Mediocre and Decelerating United States Economic Growth at around 1.5 Percent per Year, Contracting Private Domestic Investment, Swelling Undistributed Corporate Profits, Contracting Real Disposable Income per Capita, United States Housing Collapse, World Financial Turbulence and Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Mediocre and Decelerating United States Economic Growth
IA Mediocre and Decelerating United States Economic Growth
IA1 Contracting Real Private Fixed Investment
IA2 Swelling Undistributed Corporate Profits
IB Collapse of United States Dynamism of Income Growth and Employment Creation
IIA Stagnating Real Disposable Income and Consumption Expenditures
IIA1 Stagnating Real Disposable Income and Consumption Expenditures
IIA2 Financial Repression
IIB United States Housing Collapse
IIB1 United States New House Sales
IIB2 United States House Prices
IIB3 Factors of United States Housing Collapse
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
Executive Summary
I Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth, jobs (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ) and hiring (http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html), unsustainable government deficit/debt (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and waves of inflation (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IIIQ(2012) has been at the average annual rate of 2.2 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 28.1 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ).
The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to cumulative growth of 1.47 percent in the first three quarters of 2012, which is equivalent to 1.96 percent per year. Calculations show that actual growth is around 1.5 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 28.1 million people corresponding to 17.4 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html). In the four quarters of 2011 and the first three quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and revised 2.7 percent in IIIQ2012. GDP growth in IIIQ2012 was revised from 2.0 percent seasonally adjusted annual rate (SAAR) to 2.7 percent but mostly because of contribution of 0.77 percentage points of inventory accumulation and one-time contribution of 0.64 percentage points of expenditures in national defense that without which would have reduced growth from 2.7 percent to 1.3 percent. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the first three quarters of 2012 is 2.0 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 -1]100}; and discounting 2.7 percent to one quarter is 0.67 {[(1.027)1/4 -1]100). Real GDP growth in the four quarters of 2011 and the first three quarters of 2012 accumulated to 3.5 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0067) - 1]100 = 3.5%}. This is equivalent to growth from IQ2011 to IIIQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IIIQ2012 of $13,638.1 billion by the SAAR of IVQ2010 of $13,181.2(http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table I-6 below in the text) and expressing as percentage {[($13,638.1/$13,181.2) - 1]100 = 3.5%}. The growth rate in annual equivalent for the four quarters of 2011 and the first three quarters of 2012 is 2.0 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0067)4/7 -1]100 = 2.0%], or {[($13,638.1/$13,181.2)]4/7-1]100 = 2.0%} dividing the SAAR of IIIQ2012 by the SAAR of IVQ2010 in Table I-6 below, obtaining the average for seven quarters and the annual average for one year of four quarters. Growth in the first three quarters of 2012 accumulates to 1.5 percent {[(1.02)1/4(1.013)1/4(1.027)1/4 -1]100 = 1.5%}, which is equivalent to 2.0 percent per year {([(1.02)1/4(1.013)1/4(1.027)1/4 ]4/3 – 1]100 = 2.0%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.3 percent by deducting from 2.7 percent one-time inventory accumulation of 0.77 percentage points and national defense expenditures of 0.64 percentage points, the US economy grew at 1.2 percent in the remaining five quarters {[(1.00025x1.0032x1.005x1.0032x1.0032)4/5 – 1]100 = 1.2%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.7 percent in IIIQ2012 that is more like 1.3 percent without inventory accumulation and national defense expenditures. Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.77 points of inventory accumulation to growth of 2.7 percent in IIIQ2012. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thu Nov 29, 2012, the second estimate of GDP for IIIQ2012 at 2.7 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_2nd.pdf).
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 4.7 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table ESI-1 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the revision back to 2009 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) and second estimate for IIIQ2012 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_2nd.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.3 percent to -8.9 percent. The striking difference is that in the first twelve quarters of expansion from IQ1983 to IIIQ1985, shown in Table ESI-1 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 8.0, 7.1, 3.9, 3.3, 3.8, 3.4, 6.4 and 3.1 while the percentage growth rates in the first thirteen quarters of expansion from IIIQ2009 to IIQ2012, shown in relief in Table ESI-1, were mediocre: 1.4, 4.0, 2.3, 2.2, 2.6, 2.4, 0.1, 2.5, 1.3, 4.1, 2.0, 1.3 and 2.7. Asterisks denote the estimates that have been revised by the BEA in the first round of Jul 29, 2011 and double asterisks the revisions released on Jul 27, 2012. During the four quarters of 2011 GDP grew at annual equivalent rates of 0.1 percent in IQ2011, 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011 and 4.1 percent in IVQ2011. The rate of growth of the US economy decelerated from seasonally-adjusted annual equivalent of 4.1 percent in IVQ2011 to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.7 percent in IIIQ2012, which is more like 1.3 percent without contributions of 0.77 percent by inventory change and 0.64 percentage points by one-time expenditures in national defense. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. Inventory accumulation contributed 2.53 percentage points to the rate of growth of 4.1 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, and 0.77 percentage points to the rate of 2.7 percent in IIIQ2012. Economic growth and employment creation are decelerating rapidly during 2012.
Table ESI-1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | 8.0 | -1.8* | -5.3** | 2.3** |
| II | -3.2 | 2.2 | 9.3 | 7.1 | 1.3* | -0.3** | 2.2** |
| III | 4.9 | -1.5 | 8.1 | 3.9 | -3.7* | 1.4** | 2.6** |
| IV | -4.9 | 0.3 | 8.5 | 3.3 | -8.9* | 4.0** | 2.4** |
| 1985 | 2011 | ||||||
| I | 3.8 | 0.1** | |||||
| II | 3.4 | 2.5** | |||||
| III | 6.4 | 1.3** | |||||
| IV | 3.1 | 4.1** | |||||
| 1986 | 2012 | ||||||
| I | 3.9 | 2.0** | |||||
| II | 1.6 | 1.3 | |||||
| III | 3.9 | 2.7 | |||||
| IV | 1.9 |
*Revision of Jul 29, 2011 **Revision of Jul 27, 2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
ESII Trend Growth. i. As shown in Table ESII-1, actual GDP grew cumulatively 17.7 percent from IQ1980 to IVQ1985, which is relatively close to what trend growth would have been at 18.5 percent. Rapid growth at 5.7 percent annual rate on average per quarter during the expansion from IQ1983 to IVQ1985 erased the loss of GDP of 4.8 percent during the contraction and maintained trend growth at 3 percent over the entire cycle.
ii. In contrast, cumulative growth from IVQ2007 to IIIQ2012 was 2.3 percent while trend growth would have been 15.1 percent. GDP in IIIQ2012 at seasonally adjusted annual rate is estimated at $13,638.1 by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $15,338.2 billion, or $1,700.1 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $1.7 trillion of foregone GDP that would have been created as it occurred during past cyclical expansions, which explains why employment has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2012 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 28.1 million people or 17.4 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.3 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 239.618 million in 2011 or by 3.3 percent while the labor force increased from 153.124 million in 2007 to 153.617 million in 2011 or by 0.3 percent (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ).
Table ESII-1, US, Actual and Trend Growth in the Business Cycle
| Period IQ1980 to IVQ1985 | |
| GDP SAAR USD Billions | |
| IQ1980 | 5,903.4 |
| IVQ1985 | 6,950.0 |
| ∆% IQ1980 to IVQ1985 | 17.7 |
| ∆% Trend Growth IQ1980 to IVQ1985 | 18.5 |
| Period IVQ2007 to IIIQ2012 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 13,326.0 |
| IIIQ2012 | 13,638.1 |
| ∆% IVQ2007 to IIIQ2012 Actual | 2.3 |
| ∆% IVQ2007 to IIIQ2012 Trend | 15.1 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
ESIII Gross Private Domestic Investment. i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IV1985 and from IVQ2007 to IIQ2012 is provided in Table ESIII-1. Gross private domestic investment increased from $778.3 billion in IQ1980 to $965.9 billion in IVQ1985 or by 24.1 percent.
ii In the current cycle, gross private domestic investment decreased from $2,123.6 billion in IVQ2007 to $1,929.3 billion in IIIQ2012, or decline by 9.1 percent. Private fixed investment fell from $2,111.5 billion in IVQ2007 to $1843.9 billion in IIIQ2012, or decline by 12.7 percent.
Table ESIII-1, US, Private Investment in the Business Cycle
| Period IQ1980 to IVQ1985 | |
| Gross Private Domestic Investment USD 2005 Billions | |
| IQ1980 | 778.3 |
| IVQ1985 | 965.9 |
| ∆% | 24.1 |
| Period IVQ2007 to IIIQ2012 | |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,123.6 |
| IIIQ2012 | 1,929.3 |
| ∆% | -9.1 |
| Private Fixed Investment USD 2005 Billions | |
| IVQ2007 | 2,111.5 |
| IIIQ2012 | 1,843.9 |
| ∆% | -12.7 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table ESIII-2 provides real private fixed investment at seasonally-adjusted annual rates from IVQ2007 to IIIQ2012 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980 gross private domestic investment in the US was $778.3 billion of 2005 dollars, growing to $965.9 billion in IVQ1985 or 24.1 percent. Gross private domestic investment in the US decreased 9.1 percent from $2,123.6 billion of 2005 dollars in IVQ2007 to $1,929.3 billion in IIIQ2012 (Table IB-2). As shown in Table ESIII-2, real private fixed investment fell 12.7 percent from $2111.5 billion of 2005 dollars in IVQ2007 to $1843.9 billion in IIIQ2012. Growth of real private investment in Table ESIII-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.
Table ESIII-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2005 Dollars and ∆%
| Real PFI, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 2111.5 | NA | -1.2 | -1.0 |
| IQ2008 | 2066.4 | -2.1 | -2.1 | -2.9 |
| IIQ2008 | 2039.1 | -3.4 | -1.3 | -5.0 |
| IIIQ2008 | 1973.5 | -6.5 | -3.2 | -7.7 |
| IV2008 | 1835.4 | -13.1 | -7.0 | -13.1 |
| IQ2009 | 1677.3 | -20.6 | -8.6 | -18.8 |
| IIQ2009 | 1593.7 | -24.5 | -5.0 | -21.8 |
| IIIQ2009 | 1581.2 | -25.1 | -0.8 | -19.9 |
| IVQ2009 | 1556.8 | -26.3 | -1.5 | -15.2 |
| IQ2010 | 1553.1 | -26.4 | -0.2 | -7.4 |
| IIQ2010 | 1606.5 | -23.9 | 3.4 | 0.8 |
| IIIQ2010 | 1602.7 | -24.1 | -0.2 | 1.4 |
| IVQ2010 | 1632.3 | -22.7 | 1.8 | 4.8 |
| IQ2011 | 1627.0 | -22.9 | -0.3 | 4.8 |
| IIQ2011 | 1675.4 | -20.7 | 3.0 | 4.3 |
| IIIQ2011 | 1736.8 | -17.7 | 3.7 | 8.4 |
| IVQ2011 | 1778.7 | -15.8 | 2.4 | 9.0 |
| IQ2012 | 1820.6 | -13.8 | 2.4 | 11.9 |
| IIQ2012 | 1840.6 | -12.8 | 1.1 | 9.9 |
| IIIQ2012 | 1843.9 | -12.7 | 0.2 | 6.2 |
PFI: Private Fixed Investment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart ESIII-1 provides real private fixed investment in billions of chained 2005 dollars from IV2007 to IIIQ2012. Real private fixed investment has not recovered, stabilizing at a level in IIIQ2012 that is 12.7 percent below the level in IVQ2007.
Chart ESIII-1, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IVQ2007 to IIIQ2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart ESIII-2 provides real gross private domestic investment in chained dollars of 2005 from 1980 to 1986. Real gross private domestic investment climbed 24.1 percent in IVQ1985 above the level on IQ1980.
Chart ESIII-2, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 1980-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
ESIV Decline of Per Capita Real Disposable Income. i. In the entire business cycle from IQ1980 to IVQ1985, as shown in Table ESIV-1 trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 14.5 percent, which is close to what would have been trend growth of 12.1 percent.
ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2012, per capita real disposable income fell 0.5 percent while trend growth would have been 10.4 percent. Income available after inflation and taxes is lower than before the contraction after 13 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions.
Table ESIV-1, US, Real Disposable Income in the Business Cycle
| Period IQ1980 to IVQ1985 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD | 18,938 |
| Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD | 21,687 |
| ∆% IQ1980 to IVQ1985 | 14.5 |
| ∆% Trend Growth | 12.1 |
| Period IVQ2007 to IIIQ2012 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD | 32,837 |
| Real Disposable Personal Income per Capita IIIQ2012 Chained 2005 USD | 32,686 |
| ∆% IVQ2007 to IIIQ2012 | -0.5 |
| ∆% Trend Growth | 10.4 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
ESV Stagnating Real Disposable Income and Consumption Expenditures. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts GDP revisions, which are covered in http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html with the latest estimates at http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html. The release of the Bureau of Economic Analysis (BEA) for personal income and outlays for Jun 2012 available on Jul 31, 2012 provides “the results of the annual revision of national and product accounts (NIPAs), beginning with estimates for Jan 2009” (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf). All revisions are incorporated in this subsection as provided in the latest Personal Income and Outlays:October 2012 released on Nov 30, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1012.pdf) and in the interactive dataset of the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm). Table ESV-1 provides monthly and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. There are waves of changes in personal income and expenditures in Table ESV-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) because of the influence through price indexes. In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.4 percent, nominal disposable personal income (NDPI) at 5.8 percent and nominal personal consumption expenditures (NPCE) at 6.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.5 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.4 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 0.9 percent, NPDI at 1.2 percent and NPCE at 2.7 percent. RDPI contracted at 1.5 percent annual equivalent and RPCE crawled at 0.3 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 0.9 percent and NPCE at 2.7 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 1.8 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.7 percent annual equivalent and NDPI at 8.3 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 4.5 percent annual equivalent and RPCE at 2.8 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 2.8 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.5 percent, NDPI at 1.2 percent and RDPI at 1.5 percent. Financial repression failed to stimulate consumption with NPCE growing at 0.9 percent annual equivalent and RPCE at 1.2 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI and NDPI increased at 2.0 percent annual equivalent while real disposable income (RDPI) declined at 1.6 percent annual equivalent. The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase. Growth in the first three quarters of 2012 accumulates to 1.5 percent {[(1.02)1/4(1.013)1/4(1.027)1/4 -1]100 = 1.5%}, which is equivalent to 2.0 percent per year {([(1.02)1/4(1.013)1/4(1.02)1/4]4/3 – 1]100 = 2.0%}. Underlying growth in IIIQ2012 may be lower because of contributions of 0.77 percentage points by inventory accumulation and 0.64 percentage points by one-time national defense expenditures. The US economy could be growing at around 1.5 percent per year. Surprisingly, the revised data for personal income and personal consumption are much stronger than earlier until the bump in Aug 2012. RDPI stagnated in Jan-Dec 2011 with the latest revised data compared with growth of 3.3 percent in Jan-Dec 2010 but grew at annual equivalent 4.5 percent in Jan-Mar 2012 and 1.5 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE to 0.9 percent annual equivalent in Apr-Jul 2012 and of RPCE to 1.2 percent. A bump occurred in Aug with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.3 percent in Aug 2012 or at annual equivalent 3.7 percent but stagnated in real terms. Both nominal personal income and nominal disposable income increased 0.1 percent in Aug 2012 or at 1.2 percent in annual equivalent. Real disposable income (RDPI) fell 0.1 percent in Oct 2012 while real personal consumption expenditures (RPCE) contracted 0.3 percent.
