 50.0 for six consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10305). Tim Moore, Senior Economist at Markit and author of the report, finds that the composite index of manufacturing and services suggests the possibility that the economy of Germany could experience contracting GDP in IVQ2012 lost strength in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10305). The Germany Services Business Activity Index fell from 49.7 in Sep to 48.4 in Oct, which is below the long-term average of 52.9 and also lower than readings in the first half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10305). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 47.4 in Sep to 46.0 in Oct for the eighth consecutive month in contraction territory below 50.0 and much lower than the long-term average of the index of 52.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278). New export orders fell for sixteen consecutive months at the fastest rate of decline since Apr 2009. Tim Moore, Senior Economist at Markit and author of the report, continuing weakness in orders from major export sectors with output declining in part because of lower demand from the south of Europe together with deteriorating investment throughout Asia (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IIIQ2012 0.2 ∆%; III/Q2012/IIIQ2011 ∆% 0.4 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12 11/25/12 |
| Consumer Price Index | Oct month NSA ∆%: 0.0 |
| Producer Price Index | Oct month ∆%: 0.1 CSA, 0.0 NSA |
| Industrial Production | Mfg Sep month CSA ∆%: -2.3 |
| Machine Orders | MFG Sep month ∆%: -3.3 |
| Retail Sales | Sep Month ∆% 1.5 12-Month ∆% -3.1 Blog 11/4/12 |
| Employment Report | Unemployment Rate Sep 5.4% |
| Trade Balance | Exports Sep 12-month NSA ∆%: -3.4 Blog 11/11/12 |
Links to blog comments in Table DE:
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
Table VE-1 provides percentage change of Germany’s GDP in one quarter relative to the prior quarter from 2003 to 2012. Germany’s GDP contracted during four consecutive quarters from IIQ2008 to IQ2009. The deepest contraction was 4.1 percent in IQ2009. Growth was quite strong from IIIQ2009 to IQ2011 for cumulative growth of 7.3 percent in seven quarters or at the average rate of 1.0 percent per quarter, which is equivalent to 4.1 percent per year. Economic growth decelerated in IIQ2011 to 0.5 percent and 0.4 percent in IIIQ2011. The economy contracted mildly by 0.1 percent in IVQ2011 and grew 0.5 percent in IQ2012 and 0.3 percent in IIQ2012. GDP growth in IIIQ2012 was 0.2 percent relative to IIQ2012.
Table VE-1, Germany Quarter GDP ∆% Relative to Prior Quarter, Seasonally and Calendar Adjusted
| IQ | IIQ | IIIQ | IV | |
| 2012 | 0.5 | 0.3 | 0.2 | |
| 2011 | 1.2 | 0.5 | 0.4 | -0.1 |
| 2010 | 0.7 | 2.2 | 0.7 | 0.6 |
| 2009 | -4.1 | 0.2 | 0.8 | 0.9 |
| 2008 | 1.0 | -0.4 | -0.4 | -2.0 |
| 2007 | 0.6 | 0.5 | 0.9 | 0.4 |
| 2006 | 1.1 | 1.5 | 1.0 | 1.3 |
| 2005 | -0.1 | 0.6 | 0.8 | 0.3 |
| 2004 | 0.0 | 0.3 | -0.2 | 0.0 |
| 2003 | -0.8 | -0.1 | 0.5 | 0.4 |
Seasonal and calendar adjusted
Source: Statistisches Bundesamt Deutschland (Destatis)
Table VE-2 provides percentage changes of Germany’s GDP in a quarter relative to the same quarter a year earlier. Growth was weak in the recovery from the recession of 2001 through 2005, as in most of the euro area (see Pelaez and Pelaez, The Global Recession Risk (2007), 116-46). Germany’s economy then grew robustly in 2006 and 2007 until the global recession after 2007. Germany recovered with strong growth in 2010 and vigorous 5.2 percent in IQ2011. The economy decelerated in the final three quarters of 2011, growing 1.7 percent in IQ2012 relative to IQ2011. Growth decelerated further to 0.5 percent in IIQ2012 without calendar adjustment and 1.0 percent with calendar adjustment and to 0.4 percent in IIIQ2012.