Table ESV-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2012 | |||||
| Oct | 0.0 | 0.0 | -0.1 | -0.2 | -0.3 |
| Sep | 0.4 | 0.4 | 0.0 | 0.8 | 0.4 |
| Aug | 0.1 | 0.1 | -0.3 | 0.3 | 0.0 |
| AE ∆% Aug-Oct | 2.0 | 2.0 | -1.6 | 3.7 | 0.4 |
| Jul | 0.1 | 0.1 | 0.1 | 0.3 | 0.3 |
| Jun | 0.3 | 0.2 | 0.1 | 0.0 | -0.1 |
| May | 0.1 | 0.1 | 0.3 | -0.2 | 0.0 |
| Apr | 0.0 | 0.0 | 0.0 | 0.2 | 0.2 |
| AE ∆% Apr-Jul | 1.5 | 1.2 | 1.5 | 0.9 | 1.2 |
| Mar | 0.5 | 0.5 | 0.2 | 0.3 | 0.0 |
| Feb | 0.7 | 0.6 | 0.3 | 0.8 | 0.4 |
| Jan | 0.9 | 0.9 | 0.6 | 0.5 | 0.3 |
| AE ∆% Jan-Mar | 8.7 | 8.3 | 4.5 | 6.6 | 2.8 |
| 2011 | |||||
| ∆% Jan-Dec 2011* | 3.6 | 2.5 | 0.0 | 4.2 | 1.7 |
| Dec | 0.3 | 0.3 | 0.2 | 0.1 | 0.0 |
| Nov | -0.2 | -0.3 | -0.3 | 0.1 | 0.0 |
| Oct | 0.3 | 0.3 | 0.3 | 0.2 | 0.2 |
| Sep | 0.1 | 0.0 | -0.1 | 0.5 | 0.4 |
| AE ∆% Sep-Dec | 1.5 | 0.9 | 0.3 | 2.7 | 1.8 |
| Aug | 0.0 | 0.0 | -0.3 | 0.2 | -0.1 |
| Jul | 0.1 | 0.2 | -0.1 | 0.7 | 0.5 |
| Jun | 0.2 | 0.2 | 0.1 | -0.1 | -0.2 |
| May | 0.0 | 0.0 | -0.2 | 0.1 | -0.1 |
| AE ∆% May-Aug | 0.9 | 1.2 | -1.5 | 2.7 | 0.3 |
| Apr | 0.3 | 0.3 | 0.0 | 0.4 | 0.0 |
| Mar | 0.1 | 0.1 | -0.3 | 0.7 | 0.3 |
| Feb | 0.4 | 0.4 | 0.0 | 0.6 | 0.3 |
| Jan | 1.9 | 1.1 | 0.8 | 0.4 | 0.2 |
| AE ∆% Jan-Apr | 8.4 | 5.8 | 1.5 | 6.5 | 2.4 |
| 2010 | |||||
| ∆% Jan-Dec 2010** | 5.3 | 4.9 | 3.3 | 4.4 | 2.8 |
| Dec | 0.7 | 0.7 | 0.4 | 0.4 | 0.2 |
| Nov | 0.2 | 0.2 | 0.1 | 0.5 | 0.4 |
| Oct | 0.4 | 0.3 | 0.2 | 0.7 | 0.4 |
| IVQ2010∆% | 1.3 | 1.2 | 0.7 | 1.6 | 1.0 |
| IVQ2010 AE ∆% | 5.3 | 4.9 | 2.8 | 6.6 | 4.1 |
Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent
Percentage change month to month seasonally adjusted
*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
ESVI Swelling Undistributed Corporate Profits. Table ESVI-1 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally-adjusted annual rates (SAAR) in IVQ2007 and IIIQ2012 together with percentage changes. The last three rows of Table ESVI-1 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2005 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table ESVI-1 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 75.5 percent in nominal terms from IVQ2007 to IIIQ2012 while net dividends fell 4.7 percent and undistributed corporate profits swelled 333.0 percent from $110.5 billion in IQ2007 to $478.5 billion in IIIQ2012 from minus $22.1 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 1.5 percent from IVQ2007 to IIIQ2012, which is much lower than nominal increase of 11.6 percent in the same period for gross value added of total corporate business.
Table ESVI-1, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IIIQ2012
| IVQ2007 | IIIQ2012 | ∆% | |
| Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR) | |||
| Gross Value Added of Corporate Business | 7,975.6 | 8,904.3 | 11.6 |
| Consumption of Fixed Capital | 988.0 | 1,111.1 | 12.5 |
| Net Value Added | 6,987.6 | 7,793.2 | 11.5 |
| Compensation of Employees | 5,020.7 | 5,247.9 | 4.5 |
| Taxes on Production and Imports Less Subsidies | 659.7 | 706.1 | 7.0 |
| Net Operating Surplus | 1,307.2 | 1,839.1 | 40.7 |
| Net Interest and Misc | 202.4 | 181.2 | -10.5 |
| Business Current Transfer Payment Net | 73.1 | 102.4 | 40.1 |
| Corporate Profits with IVA and CCA Adjustments | 1,031.6 | 1,555.6 | 50.8 |
| Taxes on Corporate Income | 408.8 | 462.6 | 13.2 |
| Profits after Tax with IVA and CCA Adjustment | 622.9 | 1,092.9 | 75.5 |
| Net Dividends | 645.0 | 614.4 | -4.7 |
| Undistributed Profits with IVA and CCA Adjustment | -22.1 | 478.5 | NA |
| Billions of Chained USD 2005 SAAR | |||
| Gross Value Added of Nonfinancial Corporate Business | 6,642.5 | 6,745.4 | 1.5 |
| Consumption of Fixed Capital | 801.6 | 846.5 | 5.6 |
| Net Value Added | 5,840.9 | 5,898.9 | 1.0 |
IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
I Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth, jobs (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ) and hiring (http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html), unsustainable government deficit/debt (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and waves of inflation (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IIIQ(2012) has been at the average annual rate of 2.2 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 28.1 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ).
The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to cumulative growth of 1.47 percent in the first three quarters of 2012, which is equivalent to 1.96 percent per year. Calculations show that actual growth is around 1.5 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 28.1 million people corresponding to 17.4 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html). In the four quarters of 2011 and the first three quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and revised 2.7 percent in IIIQ2012. GDP growth in IIIQ2012 was revised from 2.0 percent seasonally adjusted annual rate (SAAR) to 2.7 percent but mostly because of contribution of 0.77 percentage points of inventory accumulation and one-time contribution of 0.64 percentage points of expenditures in national defense that without which would have reduced growth from 2.7 percent to 1.3 percent. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the first three quarters of 2012 is 2.0 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 -1]100}; and discounting 2.7 percent to one quarter is 0.67 {[(1.027)1/4 -1]100). Real GDP growth in the four quarters of 2011 and the first three quarters of 2012 accumulated to 3.5 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0067) - 1]100 = 3.5%}. This is equivalent to growth from IQ2011 to IIIQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IIIQ2012 of $13,638.1 billion by the SAAR of IVQ2010 of $13,181.2(http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table I-6 below) and expressing as percentage {[($13,638.1/$13,181.2) - 1]100 = 3.5%}. The growth rate in annual equivalent for the four quarters of 2011 and the first three quarters of 2012 is 2.0 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0067)4/7 -1]100 = 2.0%], or {[($13,638.1/$13,181.2)]4/7-1]100 = 2.0%} dividing the SAAR of IIIQ2012 by the SAAR of IVQ2010 in Table I-6 below, obtaining the average for seven quarters and the annual average for one year of four quarters. Growth in the first three quarters of 2012 accumulates to 1.5 percent {[(1.02)1/4(1.013)1/4(1.027)1/4 -1]100 = 1.5%}, which is equivalent to 2.0 percent per year {([(1.02)1/4(1.013)1/4(1.027)1/4 ]4/3 – 1]100 = 2.0%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.3 percent by deducting from 2.7 percent one-time inventory accumulation of 0.77 percentage points and national defense expenditures of 0.64 percentage points, the US economy grew at 1.2 percent in the remaining five quarters {[(1.00025x1.0032x1.005x1.0032x1.0032)4/5 – 1]100 = 1.2%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.7 percent in IIIQ2012 that is more like 1.3 percent without inventory accumulation and national defense expenditures. Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.77 points of inventory accumulation to growth of 2.7 percent in IIIQ2012. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thu Nov 29, 2012, the second estimate of GDP for IIIQ2012 at 2.7 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_2nd.pdf).
The objective of this section is analyzing US economic growth in the current cyclical expansion. There is initial discussion of the conventional explanation of the current recovery as being weak because of the depth of the contraction and the financial crisis and also brief discussion of the concept of “slow-growth recession.” More complete analysis is in IB Collapse of United States Dynamism of Income Growth and Employment Creation, which is updated with release of more information on the United States economic cycle. The bulk of the section consists of comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of recent performance.
This blog has analyzed systematically the weakness of the United States recovery in the current business cycle from IIIQ2009 to the present in comparison with the recovery from the two recessions in the 1980s from IQ1983 to IVQ1985. The United States has grown on average at 2.2 percent annual equivalent in the 13 quarters of expansion since IIIQ2009 while growth was 6.2 percent on average in recoveries after World War II and 5.7 percent from IQ1983 to IVQ1985. The conventional explanation is that the recession from IVQ2007 (Dec) to IIQ2009 (Jun) was so profound that it caused subsequent weak recovery and that historically growth after recessions with financial crises has been weaker. Michael D. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) provide evidence contradicting the conventional explanation: recovery is much stronger on average after profound contractions and also much stronger after recessions with financial crises than after recessions without financial crises. Insistence on the conventional explanation prevents finding policies that can accelerate growth, employment and prosperity.
A monumental effort of data gathering, calculation and analysis by Carmen M. Reinhart and Kenneth Rogoff is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:
“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”
Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.
For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).
An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):
“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”
There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:
“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”
As both sides of the Atlantic economy maneuver around defaults the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. This time is not different.
Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) incomplete conclusions by lumping together countries with different institutions, economic policies and financial systems; and (2) the erroneous contention that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.
Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money(for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for serial default. This void has been filled in scholarly research on nineteenth-century Brazil by William R. Summerhill, Jr. (2007SC, 2007IR). There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 an 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is really surprising is that Brazil borrowed by means of long-term bonds and even more surprising interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).
The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.
External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1967). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions. According to Pelaez 1976, 283) following Cameron (1971, 1967):
“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”
Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:
“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries, supplied the financial services required in the first stage of modernization of the export economy.”
Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).
The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):
“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”
Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER, finding evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:
“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”
The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). The comparison of recovery from IQ1983 to IVQ1985 is appropriate even when considering financial crises. There was significant financial turmoil during the 1980s. Bordo and Haubrich (2012DR, 11) identify a financial crisis in the United States starting in 1981. 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. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986).
Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.
The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of policy and economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html Appendix I; see Taylor 1993, 1997, 1999, 1998LB, 2012Mar27, 2012Mar28, 2012FP, 2012JMCB). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 28.085 million people in job stress, consisting of an effective number of unemployed of 17.478 million, 7.870 million employed part-time because they cannot find full employment and 2.433 million marginally attached to the labor force (see Table I-4 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.
In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:
“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”
Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.
The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):
“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”
Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.
Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.
Table I-1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| IQ | IIQ | IIIQ | IVQ | |
| 1953 | 7.7 | 3.1 | -2.4 | -6.2 |
| 1954 | -1.9 | 0.5 | 4.6 | 8.3 |
| 1955 | 12.0 | 6.8 | 5.4 | 2.3 |
| 1957 | 2.5 | -1.0 | 3.9 | -4.1 |
| 1958 | -10.4 | 2.5 | 9.7 | 9.7 |
| 1959 | 8.3 | 10.5 | -0.5 | 1.4 |
| 1973 | 10.6 | 4.7 | -2.1/ | 3.9 |
| 1974 | 3.5 | 1.0 | -3.9 | 6.9 |
| 1975 | -4.8 | 3.1 | 6.9 | 5.3 |
| 1976 | 9.4 | 3.0 | 2.0 | 2.9 |
| 1979 | 0.7 | 0.4 | 2.9 | 1.1 |
| 1980 | 1.3 | -7.9 | -0.7 | 7.6 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 4.7 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the revision back to 2009 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) and second estimate for IIIQ2012 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_2nd.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.3 percent to -8.9 percent. The striking difference is that in the first twelve quarters of expansion from IQ1983 to IIIQ1985, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 8.0, 7.1, 3.9, 3.3, 3.8, 3.4, 6.4 and 3.1 while the percentage growth rates in the first thirteen quarters of expansion from IIIQ2009 to IIQ2012, shown in relief in Table I-2, were mediocre: 1.4, 4.0, 2.3, 2.2, 2.6, 2.4, 0.1, 2.5, 1.3, 4.1, 2.0, 1.3 and 2.7. Asterisks denote the estimates that have been revised by the BEA in the first round of Jul 29, 2011 and double asterisks the revisions released on Jul 27, 2012. During the four quarters of 2011 GDP grew at annual equivalent rates of 0.1 percent in IQ2011, 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011 and 4.1 percent in IVQ2011. The rate of growth of the US economy decelerated from seasonally-adjusted annual equivalent of 4.1 percent in IVQ2011 to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.7 percent in IIIQ2012, which is more like 1.3 percent without contributions of 0.77 percent by inventory change and 0.64 percentage points by one-time expenditures in national defense. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. Inventory accumulation contributed 2.53 percentage points to the rate of growth of 4.1 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, and 0.77 percentage points to the rate of 2.7 percent in IIIQ2012. Economic growth and employment creation are decelerating rapidly during 2012.
Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | 8.0 | -1.8* | -5.3** | 2.3** |
| II | -3.2 | 2.2 | 9.3 | 7.1 | 1.3* | -0.3** | 2.2** |
| III | 4.9 | -1.5 | 8.1 | 3.9 | -3.7* | 1.4** | 2.6** |
| IV | -4.9 | 0.3 | 8.5 | 3.3 | -8.9* | 4.0** | 2.4** |
| 1985 | 2011 | ||||||
| I | 3.8 | 0.1** | |||||
| II | 3.4 | 2.5** | |||||
| III | 6.4 | 1.3** | |||||
| IV | 3.1 | 4.1** | |||||
| 1986 | 2012 | ||||||
| I | 3.9 | 2.0** | |||||
| II | 1.6 | 1.3 | |||||
| III | 3.9 | 2.7 | |||||
| IV | 1.9 |
*Revision of Jul 29, 2011 **Revision of Jul 27, 2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.
Chart I-1, US, Real GDP 1947-1999
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2011. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.
Chart I-2, US, Real GDP 1947-2011
Source:
US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.
Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1985
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, growth rates in the comparable first eleven quarters of expansion from 2009 to 2012 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.
Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.7 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first two years of the expansions in the 1980s and the current expansion. GDP grew at 4.5 percent in 1983 and 7.2 percent in 1984 while GDP grew at 2.4 percent in 2010, 1.8 percent in 2011 and at 2.0 percent in IQ2012 relative to IQ2011 and 1.5 percent in IIQ2012 relative to IQ2012. Growth in the first two quarters of 2012 accumulates to 0.87 percent, which is equivalent to 1.75 percent per year, decelerating from 2.4 percent annual growth in 2011. GDP grew at 4.1 percent in 1985 and 3.5 percent in 1986 while the forecasts of participants of the Federal Open Market Committee (FOMC) are in the range of 1.7 to 2.0 percent in 2012 and 2.5 to 3.0 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf).
Table I-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%
| Year | GDP ∆% | Year | GDP ∆% | Year | GDP ∆% |
| 1930 | -8.6 | 1980 | -0.3 | 2000 | 4.1 |
| 1931 | -6.5 | 1981 | 2.5 | 2001 | 1.1 |
| 1932 | -13.1 | 1982 | -1.9 | 2002 | 1.8 |
| 1933 | -1.3 | 1983 | 4.5 | 2003 | 2.5 |
| 1934 | 10.9 | 1984 | 7.2 | 2004 | 3.5 |
| 1935 | 8.9 | 1985 | 4.1 | 2005 | 3.1 |
| 1936 | 13.1 | 1986 | 3.5 | 2006 | 2.7 |
| 1937 | 5.1 | 1987 | 3.2 | 2007 | 1.9 |
| 1938 | -3.4 | 1988 | 4.1 | 2008 | -0.3 |
| 1930 | 8.1 | 1989 | 3.6 | 2009 | -3.1 |
| 1940 | 8.8 | 1990 | 1.9 | 2010 | 2.4 |
| 1941 | 17.1 | 1991 | -0.2 | 2011 | 1.8 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was 11 percent lower in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.
Chart I-5, US, Percentage Change of GDP in the 1930s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.
Chart I-6, US, Percentage Change of GDP in the 1980s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eleven quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 17.4 percent of the US labor force (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html).
Chart I-7, US, Percentage Change of GDP in the 2000s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 4.7 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table I-4, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions
| Number of Quarters | Cumulative Percentage Contraction | Average Percentage Rate | |
| IIQ1953 to IIQ1954 | 4 | -2.5 | -0.63 |
| IIIQ1957 to IIQ1958 | 3 | -3.1 | -9.0 |
| IQ1980 to IIIQ1980 | 2 | -2.2 | -1.1 |
| IIIQ1981 to IVQ1982 | 4 | -2.7 | -0.67 |
| IVQ2007 to IIQ2009 | 6 | -4.7 | -0.80 |
Sources: Business Cycle Reference Dates: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twelve quarters of the current cyclical expansion from IIIQ2009 to IIQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 percent decelerating to 1.8 percent annual growth in 2011 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 0.82 percent in the first three quarters of 2012 {[(1.02)1/4(1.013)1/4(1.027)1/4 – 1]100 = 1.5%}, which is equivalent to 2.0 percent per year {([(1.02)1/4(1.013)1/4(1.027)1/4 ]4/3 – 1)100 = 2.0%} but is only 1.2 percent equivalent to 1.5 percent per year by considering that underlying GDP growth in IIIQ2012 by aggregate demand was 1.3 percent without exceptional contributions of 0.77 percentage points by inventory accumulation and 0.64 percentage points by national defense expenditures. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.
Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.6 | 4.4 |
| IIQ1958 to IIQ1959 | 5 | 10.2 | 8.1 |
| IIQ1975 to IVQ1976 | 8 | 9.5 | 4.6 |
| IQ1983 to IV1985 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IIIQ2012 | 13 | 7.4 | 2.2 |
Sources: Business Cycle Reference Dates: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.
Chart I-8, US, Real GDP, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first twelve quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.
Chart I-9, US, Real GDP, 2007-2012
Source: http://www.bea.gov/iTable/index_nipa.cfm
As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 7.4 percent (last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIQ2012 with the first estimate and revisions is only higher by 2.3 percent than the level of real GDP in IVQ2007. Table I-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IIQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)4 – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)4 – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)2}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.7 percent in IIIQ2012 and 2.5 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.
Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%
| Real GDP, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 13,326.0 | NA | NA | 2.2 |
| IQ2008 | 13,266.8 | -0.4 | -0.4 | 1.6 |
| IIQ2008 | 13,310.5 | -0.1 | 0.3 | 1.0 |
| IIIQ2008 | 13,186.9 | -1.0 | -0.9 | -0.6 |
| IVQ2008 | 12,883.5 | -3.3 | -2.3 | -3.3 |
| IQ2009 | 12,711.0 | -4.6 | -1.3 | -4.2 |
| IIQ2009 | 12,701.0 | -4.7 | -0.1 | -4.6 |
| IIIQ2009 | 12,746.7 | -4.3 | 0.4 | -3.3 |
| IV2009 | 12,873.1 | -3.4 | 1.0 | -0.1 |
| IQ2010 | 12,947.6 | -2.8 | 0.6 | 1.9 |
| IIQ2010 | 13,019.6 | -2.3 | 0.6 | 2.5 |
| IIIQ2010 | 13,103.5 | -1.7 | 0.6 | 2.8 |
| IVQ2010 | 13,181.2 | -1.1 | 0.6 | 2.4 |
| IQ2011 | 13,183.8 | -1.1 | 0.0 | 1.8 |
| IIQ2011 | 13,264.7 | -0.5 | 0.6 | 1.9 |
| IIIQ2011 | 13,306.9 | -0.1 | 0.3 | 1.6 |
| IV2011 | 13,441.0 | 0.9 | 1.0 | 2.0 |
| IQ2012 | 13,506.4 | 1.4 | 0.5 | 2.4 |
| IIQ2012 | 13,548.5 | 1.7 | 0.3 | 2.1 |
| IIIQ2012 | 13,638.1 | 2.3 | 0.7 | 2.5 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.
Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak. The US missed the initial high growth rates in cyclical expansions during which unemployment and underemployment are eliminated.
Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.
Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2012. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.
Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction.
Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates
| Quarters | Revised Estimate Jul 27, 2012 | Revised Estimate Jul 29, 2011 | Earlier Estimate |
| 2008 | |||
| I | -1.8 | -0.7 | |
| II | 1.3 | 0.6 | |
| III | -3.7 | -4.0 | |
| IV | -8.9 | -6.8 | |
| 2009 | |||
| I | -5.3 | -6.7 | -4.9 |
| II | -0.3 | -0.7 | -0.7 |
| III | 1.4 | 1.7 | 1.6 |
| IV | 4.0 | 3.8 | 5.0 |
| 2010 | |||
| I | 2.3 | 3.9 | 3.7 |
| II | 2.2 | 3.8 | 1.7 |
| III | 2.6 | 2.5 | 2.6 |
| IV | 2.4 | 2.3 | 3.1 |
| 2011 | |||
| I | 0.1 | 0.4 | 1.9 |
| II | 2.5 | ||
| III | 1.3 | ||
| IV | 4.1 | ||
| 2012 | |||
| I | 2.0 | ||
| II | 1.3 | ||
| III | 2.7 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIIQ2012. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2012. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2012 of 2.7 percent at seasonally-adjusted annual rate (SAAR) consisted of positive contributions of 0.99 percentage points of personal consumption expenditures (PCE) + 0.86 percentage points of gross domestic investment (GDI) but inventory change adding 0.77 percentage points (∆ PI) plus 0.14 percentage points of net exports (net trade or exports less imports) plus 0.67 percentage points of government consumption expenditures and gross investment (GOV) but national defense expenditures adding 0.64 percentage points. While the contribution of personal consumption expenditures decreased from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIIQ2012 and 0.99 percentage points in IIIQ2012, the contribution of government expenditures increased from deduction of 0.14 percentage points in IIQ2012 to adding 0.67 percentage points in IIIQ2012. The bulk of the contribution of government consisted of 0.64 percentage points of one-time national defense expenditures resulting from growth of national defense expenditures at the seasonally adjusted annual rate (SAAR) of 12.9 percent in IIIQ2012. The contribution of PCE fell from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIQ2012 and 0.99 percentage points in IIIQ2012 as savings decreased. The contribution of GDI decreased from 0.78 percentage points in IQ2012 to 0.09 percentage points in IIQ2012 and 0.86 percentage points in IIIQ2012 with inventory accumulation adding 0.77 percentage points in IIIQ2012 relative to deduction of 0.46 percentage points in IIQ2012. Growth in IVQ2011 was driven mainly by increase in private inventories of 2.53 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.
Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 2012 | ||||||
| I | 2.0 | 1.72 | 0.78 | -0.39 | 0.06 | -0.60 |
| II | 1.3 | 1.06 | 0.09 | -0.46 | 0.23 | -0.14 |
| III | 2.7 | 0.99 | 0.86 | 0.77 | 0.14 | 0.67 |
| 2011 | ||||||
| I | 0.1 | 2.22 | -0.68 | -0.54 | 0.03 | -1.49 |
| II | 2.5 | 0.70 | 1.40 | 0.01 | 0.54 | -0.16 |
| III | 1.3 | 1.18 | 0.68 | -1.07 | 0.02 | -0.60 |
| IV | 4.1 | 1.45 | 3.72 | 2.53 | -0.64 | -0.43 |
| 2010 | ||||||
| I | 2.3 | 1.72 | 2.13 | 2.23 | -0.83 | -0.69 |
| II | 2.2 | 1.81 | 1.65 | 0.07 | -1.81 | 0.59 |
| III | 2.6 | 1.75 | 1.87 | 1.97 | -0.95 | -0.06 |
| IV | 2.4 | 2.84 | -0.75 | -1.61 | 1.24 | -0.94 |
| 2009 | ||||||
| I | -5.3 | -1.06 | -7.02 | -2.29 | 2.45 | 0.37 |
| II | -0.3 | -1.21 | -3.52 | -1.03 | 2.47 | 1.94 |
| III | 1.4 | 1.50 | -0.14 | 0.19 | -0.70 | 0.79 |
| IV | 4.0 | -0.01 | 3.85 | 4.55 | -0.05 | 0.23 |
| 1982 | ||||||
| I | -6.4 | 1.62 | -7.50 | -5.47 | -0.49 | -0.03 |
| II | 2.2 | 0.90 | -0.05 | 2.35 | 0.84 | 0.50 |
| III | -1.5 | 1.92 | -0.72 | 1.15 | -3.31 | 0.57 |
| IV | 0.3 | 4.64 | -5.66 | -5.48 | -0.10 | 1.44 |
| 1983 | ||||||
| I | 5.1 | 2.54 | 2.20 | 0.94 | -0.30 | 0.63 |
| II | 9.3 | 5.22 | 5.87 | 3.51 | -2.54 | 0.75 |
| III | 8.1 | 4.66 | 4.30 | 0.60 | -2.32 | 1.48 |
| IV | 8.5 | 4.20 | 6.84 | 3.09 | -1.17 | -1.35 |
| 1984 | ||||||
| I | 8.0 | 2.35 | 7.15 | 5.07 | -2.37 | 0.86 |
| II | 7.1 | 3.75 | 2.44 | -0.30 | -0.89 | 1.79 |
| III | 3.9 | 2.02 | 1.67 | 0.21 | -0.36 | 0.62 |
| IV | 3.3 | 3.38 | -1.26 | -2.50 | -0.58 | 1.75 |
| 1985 | ||||||
| I | 3.8 | 4.34 | -2.38 | -2.94 | 0.91 | 0.95 |
| II | 3.4 | 2.35 | 1.24 | 0.35 | -2.01 | 1.85 |
| III | 6.4 | 4.91 | -0.68 | -0.16 | -0.01 | 2.18 |
| IV | 3.1 | 0.54 | 2.72 | 1.45 | -0.68 | 0.50 |
Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive
GDP: percent change at annual rate; percentage points at annual rates
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
The Bureau of Economic Analysis (BEA) (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf 1) explains growth of GDP in IIIQ2012 as follows:
“The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, federal government spending, residential fixed investment, and exports that were partly offset by negative contributions from nonresidential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased slightly.