Table VE-2, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Price Adjusted NCSA
| IQ | IIQ | IIIQ | IV | |
| 2012 | 1.7 | 0.5 | 0.4 | |
| 2011 | 5.2 | 3.1 | 2.6 | 1.4 |
| 2010 | 2.8 | 5.0 | 4.5 | 4.2 |
| 2009 | -6.5 | -7.4 | -5.0 | -1.6 |
| 2008 | 2.1 | 3.1 | 1.1 | -1.9 |
| 2007 | 4.3 | 3.4 | 3.3 | 2.2 |
| 2006 | 4.3 | 2.4 | 3.5 | 4.6 |
| 2005 | -0.8 | 1.2 | 1.2 | 1.0 |
| 2004 | 1.5 | 1.6 | 0.6 | 0.9 |
| 2003 | 0.0 | -1.1 | -0.5 | 0.1 |
Price adjusted NSA Source: Statistisches Bundesamt Deutschland (Destatis)
There are strong calendar effects in economic activity in Germany. Table VE-3 provides Germany’s percentage change in a quarter relative to the same quarter a year earlier adjusting for price changes and calendar effects. Germany’s GDP increased 1.0 percent in IIQ2012 calendar-adjusted in contrast with only 0.5 percent without calendar adjustment. GDP growth adjusting for calendar effects was 0.9 percent in IIIQ2012 relative to IIIQ2011 and 0.4 percent without calendar adjustment. As the Statistisches Bundesamt, Germany’s Federal Statistical Agency, explains: “In a year-on-year comparison, too, GDP increased. The price-adjusted GDP rose 0.5% in the second quarter of 2012 compared with the same quarter of 2011. The relatively small increase was among other things due to the negative calendar effect as the reference quarter had one working day less than the same quarter of the previous year. Thus, in calendar-adjusted terms, the GDP increase was larger (+1.0%)” (https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1). There was similar calendar effect with IIIQ2012 as explained by the Statistisches Bundesamt, Germany’s Federal Statistical Agency: “In a year-on-year comparison, too, economic growth has slowed down since the beginning of this year. Price-adjusted GDP rose 0.4% in the third quarter of 2012 compared with the same quarter of 2011. The relatively small increase was due, among other things, to a calendar effect, as was the case in the second quarter. The reference quarter had one working day less than the same quarter of the previous year, which had a negative impact on GDP growth. In calendar-adjusted terms, the GDP increase was larger (+0.9%). The relatively small increase was due, among other things, to a calendar effect, as was the case in the second quarter. The reference quarter had one working day less than the same quarter of the previous year, which had a negative impact on GDP growth. In calendar-adjusted terms, the GDP increase was larger (+0.9%)” (https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.html;jsessionid=53305DE860BC169DF8A2A6C48E738557.cae4).
Table VE-3, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA
| IQ | IIQ | IIIQ | IV | |
| 2012 | 1.2 | 1.0 | 0.9 | |
| 2011 | 4.9 | 3.0 | 2.7 | 1.9 |
| 2010 | 2.7 | 4.6 | 4.5 | 4.2 |
| 2009 | -6.7 | -6.2 | -5.1 | -2.3 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.