The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE. “
There are positive contributions to growth in IIIQ2012 shown in Table I-9:
· Personal consumption expenditures (PCE) growing at 1.4 percent with increasing consumption of durable goods
· Residential fixed investment (RFI) growing at 14.2 percent
· Government expenditures growing at 3.5 percent because of growth of federal government expenditures at 9.5 percent with national defense expenditures growing at 12.9 percent in IIIQ2012 and contributing 0.64 percentage points after deducting from growth in three consecutive prior quarters IIQ2012, IQ2012 and IVQ2011 and contributing only 0.15 percentage points in IIIQ2011
· Private inventory investment of 0.77 percentage points
· Exports increasing 1.1 percent
There were negative contributions in IIIQ2012:
· Nonresidential fixed investment (NRFI) declining 2.2 percent
· State and local government spending (State/Local GOV) falling at 0.4 percent
The BEA explains acceleration in real GDP in IIIQ2012 by:
· Acceleration in growth of RFI from 8.5 percent in IIQ2012 to 14.2 percent in IIIQ2012
· Acceleration of private inventory investment from deduction of 0.46 percentage points in IIQ2012 to contribution of 0.77 percentage points in IIIQ2012
· Acceleration of national defense expenditures of minus 0.2 percent in IIQ2012 to 12.9 percent in IIIQ2012 with contribution to growth changing from minus 0.01 percent to 0.64 percentage points
· Deceleration of growth of imports from 2.8 percent in IIQ2012 to 0.1 percent in IIIQ2012
· Deceleration in contraction of nonresidential fixed investment from 3.6 percent in IIQ2012 to minus 2.2 percent in IIIQ2012
The BEA finds offsetting causes of acceleration in IIIQ2012:
· Deceleration in contraction of nonresidential fixed investment from 3.6 percent in IIQ2012 to minus 2.2 percent in IIIQ2012
· Deceleration in export growth from 5.3 percent in IIQ2012 to 1.1 percent in IIIQ2012
Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %
| IIIQ 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | |
| GDP | 1.3 | 4.1 | 2.0 | 1.3 | 2.7 |
| PCE | 1.7 | 2.0 | 2.4 | 1.5 | 1.4 |
| Durable Goods | 5.4 | 13.9 | 11.5 | -0.2 | 8.7 |
| NRFI | 19.0 | 9.5 | 7.5 | 3.6 | -2.2 |
| RFI | 1.4 | 12.1 | 20.5 | 8.5 | 14.2 |
| Exports | 6.1 | 1.4 | 4.4 | 5.3 | 1.1 |
| Imports | 4.7 | 4.9 | 3.1 | 2.8 | 0.1 |
| GOV | -2.9 | -2.2 | -3.0 | -0.7 | 3.5 |
| Federal GOV | -4.3 | -4.4 | -4.2 | -0.2 | 9.5 |
| National Defense | 2.6 | -10.6 | -7.1 | -0.2 | 12.9 |
| Cont to GDP Growth % Points | 0.15 | -0.60 | -0.39 | -0.01 | 0.64 |
| State/Local GOV | -2.0 | -0.7 | -2.2 | -1.0 | -0.4 |
| ∆ PI (PP) | -1.07 | 2.53 | -0.39 | -0.46 | 0.77 |
| Final Sales of Domestic Product | 2.3 | 1.5 | 2.4 | 1.7 | 1.9 |
| Gross Domestic Purchases | 1.2 | 4.6 | 1.8 | 1.0 | 2.4 |
| Prices Gross | 2.3 | 0.9 | 2.5 | 0.7 | 1.5 |
| Prices of GDP | 3.0 | 0.4 | 2.0 | 1.6 | 2.7 |
| Prices of GDP Excluding Food and Energy | 2.1 | 0.9 | 2.6 | 1.4 | 1.3 |
| Prices of PCE | 2.3 | 1.1 | 2.5 | 0.7 | 1.6 |
| Prices of PCE Excluding Food and Energy | 1.9 | 1.3 | 2.2 | 1.7 | 1.1 |
| Prices of Market Based PCE | 2.6 | 1.2 | 2.5 | 0.6 | 1.8 |
| Prices of Market Based PCE Excluding Food and Energy | 2.1 | 1.5 | 2.2 | 1.8 | 1.3 |
| Real Disposable Personal Income* | 0.6 | 0.3 | 0.2 | 1.1 | 1.6 |
| Personal Savings As % Disposable Income | 3.9 | 3.4 | 3.6 | 3.8 | 3.6 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
*Percent change from quarter one year ago
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Percentage shares of GDP are shown in Table I-10. PCE is equivalent to 70.6 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.
Table I-10, US, Percentage Shares of GDP, %
| IIIQ2012 | |
| GDP | 100.0 |
| PCE | 70.6 |
| Goods | 24.0 |
| Durable | 7.7 |
| Nondurable | 16.3 |
| Services | 46.6 |
| Gross Private Domestic Investment | 13.2 |
| Fixed Investment | 12.6 |
| NRFI | 10.2 |
| Structures | 2.9 |
| Equipment & Software | 7.3 |
| RFI | 2.5 |
| Change in Private | 0.5 |
| Net Exports of Goods and Services | -3.3 |
| Exports | 13.9 |
| Goods | 9.8 |
| Services | 4.1 |
| Imports | 17.2 |
| Goods | 14.3 |
| Services | 2.9 |
| Government | 19.6 |
| Federal | 7.9 |
| National Defense | 5.3 |
| Nondefense | 2.6 |
| State and Local | 11.7 |
PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010 and 2011. The data incorporate the new revisions released by the BEA on Jul 29, 2011 and Jul 27, 2012 and the first estimate of 2012 GDP released on Jul 27, 2012. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 2.4 percent in 2010 after six consecutive quarters of growth and 1.8 percent in 2011 after ten consecutive quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010 and 2011.
Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 1958 | -0.9 | 0.54 | -1.25 | -0.18 | -0.89 | 0.70 |
| 1959 | 7.2 | 3.61 | 2.80 | 0.86 | 0.00 | 0.76 |
| 1975 | -0.2 | 1.40 | -2.98 | -1.27 | 0.89 | 0.48 |
| 1976 | 5.4 | 3.51 | 2.84 | 1.41 | -1.08 | 0.10 |
| 1982 | -1.9 | 0.86 | -2.55 | -1.34 | -0.60 | 0.35 |
| 1983 | 4.5 | 3.65 | -1.45 | 0.29 | -1.35 | 0.76 |
| 1984 | 7.2 | 3.43 | 4.63 | 1.95 | -1.58 | 0.70 |
| 1985 | 4.1 | 3.32 | -0.17 | -1.06 | -0.42 | 1.41 |
| 2009 | -3.1 | -1.36 | -3.59 | -0.78 | 1.14 | 0.74 |
| 2010 | 2.4 | 1.28 | 1.50 | 1.52 | -0.52 | 0.14 |
| 2011 | 1.8 | 1.79 | 0.62 | -0.14 | 0.07 | -0.67 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2011 using annual-level data. PCEs contributed 1.28 PPs to GDP growth in 2010 of which 0.82 percentage points (PP) in goods and 0.46 PP in services. Gross private domestic investment (GPDI) deducted 3.59 PPs of GDP growth in 2009 of which -2.80 PPs by fixed investment and -0.78 PPs of inventory change (∆PI) and added 1.50 PPs of GPDI in 2010 of which minus 0.03 PPs of fixed investment and 1.52 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.14 PPs and imports added 2.28 PPs. In 2010, trade deducted 0.52 PPs with exports contributing 1.29 PPs and imports deducting 1.81 PPs likely benefitting from dollar devaluation. In 2009, government added 0.74 PP of which 0.46 PPs by the federal government and 0.28 PPs by state and local government; in 2010, government added 0.14 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.23 PPs. The final column of Table II-12 provides the estimate for 2011. PCE contributed 1.79 PPs in 2011 after 1.28 PPs in 2010. The breakdown into goods and services is similar. Gross private domestic investment contributed 1.50 PPs in 2010 with addition of 1.52 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.62 PPs in 2011. Net exports of goods and services contributed marginally in 2011 with 0.07 PPs. Government deducted 0.67 PPs in 2011. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recovery tends to be more sluggish as the expansion matures. At the margin in IVQ2011 the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future.
Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points
| 2009 | 2010 | 2011 | |
| GDP Growth ∆% | -3.1 | 2.4 | 1.8 |
| Personal Consumption Expenditures (PCE) | -1.36 | 1.28 | 1.79 |
| Goods | -0.69 | 0.82 | 0.89 |
| Durable | -0.41 | 0.45 | 0.53 |
| Nondurable | -0.28 | 0.37 | 0.36 |
| Services | -0.67 | 0.46 | 0.90 |
| Gross Private Domestic Investment (GPDI) | -3.59 | 1.50 | 0.62 |
| Fixed Investment | -2.80 | -0.03 | 0.76 |
| Nonresidential | -2.08 | 0.07 | 0.80 |
| Structures | -0.85 | -0.50 | 0.07 |
| Equipment, software | -1.23 | 0.56 | 0.72 |
| Residential | -0.73 | -0.09 | -0.03 |
| Change Private Inventories | -0.78 | 1.52 | -0.14 |
| Net Exports of Goods and Services | 1.14 | -0.52 | 0.07 |
| Exports | -1.14 | 1.29 | 0.87 |
| Goods | -1.05 | 1.11 | 0.65 |
| Services | -0.10 | 0.18 | 0.22 |
| Imports | 2.28 | -1.81 | -0.80 |
| Goods | 2.19 | -1.74 | -0.72 |
| Services | 0.09 | -0.07 | -0.08 |
| Government Consumption Expenditures and Gross Investment | 0.74 | 0.14 | -0.67 |
| Federal | 0.46 | 0.37 | -0.23 |
| National Defense | 0.31 | 0.17 | -0.15 |
| Nondefense | 0.16 | 0.20 | -0.09 |
| State and Local | 0.28 | -0.23 | -0.43 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Manufacturing jobs increased 13,000 in Oct 2012 relative to Sep 2012, seasonally adjusted but fell 16,000 in Oct 2012 relative to Sep 2012, not seasonally adjusted, as shown in Table I-10 at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html, because of the weaker economy and international trade. In the six months ending in Oct, United States national industrial production accumulated decline of 0.6 percent at the annual equivalent rate of decline of 1.2 percent, which is substantially lower than 1.7 percent growth in 12 months. Capacity utilization for total industry in the United States fell 0.4 percentage point in Oct to 77.8 percent, 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 Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Oct 2012, there were 134.792 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 112.399 million NSA in Oct 2012 accounted for 83.4 percent of total nonfarm jobs of 134.792 million, of which 11.777 million, or 10.5 percent of total private jobs and 8.7 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.774 million NSA in Oct 2012, or 69.6 percent of total nonfarm jobs and 83.4 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIIQ2011, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR | % Total | SAAR IIIQ2012 | % Total | |
| National Income WCCA | 13,833.6 | 100.0 | 13,991.9 | 100.0 |
| Domestic Industries | 13,586.3 | 98.2 | 13,741.8 | 98.2 |
| Private Industries | 11,933.2 | 86.3 | 12,083.1 | 86.4 |
| Agriculture | 131.7 | 0.9 | ||
| Mining | 208.3 | 1.5 | ||
| Utilities | 214.6 | 1.6 | ||
| Construction | 583.7 | 4.2 | ||
| Manufacturing | 1548.1 | 11.2 | ||
| Durable Goods | 894.3 | 6.5 | ||
| Nondurable Goods | 653.8 | 4.7 | ||
| Wholesale Trade | 853.5 | 6.2 | ||
| Retail Trade | 951.9 | 6.9 | ||
| Transportation & WH | 414.5 | 3.0 | ||
| Information | 499.1 | 3.6 | ||
| Finance, insurance, RE | 2237.5 | 16.2 | ||
| Professional, BS | 1971.7 | 14.3 | ||
| Education, Health Care | 1378.1 | 10.0 | ||
| Arts, Entertainment | 540.4 | 3.9 | ||
| Other Services | 400.30 | 2.9 | ||
| Government | 1653.0 | 11.9 | 1658.7 | 11.9 |
| Rest of the World | 247.3 | 1.8 | 250.1 | 1.8 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. In the cyclical expansions since 1950, US GDP has grown at the average rate of 6.2 percent, moving the economy back to long-term trend. Growth of GDP has been only 2.2 percent on average during the current cyclical expansion from IIIQ2009 to IIIQ2012. Weakness in the current cyclical expansion has occurred in growth, labor markets and wealth, as analyzed in IB Collapse of United States Dynamism of Income Growth and Employment Creation incorporating additional data on private investment. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 15.3 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 1.6 percent in the following eight quarters from IQ1985 to IVQ1986. There were only three quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the thirteen quarters of cyclical expansion from IIIQ2009 to IIIQ2012. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 2.5 percent, which is significantly lower than 15.3 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 11.9 percent. Growth has fallen from the SAAR of 15.5 percent in IIIQ2011 to 0.7 percent in IIIQ2012. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012.
Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 3.0 | -11.6 | 9.0 | 13.1 | -8.3 | -30.2 | -0.9 |
| II | 2.7 | -13.3 | 16.4 | 17.5 | -5.2 | -18.5 | 14.5 |
| III | 0.0 | -10.7 | 26.1 | 8.8 | -12.3 | -3.1 | -1.0 |
| IV | -1.4 | 0.6 | 25.6 | 7.4 | -25.2 | -6.0 | 7.6 |
| 1985 | 2011 | ||||||
| I | 3.1 | -1.3 | |||||
| II | 5.1 | 12.4 | |||||
| III | -3.2 | 15.5 | |||||
| IV | 7.8 | 10.0 | |||||
| 1986 | 2012 | ||||||
| I | 0.6 | 9.8 | |||||
| II | -1.0 | 4.5 | |||||
| III | -2.2 | 0.7 | |||||
| IV | 2.7 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally-adjusted annual rates of growth of real private fixed investment from 1981 to 1986. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and underemployment accumulated during the contractions.
Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1986
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Weak behavior of real private fixed investment from 2007 to 2012 is shown in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of expansion in the current economic cycle and have entered sharp trend of decline.
Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-2 provides real private fixed investment at seasonally-adjusted annual rates from IVQ2007 to IIIQ2012 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980 gross private domestic investment in the US was $778.3 billion of 2005 dollars, growing to $965.9 billion in IVQ1985 or 24.1 percent, as shown in Table IB-2 of IB Collapse of Dynamism of United States Income Growth and Employment Creation. Gross private domestic investment in the US decreased 9.1 percent from $2,123.6 billion of 2005 dollars in IVQ2007 to $1,929.3 billion in IIIQ2012 (Table IB-2). As shown in Table IAI-2, real private fixed investment fell 12.7 percent from $2111.5 billion of 2005 dollars in IVQ2007 to $1843.9 billion in IIIQ2012. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.
Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2005 Dollars and ∆%
| Real PFI, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 2111.5 | NA | -1.2 | -1.0 |
| IQ2008 | 2066.4 | -2.1 | -2.1 | -2.9 |
| IIQ2008 | 2039.1 | -3.4 | -1.3 | -5.0 |
| IIIQ2008 | 1973.5 | -6.5 | -3.2 | -7.7 |
| IV2008 | 1835.4 | -13.1 | -7.0 | -13.1 |
| IQ2009 | 1677.3 | -20.6 | -8.6 | -18.8 |
| IIQ2009 | 1593.7 | -24.5 | -5.0 | -21.8 |
| IIIQ2009 | 1581.2 | -25.1 | -0.8 | -19.9 |
| IVQ2009 | 1556.8 | -26.3 | -1.5 | -15.2 |
| IQ2010 | 1553.1 | -26.4 | -0.2 | -7.4 |
| IIQ2010 | 1606.5 | -23.9 | 3.4 | 0.8 |
| IIIQ2010 | 1602.7 | -24.1 | -0.2 | 1.4 |
| IVQ2010 | 1632.3 | -22.7 | 1.8 | 4.8 |
| IQ2011 | 1627.0 | -22.9 | -0.3 | 4.8 |
| IIQ2011 | 1675.4 | -20.7 | 3.0 | 4.3 |
| IIIQ2011 | 1736.8 | -17.7 | 3.7 | 8.4 |
| IVQ2011 | 1778.7 | -15.8 | 2.4 | 9.0 |
| IQ2012 | 1820.6 | -13.8 | 2.4 | 11.9 |
| IIQ2012 | 1840.6 | -12.8 | 1.1 | 9.9 |
| IIIQ2012 | 1843.9 | -12.7 | 0.2 | 6.2 |
PFI: Private Fixed Investment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-3 provides real private fixed investment in billions of chained 2005 dollars from IV2007 to IIIQ2012. Real private fixed investment has not recovered, stabilizing at a level in IIIQ2012 that is 12.7 percent below the level in IVQ2007.
Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IVQ2007 to IIIQ2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-4 provides real gross private domestic investment in chained dollars of 2005 from 1980 to 1986. Real gross private domestic investment climbed 24.1 percent in IVQ1985 above the level on IQ1980.
![clip_image004[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter-429641856\supfiles2B1998\ChIB-4chart%5b3%5d.png "clip_image004[1]")
Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 1980-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-5 provides real gross private domestic investment in the United States in billions of dollars of 2005 from 2006 to 2012. Gross private domestic investment reached a level in IIIQ2012 that was 9.1 percent lower than the level in IVQ2007.
Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 2006-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-3 provides percentage shares in GDP of gross private domestic investment and its components in IIIQ2012, IQ2006 and IQ2000. The share of gross private domestic investment in GDP has fallen from 17.4 percent in IQ2000 and 17.8 percent in IQ2006 to 13.2 percent in IIIQ2012. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.6 percent in IQ2000 and 6.2 percent in IQ2006 to 2.5 percent in IIIQ2012. The share of fixed investment in GDP fell from 17.2 percent in IQ2000 and 17.3 percent in IQ2006 to 12.6 percent in IIIQ2012.
Table IA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IIIQ2012
| IIIQ2012 | IQ2006 | IQ2000 | |
| Gross Private Domestic Investment | 13.2 | 17.8 | 17.4 |
| Fixed Investment | 12.6 | 17.3 | 17.2 |
| Nonresidential | 10.2 | 11.1 | 12.6 |
| Structures | 2.9 | 3.0 | 3.1 |
| Equipment and Software | 7.3 | 8.1 | 9.5 |
| Residential | 2.5 | 6.2 | 4.6 |
| Change in Private Inventories | 0.5 | 0.5 | 0.2 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2011. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.
Chart IA1-6, US, Percentage Share of Gross Domestic Investment in Gross Domestic Product, Annual, 1929-2011
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2011. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.
Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2011
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2011. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.
Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2011
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2011. There is again inadequate recovery in the current economic cycle.
Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2011
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2011. The salient characteristic of Chart I-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.
Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2011
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2012 in Chart IA1-11. There was protracted growth of that share that accelerated sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:
“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”
Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:
“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”
There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.
The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.
Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).
Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-4 provides the seasonally-adjusted annual rate of real GDP percentage change and contributions in percentage points in annual rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IIIQ2012. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion from IIIQ2009 with contributions largely only from IQ2010 to IVQ2011, contributing 0.09 percentage points in IIIQ2012 net of 0.77 percentage points of inventory accumulation and 0.09 percentage points in IIQ2012 in the fractured investment decision in the United States. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to negative 0.20 percentage points in IIIQ2012 as business scales down investment. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters and it only contributed significantly to growth of GDP in the first three quarters of 2012.
Table IA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points
| GDP | GDI | PFI | NRES | BES | RES | ∆INV | |
| 2012 | |||||||
| I | 2.0 | 0.78 | 1.18 | 0.74 | 0.39 | 0.43 | -0.39 |
| II | 1.3 | 0.09 | 0.56 | 0.36 | 0.35 | 0.19 | -0.46 |
| III | 2.7 | 0.86 | 0.10 | -0.23 | -0.20 | 0.32 | 0.77 |
| 2011 | |||||||
| I | 0.1 | -0.68 | -0.14 | -0.11 | 0.72 | -0.03 | -0.54 |
| II | 2.5 | 1.40 | 1.39 | 1.30 | 0.53 | 0.09 | 0.01 |
| III | 1.3 | 0.68 | 1.75 | 1.71 | 1.20 | 0.03 | -1.07 |
| IV | 4.1 | 3.72 | 1.19 | 0.93 | 0.62 | 0.26 | 2.53 |
| 2010 | |||||||
| I | 2.3 | 2.13 | -0.10 | 0.20 | 0.90 | -0.30 | 2.23 |
| II | 2.2 | 1.65 | 1.58 | 1.07 | 0.76 | 0.51 | 0.07 |
| III | 2.6 | 1.87 | -0.10 | 0.70 | 0.76 | -0.80 | 1.97 |
| IV | 2.4 | -0.75 | 0.87 | 0.83 | 0.60 | 0.03 | -1.61 |
| 2009 | |||||||
| I | -5.3 | -7.02 | -4.73 | -3.54 | -2.16 | -1.18 | -2.29 |
| II | -0.3 | -3.52 | -2.49 | -1.86 | -0.54 | -0.63 | -1.03 |
| III | 1.4 | -0.14 | -0.32 | -0.73 | 0.25 | 0.40 | 0.19 |
| IV | 4.0 | 3.85 | -0.69 | -0.57 | 0.40 | -0.12 | 4.55 |
| 1982 | |||||||
| I | -6.4 | -7.50 | -2.04 | -1.25 | -0.47 | -0.79 | -5.47 |
| II | 2.2 | -0.05 | -2.40 | -1.98 | -1.19 | -0.42 | 2.35 |
| III | -1.5 | -0.72 | -1.87 | -1.82 | -0.57 | -0.04 | 1.15 |
| IV | 0.3 | -5.66 | -0.18 | -1.09 | -0.60 | 0.92 | -5.48 |
| 1983 | |||||||
| I | 5.1 | 2.20 | 1.26 | -1.02 | -0.18 | 2.28 | 0.94 |
| II | 9.3 | 5.87 | 2.36 | 0.52 | -1.40 | 1.84 | 3.51 |
| III | 8.1 | 4.30 | 3.70 | 2.02 | 1.62 | 1.68 | 0.60 |
| IV | 8.5 | 6.84 | 3.76 | 2.98 | 2.50 | 0.77 | 3.09 |
| 1984 | |||||||
| I | 8.0 | 7.15 | 2.08 | 1.55 | 0.57 | 0.52 | 5.07 |
| II | 7.1 | 2.44 | 2.74 | 2.39 | 1.50 | 0.35 | -0.30 |
| III | 3.9 | 1.67 | 1.45 | 1.62 | 1.05 | -0.17 | 0.21 |
| IV | 3.3 | -1.26 | 1.24 | 1.22 | 1.03 | 0.02 | -2.50 |
| 1985 | |||||||
| I | 3.8 | -2.38 | 0.57 | 0.62 | -0.16 | -0.06 | -2.94 |
| II | 3.4 | 1.24 | 0.88 | 0.74 | 0.75 | 0.14 | 0.35 |
| III | 6.4 | -0.68 | -0.53 | -0.75 | -0.37 | 0.23 | -0.16 |
| IV | 3.1 | 2.72 | 1.27 | 0.85 | 0.62 | 0.42 | 1.45 |
GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; RES: Residential; ∆INV: Change in Private Inventories.
GDI = PFI + ∆INV, may not add exactly because of errors of rounding.
GDP: seasonally-adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
IA2 Swelling Undistributed Corporate Profits. Table IA1-5 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally-adjusted annual rates (SAAR) in IVQ2007 and IIIQ2012 together with percentage changes. The last three rows of Table IA1-5 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2005 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table IA1-5 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 75.5 percent in nominal terms from IVQ2007 to IIIQ2012 while net dividends fell 4.7 percent and undistributed corporate profits swelled 333.0 percent from $110.5 billion in IQ2007 to $478.5 billion in IIIQ2012 from minus $22.1 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 1.5 percent from IVQ2007 to IIIQ2012, which is much lower than nominal increase of 11.6 percent in the same period for gross value added of total corporate business.
Table IA1-5, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IIIQ2012
| IVQ2007 | IIIQ2012 | ∆% | |
| Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR) | |||
| Gross Value Added of Corporate Business | 7,975.6 | 8,904.3 | 11.6 |
| Consumption of Fixed Capital | 988.0 | 1,111.1 | 12.5 |
| Net Value Added | 6,987.6 | 7,793.2 | 11.5 |
| Compensation of Employees | 5,020.7 | 5,247.9 | 4.5 |
| Taxes on Production and Imports Less Subsidies | 659.7 | 706.1 | 7.0 |
| Net Operating Surplus | 1,307.2 | 1,839.1 | 40.7 |
| Net Interest and Misc | 202.4 | 181.2 | -10.5 |
| Business Current Transfer Payment Net | 73.1 | 102.4 | 40.1 |
| Corporate Profits with IVA and CCA Adjustments | 1,031.6 | 1,555.6 | 50.8 |
| Taxes on Corporate Income | 408.8 | 462.6 | 13.2 |
| Profits after Tax with IVA and CCA Adjustment | 622.9 | 1,092.9 | 75.5 |
| Net Dividends | 645.0 | 614.4 | -4.7 |
| Undistributed Profits with IVA and CCA Adjustment | -22.1 | 478.5 | NA |
| Billions of Chained USD 2005 SAAR | |||
| Gross Value Added of Nonfinancial Corporate Business | 6,642.5 | 6,745.4 | 1.5 |
| Consumption of Fixed Capital | 801.6 | 846.5 | 5.6 |
| Net Value Added | 5,840.9 | 5,898.9 | 1.0 |
IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-6 provides comparable United States value added of corporate business, corporate profits and dividends from IQ1980 to IVQ1985. There is significant difference both in nominal and inflation-adjusted data. Profits after tax with IVA and CCA increased 140.3 percent with dividends growing 112.7 percent and undistributed profits jumping 169.7 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index for all items not seasonally adjusted increased 34.9 percent between Mar 1980 and Dec 1985 but only 10.2 percent between Dec 2007 and Sep 2012 (http://www.bls.gov/cpi/data.htm). The comparison is still valid in terms of inflation-adjusted data: gross value added of nonfinancial corporate business adjusted for inflation increased 21.2 percent between IQ1980 and IVQ1985 but only 1.5 percent between IVQ2007 and IIIQ2012 while net value added adjusted for inflation increased 20.6 percent between IQ1980 and IVQ1985 but only 1.0 percent between IVQ2007 and IIIQ2012.
Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IVQ1985
| IQ1980 | IVQ1985 | ∆% | |
| Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR) | |||
| Gross Value Added of Corporate Business | 1,619.3 | 2,576.1 | 59.1 |
| Consumption of Fixed Capital | 169.9 | 278.9 | 64.2 |
| Net Value Added | 1,449.4 | 2,297.1 | 58.5 |
| Compensation of Employees | 1,090.6 | 1,667.0 | 52.9 |
| Taxes on Production and Imports Less Subsidies | 121.5 | 213.3 | 75.6 |
| Net Operating Surplus | 237.3 | 416.9 | 75.7 |
| Net Interest and Misc | 49.0 | 96.8 | 97.6 |
| Business Current Transfer Payment Net | 12.1 | 30.0 | 147.9 |
| Corporate Profits with IVA and CCA Adjustments | 176.3 | 290.0 | 64.5 |
| Taxes on Corporate Income | 97.0 | 99.7 | 2.8 |
| Profits after Tax with IVA and CCA Adjustment | 79.2 | 190.3 | 140.3 |
| Net Dividends | 40.9 | 87.0 | 112.7 |
| Undistributed Profits with IVA and CCA Adjustment | 38.3 | 103.3 | 169.7 |
| Billions of Chained USD 2005 SAAR | |||
| Gross Value Added of Nonfinancial Corporate Business | 2,642.8 | 3,203.9 | 21.2 |
| Consumption of Fixed Capital | 223.2 | 286.6 | 28.4 |
| Net Value Added | 2,419.6 | 2,917.3 | 20.6 |
IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-12 of the US Bureau of Economic Analysis provides quarterly corporate profits after tax and undistributed profits with IVA and CCA from 1979 to 2012. There is tightness between the series of quarterly corporate profits and undistributed profits in the 1980s with significant gap developing from 1988 and to the present with the closest approximation peaking in IVQ2005 and surrounding quarters. These gaps widened during all recessions including in 1991 and 2001 and recovered in expansions with exceptionally weak performance in the current expansion.
Chart IA1-12, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-7 provides price, costs and profit per unit of gross value added of nonfinancial domestic corporate income for IVQ2007 and IIIQ2012 in the upper block and for IQ1980 and IVQ1985 in the lower block. Compensation of employees or labor costs per unit of gross value added of nonfinancial domestic corporate income hardly changed from 0.667 in IVQ2007 to 0.693 in IIIQ2012 in a fractured labor market but increased from 0.386 in IQ1980 to 0.480 in IVQ1985 in a more vibrant labor market. Unit nonlabor costs increased mildly from 0.271 per unit of gross value added in IVQ2007 to 0.288 in IIIQ2012 but increased from 0.127 in IQ1980 to 0.175 in IVQ1985 in an economy closer to full employment of resources. Profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income increased from 0.076 in IVQ2007 to 0.116 in IIQ2012 and from 0.025 in IQ1980 to 0.053 in IVQ1985.