Table VE-4 provides annual 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 economies. The German economy grew at 4.2 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.2 percent in IQ2011, 0.5 percent in IIQ2011 and 0.4 percent in IIIQ2011 to decline of 0.1 percent in IVQ2011, growth of 0.5 percent in IQ2012 and only 0.3 percent in IIQ2012. 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-4, Germany, GDP Year ∆%
| 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 (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811. html;jsessionid=71CF7AAAD3F91D4904E53BF98CBEE7B5.cae3
The Statistisches Bundesamt provides the analysis of percentage point contributions to GDP on growth from the same quarter a year earlier, shown in Table VE-5. The original data are adjusted for price but not for seasonality. There is strong internal demand, or consumption and investment, which is uncommon in advanced economies. Consumption provided 1.2 percentage points to growth in IQ2012 and grew 1.6 percent from the same quarter a year earlier; provided 0.4 percentage points in IIQ2012 with growth of 0.5 percent; and provided 0.1 percentage points in IIIQ2012 with growth of 0.1 percet. Growth of fixed capital formation (GFCF) provided 0.2 percentage points to growth of GDP in IQ2012 and grew 1.2 percent from the same quarter a year earlier; deducted 0.5 percentage points in IIQ2012 and declined 2.6 percent relative to a year earlier; and deducted 0.5 percentage points in IIIQ2012 and declined 2.6 percent relative to a year earlier (https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.html;jsessionid=53305DE860BC169DF8A2A6C48E738557.cae4 ). Domestic uses contributed 1.3 percentage points in IQ2012 and grew 1.4 percent from the same quarter a year earlier; deducted 0.6 percentage points in IIQ2012 and fell 0.9 percent relative to a year earlier; and deducted 1.0 percentage points in IIIQ2012, growing 1.0 percent relative to a year earlier. Net exports contributed 0.4 percentage points in IQ2012; added 1.4 percentage points in IIQ2012; and added 1.4 percentage points in IIIQ2012. The rates of growth of exports and imports fell from over 10 percent to single digits with 3.5 percent growth of exports and 3.2 percent growth of imports in IQ2012; 5.0 percent growth of exports and 2.4 percent growth of imports in IIQ2012; and 4.2 percent growth of exports in IIIQ2012 and 1.6 percent growth of imports. GDP per person in employment grew 0.3 percent in IQ2012, minus 0.6 percent in IIQ2012 and minus 0.5 percent in IIIQ2012.
Table VE-5, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Same Quarter Year earlier, Price Adjusted
| IVQ 11 PP | ∆% IVQ 11 | IQ12 PP | ∆% IQ 12 | IIQ 12 PP | ∆% | IIIQ 11 PP | ∆% IIIQ 11 | |
| Consumption | 0.8 | 1.0 | 1.2 | 1.6 | 0.4 | 0.5 | 0.1 | 0.1 |
| Households Consumption | 0.5 | 0.9 | 0.8 | 1.5 | 0.2 | 0.4 | -0.1 | -0.2 |
| Government | 0.3 | 1.3 | 0.3 | 1.7 | 0.1 | 0.8 | 0.2 | 1.0 |
| Gross Capital Formation | 0.9 | 5.4 | 0.1 | 0.7 | -1.3 | -7.0 | -1.0 | -5.3 |
| Gross Fixed | 0.8 | 4.5 | 0.2 | 1.2 | -0.5 | -2.6 | -0.5 | -2.6 |
| GFCF including | 0.2 | 2.3 | 0.2 | 2.4 | -0.3 | -4.8 | -0.5 | -8.0 |
| GFCF in Construction | 0.6 | 6.5 | 0.0 | 0.2 | -0.2 | -1.8 | 0.0 | 0.1 |
| Change in Inventories | 0.1 | -0.1 | -0.8 | -0.5 | ||||
| Domestic Uses | 2.4 | 1.7 | 1.3 | 1.4 | -0.6 | -0.9 | -1.0 | -1.0 |
| Net Exports | -0.3 | 0.4 | 1.4 | 1.4 | ||||
| Exports | 3.9 | 3.5 | 5.0 | 4.2 | ||||
| Imports | 5.1 | 3.2 | 2.4 | 1.6 | ||||
| GDP | 1.4 | 1.7 | 0.5 | 0.4 | ||||
| GDP per Person in Employment | 0.0 | 0.3 | -0.6 | -0.5 | ||||
| GDP per Hour Worked | 1.2 | -0.3 | 0.0 | 0.8 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.html;jsessionid=71CF7AAAD3F91D4904E53BF98CBEE7B5.cae3
Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table VE-6. The two rows of industry ex construction and including manufacturing reveal sharp reductions in yearly growth rates from double digits in 2010, upper single digits in 2011, lower single digits in IQ2012 and contractions in IIQ2012 and IIIQ2012. Finance and insurance rebounded from decline of 1.7 percent in 2007 to growth of 2.2 percent in IIQ2012 and 3.2 percent in IIIQ2012. Business services also grew at relatively higher rates from minus 12.3 percent in 2007 to 4.1 percent in IQ2012, 3.0 percent in IIQ2012 and 2.4 percent in IIIQ2012.
Table VE-6, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA
| 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | |
| Agriculture | -9.2 | -12.9 | 2.8 | -0.3 | 2.8 |
| Industry ex | 6.2 | 0.7 | 1.2 | -0.9 | -2.2 |
| Industry Including Manufacturing | 8.3 | 2.2 | 2.3 | -1.2 | -2.6 |
| Construction | 4.6 | 6.7 | 1.1 | -2.4 | -0.5 |
| Trade, Transport & Food Services | 3.1 | 1.8 | 2.5 | 1.0 | 0.7 |
| Information & Communications. | 1.9 | 1.9 | 3.5 | 2.6 | 3.2 |
| Finance & Insurance | 1.4 | 1.4 | 1.8 | 2.2 | 1.8 |
| Real Estate | 0.6 | 1.1 | 1.7 | 1.6 | 1.5 |
| Business Services | 4.2 | 3.4 | 4.1 | 3.0 | 2.4 |
| Public Services, Education & Health | 0.9 | 1.1 | 0.9 | 1.0 | 0.7 |
| Other Services | -0.5 | 0.3 | 1.2 | 0.8 | 0.6 |
| Total Gross Value Added | 3.0 | 1.4 | 1.8 | 0.7 | 0.3 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.html;jsessionid=71CF7AAAD3F91D4904E53BF98CBEE7B5.cae3
Chart VE-1 of the Statistisches Bundesamt Deutschland (Destatis) (Federal Statistics Agency of Germany) provides GDP at current prices from 2003 to 2012. The German economy is productive with significant dynamism over the long term. There are fluctuations in an increasing trend since 2009.
Chart VE-1, Germany, GDP, Current Prices, Billion Euro
Source: Statistisches Bundesamt Deutschland (Destatis)
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-2 of the Statistisches Bundesamt Deutschland (Destatis) (Federal Statistics Agency of Germany) provides the index of price-adjusted chain-linked GDP of Germany from 2008 to 2012. Germany was growing rapidly before the global contraction and rebounded with significant strength along a strong upward trend.
Chart VE-2, Germany, Index of Price-Adjusted Chain-Linked GDP, 2000=100
Source: Statistisches Bundesamt Deutschland (Destatis)
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table VE-7 provides Germany’s GDP of €661.1 billion in IIQ2012 and €664.88 in IIIQ2012 and its uses. Private consumption is 57.2 percent of GDP and gross capital formation 17.5 percent with government consumption of 19.4 percent and net exports 5.9 percent in IIQ2012 and 6.4 percent in IIIQ2012. Germany’s savings ratio has been in the rate of 8.8 percent to 13.7 percent. Structural reforms in the early 2000s provided strength and dynamism to Germany’s economic performance.
Table VE-7, Germany, GDP and Uses, Euro Billions and %
| IIQ2012 | IIIQ2012 | |
| GDP Euro Billions | 661.07 | 664.88 |
| Percent Distribution of Uses | ||
| Gross Capital Formation | 17.5 | 17.5 |
| Private Consumption | 57.2 | 57.2 |
| Balance of Exports and Imports | 5.9 | 6.4 |
| Government Consumption | 19.4 | 19.4 |
| Memo: Savings Ratio % | 10.0 | 8.8 |
| IIIQ2012 | 8.8 | |
| IIQ2012 | 10.0 | |
| IQ2012 | 13.7 | |
| IVQ2011 | 9.1 | |
| IIIQ2011 | 8.8 | |
| 2011 | 10.4 | |
| 2010 | 10.9 | |
| 2009 | 10.9 | |
| 2008 | 11.5 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2012/11/PE12_407_811.html;jsessionid=71CF7AAAD3F91D4904E53BF98CBEE7B5.cae3
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 43.5 in Oct to 44.6 in Nov for the ninth consecutive contraction, indicating fast rate of decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10328). Jack Kennedy, Senior Economist at Markit and author of the report, finds weakness in the index suggesting that GDP growth of 0.2 percent in IIIQ2012 may not be sustained in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10328).