Table IA1-7, US, Price, Costs and Profit per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income
| IVQ2007 | IIIQ2012 | |
| Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business | 1.056 | 1.142 |
| Compensation of Employees (Unit Labor Cost) | 0.667 | 0.693 |
| Unit Nonlabor Cost | 0.271 | 0.288 |
| Consumption of Fixed Capital | 0.128 | 0.139 |
| Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net) | 0.103 | 0.110 |
| Net Interest and Misc. Payments | 0.040 | 0.039 |
| Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production) | 0.118 | 0.162 |
| Taxes on Corporate Income | 0.043 | 0.046 |
| Profits after Tax with IVA and CCA Adjustment | 0.076 | 0.116 |
| IQ1980 | IVQ1985 | |
| Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business | 0.566 | 0.730 |
| Compensation of Employees (Unit Labor Cost) | 0.386 | 0.480 |
| Unit Nonlabor Cost | 0.127 | 0.175 |
| Consumption of Fixed Capital | 0.060 | 0.078 |
| Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net) | 0.047 | 0.068 |
| Net Interest and Misc. Payments | 0.020 | 0.029 |
| Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production) | 0.054 | 0.075 |
| Taxes on Corporate Income | 0.029 | 0.022 |
| Profits after Tax with IVA and CCA Adjustment | 0.025 | 0.053 |
IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment
Chart IA1-13 provides quarterly profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income from 1980 to 2012. In an environment of idle labor and other productive resources nonfinancial corporate income increased after tax profits with IVA and CCA per unit of gross value added at a faster pace in the weak economy from IVQ2007 to IIIQ2012 than in the vibrant expansion of the cyclical contractions of the 1980s. Part of the profits was distributed as dividends and significant part was retained as undistributed profits in the current economic cycle with frustrated investment decision.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-13, US, Profits after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income, 1980-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IB Collapse of United States Dynamism of Income Growth and Employment Creation. There are four major approaches to the analysis of the depth of the financial crisis and global recession from IVQ2007 (Dec) to IIQ2009 (Jun) and the subpar recovery from IIIQ2009 (Jul) to the present IIIQ2012: (1) deeper contraction and slower recovery in recessions with financial crises; (2) counterfactual of avoiding deeper contraction by fiscal and monetary policies; (3) counterfactual that the financial crises and global recession would have been avoided had economic policies been different; and (4) evidence that growth rates are higher after deeper recessions with financial crises. A counterfactual consists of theory and measurements of what would have occurred otherwise if economic policies or institutional arrangements had been different. This task is quite difficult because economic data are observed with all effects as they actually occurred while the counterfactual attempts to evaluate how data would differ had policies and institutional arrangements been different (see Pelaez and Pelaez, Globalization and the State, Vol. I (2008b), 125, 136). Counterfactual data are unobserved and must be calculated using theory and measurement methods. The measurement of costs and benefits of projects or applied welfare economics (Harberger 1971, 1997) specifies and attempts to measure projects such as what would be economic welfare with or without a bridge or whether markets would be more or less competitive in the absence of antitrust and regulation laws (Winston 2006). Counterfactuals were used in the “new economic history” of the United States to measure the economy with or without railroads (Fishlow 1965, Fogel 1964) and also in analyzing slavery (Fogel and Engerman 1974). A critical counterfactual in economic history is how Britain surged ahead of France (North and Weingast 1989). These four approaches are discussed below in turn followed with comparison of the two recessions of the 1980s from IQ1980 (Jan) to IIIQ1980 (Jul) and from IIIQ1981 (Jul) to IVQ1982 (Nov) as dated by the National Bureau of Economic Research (NBER http://www.nber.org/cycles.html). These comparisons are not idle exercises, defining the interpretation of history and even possibly critical policies and institutional arrangements. There is active debate on these issues (Bordo 2012Oct 21 http://www.bloomberg.com/news/2012-10-21/why-this-u-s-recovery-is-weaker.html Reinhart and Rogoff, 2012Oct14 http://www.economics.harvard.edu/faculty/rogoff/files/Is_US_Different_RR_3.pdf Taylor 2012Oct 25 http://www.johnbtaylorsblog.blogspot.co.uk/2012/10/an-unusually-weak-recovery-as-usually.html, Wolf 2012Oct23 http://www.ft.com/intl/cms/s/0/791fc13a-1c57-11e2-a63b-00144feabdc0.html#axzz2AotsUk1q).
(1) Lower Growth Rates in Recessions with Financial Crises. A monumental effort of data gathering, calculation and analysis by Professors Carmen M. Reinhart and Kenneth Rogoff at Harvard University is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html. The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:
“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”
Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.
For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).
An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):
“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”
There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:
“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”
As both sides of the Atlantic economy maneuver around defaults the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. The conclusion is that this time is not different.
Professor Alan M. Taylor (2012) at the University of Virginia analyzes own and collaborative research on 140 years of history with data from 14 advanced economies in the effort to elucidate experience anticipating, during and after financial crises. The conclusion is (Allan M. Taylor 2012, 8):
“Recessions might be painful, but they tend to be even more painful when combined with financial crises or (worse) global crises, and we already know that post-2008 experience will not overturn this conclusion. The impact on credit is also very strong: financial crises lead to strong setbacks in the rate of growth of loans as compared to what happens in normal recessions, and this effect is strong for global crises. Finally, inflation generally falls in recessions, but the downdraft is stronger in financial crisis times.”
Alan M. Taylor (2012) also finds that advanced economies entered the global recession with the largest financial sector in history. There was doubling after 1980 of the ratio of loans to GDP and tripling of the size of bank balance sheets. In contrast, in the period from 1950 to 1970 there was high investment, savings and growth in advanced economies with firm regulation of finance and controls of foreign capital flows.
(2) Counterfactual of the Global Recession. There is a difficult decision on when to withdraw the fiscal stimulus that could have adverse consequences on current growth and employment analyzed by Krugman (2011Jun18). CBO (2011JunLTBO, Chapter 2) considers the timing of withdrawal as well as the equally tough problems that result from not taking prompt action to prevent a possible debt crisis in the future. Krugman (2011Jun18) refers to Eggertsson and Krugman (2010) on the possible contractive effects of debt. The world does not become poorer as a result of debt because an individual’s asset is another’s liability. Past levels of credit may become unacceptable by credit tightening, such as during a financial crisis. Debtors are forced into deleveraging, which results in expenditure reduction, but there may not be compensatory effects by creditors who may not be in need of increasing expenditures. The economy could be pushed toward the lower bound of zero interest rates, or liquidity trap, remaining in that threshold of deflation and high unemployment.
Analysis of debt can lead to the solution of the timing of when to cease stimulus by fiscal spending (Krugman 2011Jun18). Excessive debt caused the financial crisis and global recession and it is difficult to understand how more debt can recover the economy. Krugman (2011Jun18) argues that the level of debt is not important because one individual’s asset is another individual’s liability. The distribution of debt is important when economic agents with high debt levels are encountering different constraints than economic agents with low debt levels. The opportunity for recovery may exist in borrowing by some agents that can adjust the adverse effects of past excessive borrowing by other agents. As Krugman (2011Jun18, 20) states:
“Suppose, in particular, that the government can borrow for a while, using the borrowed money to buy useful things like infrastructure. The true social cost of these things will be very low, because the spending will be putting resources that would otherwise be unemployed to work. And government spending will also make it easier for highly indebted players to pay down their debt; if the spending is sufficiently sustained, it can bring the debtors to the point where they’re no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment. Yes, private debt will in part have been replaced by public debt – but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy’s problems will have been reduced even if the overall level of debt hasn’t fallen. The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can – and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.”
Besides operational issues, the consideration of this argument would require specifying and measuring two types of gains and losses from this policy: (1) the benefits in terms of growth and employment currently; and (2) the costs of postponing the adjustment such as in the exercise by CBO (2011JunLTO, 28-31) in Table 11. It may be easier to analyze the costs and benefits than actual measurement.
An analytical and empirical approach is followed by Blinder and Zandi (2010), using the Moody’s Analytics model of the US economy with four different scenarios: (1) baseline with all policies used; (2) counterfactual including all fiscal stimulus policies but excluding financial stimulus policies; (3) counterfactual including all financial stimulus policies but excluding fiscal stimulus; and (4) a scenario excluding all policies. The scenario excluding all policies is an important reference or the counterfactual of what would have happened if the government had been entirely inactive. A salient feature of the work by Blinder and Zandi (2010) is the consideration of both fiscal and financial policies. There was probably more activity with financial policies than with fiscal policies. Financial policies included the Fed balance sheet, 11 facilities of direct credit to illiquid segments of financial markets, interest rate policy, the Financial Stability Plan including stress tests of banks, the Troubled Asset Relief Program (TARP) and others (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 157-67; Regulation of Banks and Finance (2009a), 224-7).
Blinder and Zandi (2010, 4) find that:
“In the scenario that excludes all the extraordinary policies, the downturn continues into 2011. Real GDP falls a stunning 7.4% in 2009 and another 3.7% in 2010 (see Table 3). The peak-to-trough decline in GDP is therefore close to 12%, compared to an actual decline of about 4%. By the time employment hits bottom, some 16.6 million jobs are lost in this scenario—about twice as many as actually were lost. The unemployment rate peaks at 16.5%, and although not determined in this analysis, it would not be surprising if the underemployment rate approached one-fourth of the labor force. The federal budget deficit surges to over $2 trillion in fiscal year 2010, $2.6 trillion in fiscal year 2011, and $2.25 trillion in FY 2012. Remember, this is with no policy response. With outright deflation in prices and wages in 2009-2011, this dark scenario constitutes a 1930s-like depression.”
The conclusion by Blinder and Zandi (2010) is that if the US had not taken massive fiscal and financial measures the economy could have suffered far more during a prolonged period. There are still a multitude of questions that cloud understanding of the impact of the recession and what would have happened without massive policy impulses. Some effects are quite difficult to measure. An important argument by Blinder and Zandi (2010) is that this evaluation of counterfactuals is relevant to the need of stimulus if economic conditions worsened again.
(3) Counterfactual of Policies Causing the Financial Crisis and Global Recession. The counterfactual of avoidance of deeper and more prolonged contraction by fiscal and monetary policies is not the critical issue. As Professor John B. Taylor (2012Oct25) argues the critically important counterfactual is that the financial crisis and global recessions would have not occurred in the first place if different economic policies had been followed. The counterfactual intends to verify that a combination of housing policies and discretionary monetary policies instead of rules (Taylor 1993) caused, deepened and prolonged the financial crisis (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB; see http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html) and that the experience resembles that of the Great Inflation of the 1960s and 1970s with stop-and-go growth/inflation that coined the term stagflation (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html 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 explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:
“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”
Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:
“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”
There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.
The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.
Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).
There are significant elements of the theory of bank financial fragility of Diamond and Dybvig (1983) and Diamond and Rajan (2000, 2001a, 2001b) that help to explain the financial fragility of banks during the credit/dollar crisis (see also Diamond 2007). The theory of Diamond and Dybvig (1983) as exposed by Diamond (2007) is that banks funding with demand deposits have a mismatch of liquidity (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 58-66). A run occurs when too many depositors attempt to withdraw cash at the same time. All that is needed is an expectation of failure of the bank. Three important functions of banks are providing evaluation, monitoring and liquidity transformation. Banks invest in human capital to evaluate projects of borrowers in deciding if they merit credit. The evaluation function reduces adverse selection or financing projects with low present value. Banks also provide important monitoring services of following the implementation of projects, avoiding moral hazard that funds be used for, say, real estate speculation instead of the original project of factory construction. The transformation function of banks involves both assets and liabilities of bank balance sheets. Banks convert an illiquid asset or loan for a project with cash flows in the distant future into a liquid liability in the form of demand deposits that can be withdrawn immediately.
In the theory of banking of Diamond and Rajan (2000, 2001a, 2001b), the bank creates liquidity by tying human assets to capital. The collection of skills of the relationship banker converts an illiquid project of an entrepreneur into liquid demand deposits that are immediately available for withdrawal. The deposit/capital structure is fragile because of the threat of bank runs. In these days of online banking, the run on Washington Mutual was through withdrawals online. A bank run can be triggered by the decline of the value of bank assets below the value of demand deposits.
Pelaez and Pelaez (Regulation of Banks and Finance 2009b, 60, 64-5) find immediate application of the theories of banking of Diamond, Dybvig and Rajan to the credit/dollar crisis after 2007. It is a credit crisis because the main issue was the deterioration of the credit portfolios of securitized banks as a result of default of subprime mortgages. It is a dollar crisis because of the weakening dollar resulting from relatively low interest rate policies of the US. It caused systemic effects that converted into a global recession not only because of the huge weight of the US economy in the world economy but also because the credit crisis transferred to the UK and Europe. Management skills or human capital of banks are illustrated by financial engineering of complex products. The increasing importance of human relative to inanimate capital (Rajan and Zingales 2000) is revolutionizing the theory of the firm (Zingales 2000) and corporate governance (Rajan and Zingales 2001). Finance is one of the most important examples of this transformation. Profits were derived from the charter in the original banking institution. Pricing and structuring financial instruments was revolutionized with option pricing formulas developed by Black and Scholes (1973) and Merton (1973, 1974, 1998) that permitted the development of complex products with fair pricing. The successful financial company must attract and retain finance professionals who have invested in human capital, which is a sunk cost to them and not of the institution where they work.
The complex financial products created for securitized banking with high investments in human capital are based on houses, which are as illiquid as the projects of entrepreneurs in the theory of banking. The liquidity fragility of the securitized bank is equivalent to that of the commercial bank in the theory of banking (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65). Banks created off-balance sheet structured investment vehicles (SIV) that issued commercial paper receiving AAA rating because of letters of liquidity guarantee by the banks. The commercial paper was converted into liquidity by its use as collateral in SRPs at the lowest rates and minimal haircuts because of the AAA rating of the guarantor bank. In the theory of banking, default can be triggered when the value of assets is perceived as lower than the value of the deposits. Commercial paper issued by SIVs, securitized mortgages and derivatives all obtained SRP liquidity on the basis of illiquid home mortgage loans at the bottom of the pyramid. The run on the securitized bank had a clear origin (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65):
“The increasing default of mortgages resulted in an increase in counterparty risk. Banks were hit by the liquidity demands of their counterparties. The liquidity shock extended to many segments of the financial markets—interbank loans, asset-backed commercial paper (ABCP), high-yield bonds and many others—when counterparties preferred lower returns of highly liquid safe havens, such as Treasury securities, than the risk of having to sell the collateral in SRPs at deep discounts or holding an illiquid asset. The price of an illiquid asset is near zero.”
Gorton and Metrick (2010H, 507) provide a revealing quote to the work in 1908 of Edwin R. A. Seligman, professor of political economy at Columbia University, founding member of the American Economic Association and one of its presidents and successful advocate of progressive income taxation. The intention of the quote is to bring forth the important argument that financial crises are explained in terms of “confidence” but as Professor Seligman states in reference to historical banking crises in the US the important task is to explain what caused the lack of confidence. It is instructive to repeat the more extended quote of Seligman (1908, xi) on the explanations of banking crises:
“The current explanations may be divided into two categories. Of these the first includes what might be termed the superficial theories. Thus it is commonly stated that the outbreak of a crisis is due to lack of confidence,--as if the lack of confidence was not in itself the very thing which needs to be explained. Of still slighter value is the attempt to associate a crisis with some particular governmental policy, or with some action of a country’s executive. Such puerile interpretations have commonly been confined to countries like the United States, where the political passions of democracy have had the fullest way. Thus the crisis of 1893 was ascribed by the Republicans to the impending Democratic tariff of 1894; and the crisis of 1907 has by some been termed the ‘[Theodore] Roosevelt panic,” utterly oblivious of the fact that from the time of President Jackson, who was held responsible for the troubles of 1837, every successive crisis had had its presidential scapegoat, and has been followed by a political revulsion. Opposed to these popular, but wholly unfounded interpretations, is the second class of explanations, which seek to burrow beneath the surface and to discover the more occult and fundamental causes of the periodicity of crises.”
Scholars ignore superficial explanations in the effort to seek good and truth. The problem of economic analysis of the credit/dollar crisis is the lack of a structural model with which to attempt empirical determination of causes (Gorton and Metrick 2010SB). There would still be doubts even with a well-specified structural model because samples of economic events do not typically permit separating causes and effects. There is also confusion is separating the why of the crisis and how it started and propagated, all of which are extremely important.