The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased marginally from 43.2 in Sep to 43.5 in Oct, indicating significant contraction of private sector activity for an eighth consecutive month at a fast rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10301). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that combined manufacturing and services weakness contracted at the sharpest rate since Sep 2008 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10301). The Markit France Services Activity index fell from 45.0 in Sep to 43.5 in Oct for the lowest reading in twelve months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10301). The Markit France Manufacturing Purchasing Managers’ Index® increased to 43.7 in Oct from 42.7 in Sep (which was the sharpest decline of the manufacturing economy since Apr 2009), remaining deeply below the neutral level of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10247). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing weakness in manufacturing with export orders falling at the fastest rate since the middle of 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10247). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Oct month ∆% 0.2 |
| PPI | Sep month ∆%: 0.3 Blog 11/4/12 |
| GDP Growth | IIIQ2012/IIQ2012 ∆%: 0.2 |
| Industrial Production | Sep ∆%: |
| Consumer Spending | Sep Manufactured Goods |
| Employment | IIQ2012 Unemployed 2.785 million |
| Trade Balance | Sep Exports ∆%: month -1.5, 12 months 5.2 Sep Imports ∆%: month -1.9, 12 months 0.0 Blog 11/11/12 |
| Confidence Indicators | Historical averages 100 Nov Mfg Business Climate 88 Blog 11/25/12 |
Links to blog comments in Table FR:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.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 and rebounding to 88 in Nov. The final row shows general production expectations deteriorating from minus 32 in Jun to minus 44 in Jul and Aug, minus 52 in Sep, minus 55 in Oct but minus 40 in Nov, which is still 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 -38 in Oct, improving marginally to minus 36 in Nov, 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 | Aug | Sep | Oct | Nov |
| Synthetic Index | 100 | 90 | 90 | 85 | 88 |
| Recent Changes in Output | 5 | -9 | -21 | -23 | -17 |
| Finished- Goods Inventory Level | 13 | 13 | 7 | 17 | 16 |
| Demand and Total Order Levels | -17 | -33 | -28 | -41 | -34 |
| Demand and Export Order Levels | -12 | -28 | -27 | -38 | -36 |
| Personal Production Expectations | 5 | -7 | -5 | -9 | -7 |
| General Production Expectations | -9 | -44 | -52 | -55 | -40 |
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121123
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, marginally reversed in Nov 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=20121123
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-Oct 2012 followed by rebound in Nov 2012.
Chart VF-2, INSEE Business Climate Manufacturing Turning Point Indicator
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121123
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 followed by improvement in Nov 2012.
Chart VF-3, Climate Manufacturing General Production, Personal Production and Recent Changes in Output of INSEE, SA %
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20121123
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 44.5 in Sep to 46.0 in Oct, indicating significant contraction of output of Italy’s services at a marginally slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10304). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the data suggest contraction of GDP in Italy in IVQ2012 but with rate and movement of private-sector activity toward improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10304). The Markit/ADACI Purchasing Managers’ Index® (PMI®), decreased from 45.7 in Sep to 45.5 in Oct for 15 consecutive months of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10273). There was more moderate increase in new foreign orders than sharper decline in domestic new orders. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds that growth of foreign orders was moderate because of weakness in the economies of France and Germany (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10273). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Oct month ∆%: 0.0 |
| Producer Price Index | Sep month ∆%: -0.1 Blog 11/4/12 |
| GDP Growth | IIQ2012/IQ2012 SA ∆%: minus 0.8 |
| Labor Report | Sep 2012 Participation rate 63.7% Employment ratio 56.9% Unemployment rate 10.8% Blog 11/4/12 |
| Industrial Production | Sep month ∆%: minus 1.5 |
| Retail Sales | Sep month ∆%: 0.0 Sep 12-month ∆%: -1.7 Blog 11/25/12 |
| Business Confidence | Mfg Oct 87.6, Jun 88.8 Construction Oct 81.4, Jun 85.4 Blog 10/28/12 |
| Trade Balance | Balance Sep SA €1556 million versus Aug €968 |
Links to blog comments in Table IT:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
10/28/12 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.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 increased 0.1 percent in Sep 2012 relative to Aug 2012, increased 0.1 percent in Jul-Sep 2012 relative to Apr-Jun 2012, decreased 1.7 percent in Sep 2012 relative to Sep 2011 and decreased 1.7 percent in Jan-Sep 2012 relative to Jan-Sep 2011. Food retail sales outperform non-food retail sales.
Table VG-1, Italy, Retail Sales ∆%
| Sep 2012/ Aug 2012 SA | Jul-Sep 12/ | Sep 2012/ Sep 2011 NSA | Jan-Sep 2012/ | |
| Total | 0.1 | 0.1 | -1.7 | -1.7 |
| Food | 0.2 | 0.4 | -0.6 | -0.1 |
| Non-food | 0.0 | 0.1 | -2.4 | -2.4 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/75068
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 with marginal deterioration in Sep 2012.
Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months
Source: Istituto Nazionale di Statistica
A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage changes in 2011 and Jan-Sep 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 0.6 percent in Oct 2011, 1.3 percent in Apr 2011, 0.2 percent in May 2012 and 0.4 percent in Jun 2012. 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 2011. 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 1.3 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 0.7 percent and 1.7 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 1.1 percent. Increase of 0.1 percent in Sep 2012 was not sufficient to prevent decline of 1.7 percent in 12 months.
Table VG-2, Italy, Retail Sales Month and 12-Month ∆%
| Month ∆% SA | 12-Month ∆% NSA | |
| Sep 2012 | 0.1 | -1.7 |
| Aug | 0.0 | -1.1 |
| Jul | -0.2 | -3.2 |
| Jun | 0.4 | -0.5 |
| May | 0.2 | -1.7 |
| Apr | -1.7 | -6.8 |
| Mar | -0.7 | 1.5 |
| Feb | 0.8 | 0.5 |
| Jan | 1.3 | -1.1 |
| Dec 2011 | -1.1 | -3.7 |
| Nov | -0.7 | -1.8 |
| Oct | 0.6 | -1.4 |
| Sep | -0.5 | -1.6 |
| Aug | -0.3 | -0.3 |
| July | -0.2 | -2.3 |
| Jun | -0.6 | -1.1 |
| May | -0.4 | -0.4 |
| Apr | 1.3 | 2.2 |
| Mar | 0.1 | -2.1 |
| Feb | -0.7 | 0.0 |
| Jan | -1.0 | -1.1 |
| 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/75068
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
The Business Activity Index of the Markit/CIPS UK Services PMI® decreased from 52.2 in Sep to 50.2 in Oct with growth during 22 consecutive months, decreasing at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10288). Andrew Harker, Economist at Markit, finds that the lowest level of the index registered in 22 months suggests continuing leveled trend of economic activity found in official data (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10288). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) decreased from 48.1 in Sep to 47.5 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10257). The PMI registered average 47.7 in IIIQ2012, which is the lowest reading since IIQ2009. New export orders fell for a seventh consecutive month. Rob Dobson, Chief Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds that the decline of UK manufacturing accelerated at the beginning of IVQ2012 with continuing deterioration of new export orders with unresolved issues in the euro area and slowing economy in Asia (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10257). Table UK provides the economic indicators for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | Oct month ∆%: 0.5 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IIIQ2012 prior quarter ∆% minus 1.0; year earlier same quarter ∆%: 0.0 |
| Industrial Production | Sep 2012/Sep 2011 NSA ∆%: Production Industries minus 2.6; Manufacturing minus 1.0 |
| Retail Sales | Oct month ∆%: 0.0 |
| Labor Market | Jul-Sep Unemployment Rate: 7.8%; Claimant Count 4.8%; Earnings Growth 1.8% |
| Trade Balance | Balance Sep minus ₤2699 million |
Links to blog comments in Table UK:
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/11/12 http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html
10/28/12 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html
© Carlos M. Pelaez, 2010, 2011, 2012
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