In true heritage of the principles of Seligman (1908), Gorton (2009EFM) discovers a prime causal driver of the credit/dollar crisis. The objective of subprime and Alt-A mortgages was to facilitate loans to populations with modest means so that they could acquire a home. These borrowers would not receive credit because of (1) lack of funds for down payments; (2) low credit rating and information; (3) lack of information on income; and (4) errors or lack of other information. Subprime mortgage “engineering” was based on the belief that both lender and borrower could benefit from increases in house prices over the short run. The initial mortgage would be refinanced in two or three years depending on the increase of the price of the house. According to Gorton (2009EFM, 13, 16):
“The outstanding amounts of Subprime and Alt-A [mortgages] combined amounted to about one quarter of the $6 trillion mortgage market in 2004-2007Q1. Over the period 2000-2007, the outstanding amount of agency mortgages doubled, but subprime grew 800%! Issuance in 2005 and 2006 of Subprime and Alt-A mortgages was almost 30% of the mortgage market. Since 2000 the Subprime and Alt-A segments of the market grew at the expense of the Agency (i.e., the government sponsored entities of Fannie Mae and Freddie Mac) share, which fell from almost 80% (by outstanding or issuance) to about half by issuance and 67% by outstanding amount. The lender’s option to rollover the mortgage after an initial period is implicit in the subprime mortgage. The key design features of a subprime mortgage are: (1) it is short term, making refinancing important; (2) there is a step-up mortgage rate that applies at the end of the first period, creating a strong incentive to refinance; and (3) there is a prepayment penalty, creating an incentive not to refinance early.”
The prime objective of successive administrations in the US during the past 20 years and actually since the times of Roosevelt in the 1930s has been to provide “affordable” financing for the “American dream” of home ownership. The US housing finance system is mixed with public, public/private and purely private entities. The Federal Home Loan Bank (FHLB) system was established by Congress in 1932 that also created the Federal Housing Administration in 1934 with the objective of insuring homes against default. In 1938, the government created the Federal National Mortgage Association, or Fannie Mae, to foster a market for FHA-insured mortgages. Government-insured mortgages were transferred from Fannie Mae to the Government National Mortgage Association, or Ginnie Mae, to permit Fannie Mae to become a publicly-owned company. Securitization of mortgages began in 1970 with the government charter to the Federal Home Loan Mortgage Corporation, or Freddie Mac, with the objective of bundling mortgages created by thrift institutions that would be marketed as bonds with guarantees by Freddie Mac (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 42-8). In the third quarter of 2008, total mortgages in the US were $12,057 billion of which 43.5 percent, or $5423 billion, were retained or guaranteed by Fannie Mae and Freddie Mac (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 45). In 1990, Fannie Mae and Freddie Mac had a share of only 25.4 percent of total mortgages in the US. Mortgages in the US increased from $6922 billion in 2002 to $12,088 billion in 2007, or by 74.6 percent, while the retained or guaranteed portfolio of Fannie and Freddie rose from $3180 billion in 2002 to $4934 billion in 2007, or by 55.2 percent.
According to Pinto (2008) in testimony to Congress:
“There are approximately 25 million subprime and Alt-A loans outstanding, with an unpaid principal amount of over $4.5 trillion, about half of them held or guaranteed by Fannie and Freddie. Their high risk activities were allowed to operate at 75:1 leverage ratio. While they may deny it, there can be no doubt that Fannie and Freddie now own or guarantee $1.6 trillion in subprime, Alt-A and other default prone loans and securities. This comprises over 1/3 of their risk portfolios and amounts to 34% of all the subprime loans and 60% of all Alt-A loans outstanding. These 10.5 million unsustainable, nonprime loans are experiencing a default rate 8 times the level of the GSEs’ 20 million traditional quality loans. The GSEs will be responsible for a large percentage of an estimated 8.8 million foreclosures expected over the next 4 years, accounting for the failure of about 1 in 6 home mortgages. Fannie and Freddie have subprimed America.”
In perceptive analysis of growth and macroeconomics in the past six decades, Rajan (2012FA) argues that “the West can’t borrow and spend its way to recovery.” The Keynesian paradigm is not applicable in current conditions. Advanced economies in the West could be divided into those that reformed regulatory structures to encourage productivity and others that retained older structures. In the period from 1950 to 2000, Cobet and Wilson (2002) find that US productivity, measured as output/hour, grew at the average yearly rate of 2.9 percent while Japan grew at 6.3 percent and Germany at 4.7 percent (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). In the period from 1995 to 2000, output/hour grew at the average yearly rate of 4.6 percent in the US but at lower rates of 3.9 percent in Japan and 2.6 percent in Germany. Rajan (2012FA) argues that the differential in productivity growth was accomplished by deregulation in the US at the end of the 1970s and during the 1980s. In contrast, Europe did not engage in reform with the exception of Germany in the early 2000s that empowered the German economy with significant productivity advantage. At the same time, technology and globalization increased relative remunerations in highly-skilled, educated workers relative to those without skills for the new economy. It was then politically appealing to improve the fortunes of those left behind by the technological revolution by means of increasing cheap credit. As Rajan (2012FA) argues:
“In 1992, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act, partly to gain more control over Fannie Mae and Freddie Mac, the giant private mortgage agencies, and partly to promote affordable homeownership for low-income groups. Such policies helped money flow to lower-middle-class households and raised their spending—so much so that consumption inequality rose much less than income inequality in the years before the crisis. These policies were also politically popular. Unlike when it came to an expansion in government welfare transfers, few groups opposed expanding credit to the lower-middle class—not the politicians who wanted more growth and happy constituents, not the bankers and brokers who profited from the mortgage fees, not the borrowers who could now buy their dream houses with virtually no money down, and not the laissez-faire bank regulators who thought they could pick up the pieces if the housing market collapsed. The Federal Reserve abetted these shortsighted policies. In 2001, in response to the dot-com bust, the Fed cut short-term interest rates to the bone. Even though the overstretched corporations that were meant to be stimulated were not interested in investing, artificially low interest rates acted as a tremendous subsidy to the parts of the economy that relied on debt, such as housing and finance. This led to an expansion in housing construction (and related services, such as real estate brokerage and mortgage lending), which created jobs, especially for the unskilled. Progressive economists applauded this process, arguing that the housing boom would lift the economy out of the doldrums. But the Fed-supported bubble proved unsustainable. Many construction workers have lost their jobs and are now in deeper trouble than before, having also borrowed to buy unaffordable houses. Bankers obviously deserve a large share of the blame for the crisis. Some of the financial sector’s activities were clearly predatory, if not outright criminal. But the role that the politically induced expansion of credit played cannot be ignored; it is the main reason the usual checks and balances on financial risk taking broke down.”
In fact, Raghuram G. Rajan (2005) anticipated low liquidity in financial markets resulting from low interest rates before the financial crisis that caused distortions of risk/return decisions provoking the credit/dollar crisis and global recession from IVQ2007 to IIQ2009. Near zero interest rates of unconventional monetary policy induced excessive risks and low liquidity in financial decisions that were critical as a cause of the credit/dollar crisis after 2007. Rajan (2012FA) argues that it is not feasible to return to the employment and income levels before the credit/dollar crisis because of the bloated construction sector, financial system and government budgets.
(4) Historically Sharper Recoveries from Deeper Contractions and Financial Crises. Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) lumping together countries with different institutions, economic policies and financial systems; and (2) the conclusion that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.
Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money(for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for “serial default”. This void has been filled in scholarly research on nineteenth-century Brazil by William R. Summerhill, Jr. (2007SC, 2007IR). There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 an 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is really surprising is that Brazil borrowed by means of long-term bonds and even more surprising interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).
The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.
External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1967). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions. According to Pelaez 1976, 283) following Cameron:
“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”
Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:
“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries [Cameron 1967], supplied the financial services required in the first stage of modernization of the export economy.”
Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).
The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):
“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”
Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER and find evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:
“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”
The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.
Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy then returns to trend. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. The analysis is sharpened by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. 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 USD 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 Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Long-term economic growth and prosperity are measured by the key indicators of growth of real income per capita, or what is earned per person after inflation. A refined concept would include real disposable income per capita, or what is earned per person after inflation and taxes.
Table IB-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 13 quarters of the current cyclical expansion from IIIQ2009 to IIIQ2012, GDP increased 7.4 percent at the annual equivalent rate of 2.2 percent. In the 12 quarters of cyclical expansion real disposable personal income (RDPI) increased 5.4 percent at the annual equivalent rate of 1.6 percent; RDPI per capita increased 3.0 percent at the annual equivalent rate of 1.0 percent; and population increased 2.3 percent at the annual equivalent rate of 0.7 percent. Third, since the beginning of the recession in IVQ2007 to IIIQ2012, GDP increased 2.2 percent, or barely above the level before the recession. Since the beginning of the recession in IVQ2007 to IIIQ2012, real disposable personal income increased 3.4 percent at the annual equivalent rate of 0.7 percent; population increased 3.9 percent at the annual equivalent rate of 0.8 percent; and real disposable personal income per capita is 0.5 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction from IVQ2007 to IIQ2009 of 4.7 percent and the financial crisis.
Table IB-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %
| # Quarters | ∆% | ∆% Annual Equivalent | |
| IQ1983 to IVQ1985 | 13 | ||
| GDP | 19.6 | 5.7 | |
| RDPI | 14.5 | 4.3 | |
| RDPI Per Capita | 11.5 | 3.4 | |
| Population | 2.7 | 0.8 | |
| IIIQ2009 to IIIQ2012 | 13 | ||
| GDP | 7.4 | 2.2 | |
| RDPI | 5.4 | 1.6 | |
| RDPI per Capita | 3.0 | 0.9 | |
| Population | 2.3 | 0.7 | |
| IVQ2007 to IIIQ2012 | 20 | ||
| GDP | 2.2 | 0.4 | |
| RDPI | 3.4 | 0.7 | |
| RDPI per Capita | -0.5 | ||
| Population | 3.9 | 0.8 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
There are seven basic facts illustrating the current economic disaster of the United States: (1) GDP maintained trend growth in the entire business cycle from IQ1980 to IV1985, including contractions and expansions, but is well below trend in the entire business cycle from IVQ2007 to IIQ2012, including contractions and expansions; (2) per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIQ2012; (3) the number of employed persons increased in the 1980s but declined into IIQ2012; (4) the number of full-time employed persons increased in the 1980s but declined into IIIQ2012; (5) the number unemployed, unemployment rate and number employed part-time for economic reasons fell in the recovery from the recessions of the 1980s but not substantially in the recovery after IIQ2009; (6) wealth of households and nonprofit organizations soared in the 1980s but declined into IIQ2012; and (7) gross private domestic investment increased sharply from IQ1980 to IVQ1985 but gross private domestic investment and private fixed investment have fallen sharply from IVQ2007 to IIIQ2007. There is a critical issue of whether the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IB-2 provides data for analysis of these five basic facts. The six blocks of Table IB-2 are separated initially after individual discussion of each one followed by the full Table IB-2.
1. Trend Growth.
i. As shown in Table IB-2, actual GDP grew cumulatively 17.7 percent from IQ1980 to IVQ1985, which is relatively close to what trend growth would have been at 18.5 percent. Rapid growth at 5.7 percent annual rate on average per quarter during the expansion from IQ1983 to IVQ1985 erased the loss of GDP of 4.8 percent during the contraction and maintained trend growth at 3 percent over the entire cycle.
ii. In contrast, cumulative growth from IVQ2007 to IIIQ2012 was 2.3 percent while trend growth would have been 15.1 percent. GDP in IIIQ2012 at seasonally adjusted annual rate is estimated at $13,638.1 by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $15,338.2 billion, or $1,700.1 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $1.7 trillion of foregone GDP that would have been created as it occurred during past cyclical expansions, which explains why employment has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2012 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 28.1 million people or 17.4 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.3 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 239.618 million in 2011 or by 3.3 percent while the labor force increased from 153.124 million in 2007 to 153.617 million in 2011 or by 0.3 percent (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ).
| Period IQ1980 to IVQ1985 | |
| GDP SAAR USD Billions | |
| IQ1980 | 5,903.4 |
| IVQ1985 | 6,950.0 |
| ∆% IQ1980 to IVQ1985 | 17.7 |
| ∆% Trend Growth IQ1980 to IVQ1985 | 18.5 |
| Period IVQ2007 to IIIQ2012 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 13,326.0 |
| IIIQ2012 | 13,638.1 |
| ∆% IVQ2007 to IIIQ2012 Actual | 2.3 |
| ∆% IVQ2007 to IIIQ2012 Trend | 15.1 |
2. Decline of Per Capita Real Disposable Income
i. In the entire business cycle from IQ1980 to IVQ1985, as shown in Table IB-2 trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 14.5 percent, which is close to what would have been trend growth of 12.1 percent.
ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2012, per capita real disposable income fell 0.5 percent while trend growth would have been 10.4 percent. Income available after inflation and taxes is lower than before the contraction after 13 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions.
| Period IQ1980 to IVQ1985 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD | 18,938 |
| Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD | 21,687 |
| ∆% IQ1980 to IVQ1985 | 14.5 |
| ∆% Trend Growth | 12.1 |
| Period IVQ2007 to IIIQ2012 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD | 32,837 |
| Real Disposable Personal Income per Capita IIIQ2012 Chained 2005 USD | 32,686 |
| ∆% IVQ2007 to IIIQ2012 | -0.5 |
| ∆% Trend Growth | 10.4 |
3. Number of Employed Persons
i. As shown in Table IB-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 107.819 million NSA in IVQ1985 or by 9.4 percent.
ii. In contrast, during the entire business cycle the number employed fell from 146.334 million in IVQ2007 to 143.202 million in IIIQ2012 or by 2.1 percent. There are 28.1 million persons unemployed or underemployed, which is 17.4 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html).
| Period IQ1980 to IVQ1985 |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IV1985 NSA End of Quarter | 107.819 |
| ∆% Employed IQ1980 to IV1985 | 9.4 |
| Period IVQ2007 to IIIQ2012 |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2012 NSA End of Quarter | 143.333 |
| ∆% Employed IVQ2007 to IIIQ2012 | -2.1 |
4. Number of Full-Time Employed Persons
i. As shown in Table IB-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 88.757 million NSA in IVQ1985 or 9.2 percent.
ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 115.678 million in IIIQ2012 or by minus 4.4 percent.
| Period IQ1980 to IVQ1985 |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IV1985 NSA End of Quarter | 88.757 |
| ∆% Full-time Employed IQ1980 to IV1985 | 9.2 |
| Period IVQ2007 to IIIQ2012 |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2012 NSA End of Quarter | 115.678 |
| ∆% Full-time Employed IVQ2007 to IIIQ2012 | -4.4 |
5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.
i. As shown in Table IB-2 and in the following block, in the cycle from IQ1980 to IVQ1985: (a) the rate of unemployment was virtually the same at 6.7 percent in IQ1985 relative to 6.6 percent in IQ1980; (b) the number unemployed increased from 6.983 million in IQ1980 to 7.717 million in IVQ1985 or 10.5 percent; and (c) the number employed part-time for economic reasons increased 49.1 percent from 3.624 million in IQ1980 to 5.402 million in IVQ1985.
ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2012: (a) the rate of unemployment increased from 4.8 percent in IVQ2007 to 7.6 percent in IIIQ2012; (b) the number unemployed increased 59.3 percent from 7.371 million in IVQ2007 to 11.742 million in IIIQ2012; (c) the number employed part-time for economic reasons increased 70.7 percent from 4.750 million in IVQ2007 to 8.110 million in IIIQ2012; and (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 14.2 percent in IIIQ2012.
| Period IQ1980 to IVQ1985 |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IV1985 NSA End of Quarter | 6.7 |
| Unemployed IQ1980 Millions End of Quarter | 6.983 |
| Unemployed IV 1985 Millions End of Quarter | 7.717 |
| Employed Part-time Economic Reasons Millions IQ1980 End of Quarter | 3.624 |
| Employed Part-time Economic Reasons Millions IVQ1985 End of Quarter | 5.402 |
| ∆% | 49.1 |
| Period IVQ2007 to IIIQ2012 |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2012 NSA End of Quarter | 7.6 |
| Unemployed IVQ2007 Millions End of Quarter | 7.371 |
| Unemployed IIIQ2009 Millions End of Quarter | 11.742 |
| ∆% | 59.3 |
| Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2009 End of Quarter | 8.110 |
| ∆% | 70.7 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2012 | 14.2 |
6. Wealth of Households and Nonprofit Organizations.
i. The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and also from IVQ1979) to IVQ1985 and from IVQ2007 to IIQ2012 is provided in the following block and in Table IB-2. Net worth of households and nonprofit organizations increased from $8,326.4 billion in IVQ1979 to $14,395.2 billion in IVQ1985 or 72.9 percent or 69.3 percent from $8,502.9 billion in IQ1980. The starting quarter does not bias the results. The US consumer price index not seasonally adjusted increased from 76.7 in Dec 1979 to 109.3 in Dec 1985 or 42.5 percent or 36.5 percent from 80.1 in Mar 1980 (using consumer price index data from the US Bureau of Labor Statistics at http://www.bls.gov/cpi/data.htm). In terms of purchasing power measured by the consumer price index, real wealth of households and nonprofit organizations increased 21.3 percent in constant purchasing power from IVQ1979 to IVQ1985 or 24.0 percent from IQ1980.
ii. In contrast, as shown in the following block and in Table IB-2, net worth of households and nonprofit organizations fell from $66,057.1 billion in IVQ2007 to $62,668.4 billion in IIQ2012 by $3,388.7 billion or 5.1 percent. The US consumer price index was 210.036 in Dec 2007 and 229.478 in Jun 2012 for increase of 9.3 percent. In purchasing power of Dec 2007, wealth of households and nonprofit organizations is lower by 13.2 percent in Jun 2012 after 12 consecutive quarters of expansion from IIIQ2009 to IIQ2012 relative to IVQ2012 when the recession began. The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. The average growth rate from IIIQ2009 to IIQ2012 has been 2.2 percent, which is substantially lower than the average of 6.2 percent in cyclical expansions after World War II and 5.7 percent in the expansion from IQ1983 to IVQ1985 (see Table I-5 http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). The US missed the opportunity of high growth rates that has been available in past cyclical expansions.
| Period IQ1980 to IVQ1985 | |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ1979 | 8,326.4 |
| IVQ1985 | 14,395.2 |
| ∆ USD Billions | +6,068.8 |
| Period IVQ2007 to IIQ2012 | |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ2007 | 66,057.1 |
| IIQ2012 | 62,668.4 |
| ∆ USD Billions | -3,388.7 |
7. Gross Private Domestic Investment.
i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IV1985 and from IVQ2007 to IIQ2012 is provides in the following block and in Table IB-2. Gross private domestic investment increased from $778.3 billion in IQ1980 to $965.9 billion in IVQ1985 or by 24.1 percent.
ii In the current cycle, gross private domestic investment decreased from $2,123.6 billion in IVQ2007 to $1,929.3 billion in IIIQ2012, or decline by 9.1 percent. Private fixed investment fell from $2,111.5 billion in IVQ2007 to $1843.9 billion in IIIQ2012, or decline by 12.7 percent.
| Period IQ1980 to IVQ1985 | |
| Gross Private Domestic Investment USD 2005 Billions | |
| IQ1980 | 778.3 |
| IVQ1985 | 965.9 |
| ∆% | 24.1 |
| Period IVQ2007 to IIIQ2012 | |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,123.6 |
| IIIQ2012 | 1,929.3 |
| ∆% | -9.1 |
| Private Fixed Investment USD 2005 Billions | |
| IVQ2007 | 2,111.5 |
| IIIQ2012 | 1,843.9 |
| ∆% | -12.7 |
Table IB-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%
| Period IQ1980 to IVQ1985 | |
| GDP SAAR USD Billions | |
| IQ1980 | 5,903.4 |
| IVQ1985 | 6,950.0 |
| ∆% IQ1980 to IVQ1985 | 17.7 |
| ∆% Trend Growth IQ1980 to IVQ1985 | 18.5 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD | 18,938 |
| Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD | 21,687 |
| ∆% IQ1980 to IVQ1985 | 14.5 |
| ∆% Trend Growth | 12.1 |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IV1985 NSA End of Quarter | 107.819 |
| ∆% Employed IQ1980 to IV1985 | 9.4 |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IV1985 NSA End of Quarter | 88.757 |
| ∆% Full-time Employed IQ1980 to IV1985 | 9.2 |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IV1985 NSA End of Quarter | 6.7 |
| Unemployed IQ1980 Millions NSA End of Quarter | 6.983 |
| Unemployed IV 1985 Millions NSA End of Quarter | 7.717 |
| ∆% | 11.9 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIQ2009 NSA End of Quarter | 8.394 |
| ∆% | 76.7 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ1979 | 8,326.4 |
| IVQ1985 | 14,395.2 |
| ∆ USD Billions | +6,068.8 |
| Gross Private Domestic Investment USD 2005 Billions | |
| IQ1980 | 778.3 |
| IVQ1985 | 965.9 |
| ∆% | 24.1 |
| Period IVQ2007 to IIIQ2012 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 13,326.0 |
| IIIQ2012 | 13,638.1 |
| ∆% IVQ2007 to IIIQ2012 | 2.3 |
| ∆% IVQ2007 to IIIQ2012 Trend Growth | 15.1 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD | 32,837 |
| Real Disposable Personal Income per Capita IIIQ2012 Chained 2005 USD | 32,686 |
| ∆% IVQ2007 to IIIQ2012 | -0.5 |
| ∆% Trend Growth | 10.4 |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2012 NSA End of Quarter | 143.333 |
| ∆% Employed IVQ2007 to IIIQ2012 | -2.1 |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2012 NSA End of Quarter | 115.678 |
| ∆% Full-time Employed IVQ2007 to IIIQ2012 | -4.4 |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2012 NSA End of Quarter | 7.6 |
| Unemployed IVQ2007 Millions NSA End of Quarter | 7.371 |
| Unemployed IIIQ2009 Millions NSA End of Quarter | 11.742 |
| ∆% | 59.3 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2009 NSA End of Quarter | 8.110 |
| ∆% | 70.7 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2012 | 14.2 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ2007 | 66,057.1 |
| IIQ2012 | 62,668.4 |
| ∆ USD Billions | -3,388.7 |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,123.6 |
| IIIQ2012 | 1,929.3 |
| ∆% | -9.1 |
| Private Fixed Investment USD 2005 Billions | |
| IVQ2007 | 2,111.5 |
| IIIQ2012 | 1,843.9 |
| ∆% | -12.7 |
Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2012Sep20. Flow of funds accounts of the United States. Washington, DC, Federal Reserve System.
IIA Stagnating Real Disposable Income and Consumption Expenditures and Financial Repression. Subsection IIA1 Stagnating Real Disposable Income and Consumption Expenditures provides analysis of the personal income and consumption outlays of the Bureau of Economic Analysis (BEA) for Jul 2012. Subsection IIA2 Financial Repression provides analysis of the consequences of unconventional monetary policy of zero interest rates and quantitative easing on savings and risk/return decisions.
IIA Stagnating Real Disposable Income and Consumption Expenditures. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts GDP revisions, which are covered in http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html with the latest estimates at http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html. The release of the Bureau of Economic Analysis (BEA) for personal income and outlays for Jun 2012 available on Jul 31, 2012 provides “the results of the annual revision of national and product accounts (NIPAs), beginning with estimates for Jan 2009” (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf). All revisions are incorporated in this subsection as provided in the latest Personal Income and Outlays:October 2012 released on Nov 30, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1012.pdf) and in the interactive dataset of the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm). Table IIA-1 provides monthly and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. There are waves of changes in personal income and expenditures in Table IIA-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) because of the influence through price indexes. In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.4 percent, nominal disposable personal income (NDPI) at 5.8 percent and nominal personal consumption expenditures (NPCE) at 6.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.5 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.4 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 0.9 percent, NPDI at 1.2 percent and NPCE at 2.7 percent. RDPI contracted at 1.5 percent annual equivalent and RPCE crawled at 0.3 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 0.9 percent and NPCE at 2.7 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 1.8 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.7 percent annual equivalent and NDPI at 8.3 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 4.5 percent annual equivalent and RPCE at 2.8 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 2.8 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.5 percent, NDPI at 1.2 percent and RDPI at 1.5 percent. Financial repression failed to stimulate consumption with NPCE growing at 0.9 percent annual equivalent and RPCE at 1.2 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI and NDPI increased at 2.0 percent annual equivalent while real disposable income (RDPI) declined at 1.6 percent annual equivalent. The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase. Growth in the first three quarters of 2012 accumulates to 1.5 percent {[(1.02)1/4(1.013)1/4(1.027)1/4 -1]100 = 1.5%}, which is equivalent to 2.0 percent per year {([(1.02)1/4(1.013)1/4(1.02)1/4]4/3 – 1]100 = 2.0%}. Underlying growth in IIIQ2012 may be lower because of contributions of 0.77 percentage points by inventory accumulation and 0.64 percentage points by one-time national defense expenditures. The US economy could be growing at around 1.5 percent per year. Surprisingly, the revised data for personal income and personal consumption are much stronger than earlier until the bump in Aug 2012. RDPI stagnated in Jan-Dec 2011 with the latest revised data compared with growth of 3.3 percent in Jan-Dec 2010 but grew at annual equivalent 4.5 percent in Jan-Mar 2012 and 1.5 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE to 0.9 percent annual equivalent in Apr-Jul 2012 and of RPCE to 1.2 percent. A bump occurred in Aug with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.3 percent in Aug 2012 or at annual equivalent 3.7 percent but stagnated in real terms. Both nominal personal income and nominal disposable income increased 0.1 percent in Aug 2012 or at 1.2 percent in annual equivalent. Real disposable income (RDPI) fell 0.1 percent in Oct 2012 while real personal consumption expenditures (RPCE) contracted 0.3 percent.
Table IIA-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2012 | |||||
| Oct | 0.0 | 0.0 | -0.1 | -0.2 | -0.3 |
| Sep | 0.4 | 0.4 | 0.0 | 0.8 | 0.4 |
| Aug | 0.1 | 0.1 | -0.3 | 0.3 | 0.0 |
| AE ∆% Aug-Oct | 2.0 | 2.0 | -1.6 | 3.7 | 0.4 |
| Jul | 0.1 | 0.1 | 0.1 | 0.3 | 0.3 |
| Jun | 0.3 | 0.2 | 0.1 | 0.0 | -0.1 |
| May | 0.1 | 0.1 | 0.3 | -0.2 | 0.0 |
| Apr | 0.0 | 0.0 | 0.0 | 0.2 | 0.2 |
| AE ∆% Apr-Jul | 1.5 | 1.2 | 1.5 | 0.9 | 1.2 |
| Mar | 0.5 | 0.5 | 0.2 | 0.3 | 0.0 |
| Feb | 0.7 | 0.6 | 0.3 | 0.8 | 0.4 |
| Jan | 0.9 | 0.9 | 0.6 | 0.5 | 0.3 |
| AE ∆% Jan-Mar | 8.7 | 8.3 | 4.5 | 6.6 | 2.8 |
| 2011 | |||||
| ∆% Jan-Dec 2011* | 3.6 | 2.5 | 0.0 | 4.2 | 1.7 |
| Dec | 0.3 | 0.3 | 0.2 | 0.1 | 0.0 |
| Nov | -0.2 | -0.3 | -0.3 | 0.1 | 0.0 |
| Oct | 0.3 | 0.3 | 0.3 | 0.2 | 0.2 |
| Sep | 0.1 | 0.0 | -0.1 | 0.5 | 0.4 |
| AE ∆% Sep-Dec | 1.5 | 0.9 | 0.3 | 2.7 | 1.8 |
| Aug | 0.0 | 0.0 | -0.3 | 0.2 | -0.1 |
| Jul | 0.1 | 0.2 | -0.1 | 0.7 | 0.5 |
| Jun | 0.2 | 0.2 | 0.1 | -0.1 | -0.2 |
| May | 0.0 | 0.0 | -0.2 | 0.1 | -0.1 |
| AE ∆% May-Aug | 0.9 | 1.2 | -1.5 | 2.7 | 0.3 |
| Apr | 0.3 | 0.3 | 0.0 | 0.4 | 0.0 |
| Mar | 0.1 | 0.1 | -0.3 | 0.7 | 0.3 |
| Feb | 0.4 | 0.4 | 0.0 | 0.6 | 0.3 |
| Jan | 1.9 | 1.1 | 0.8 | 0.4 | 0.2 |
| AE ∆% Jan-Apr | 8.4 | 5.8 | 1.5 | 6.5 | 2.4 |
| 2010 | |||||
| ∆% Jan-Dec 2010** | 5.3 | 4.9 | 3.3 | 4.4 | 2.8 |
| Dec | 0.7 | 0.7 | 0.4 | 0.4 | 0.2 |
| Nov | 0.2 | 0.2 | 0.1 | 0.5 | 0.4 |
| Oct | 0.4 | 0.3 | 0.2 | 0.7 | 0.4 |
| IVQ2010∆% | 1.3 | 1.2 | 0.7 | 1.6 | 1.0 |
| IVQ2010 AE ∆% | 5.3 | 4.9 | 2.8 | 6.6 | 4.1 |
Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent
Percentage change month to month seasonally adjusted
*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Further information on income and consumption is provided by Table IIA-2. The 12-month rates of increase of RDPI and RPCE in 2011 show sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent at the end of IQ2011 and then collapsing to a range of 0.9 to 0.0 percent in Jun-Dec 2011. Revisions shows decline of RDPI of 0.2 percent in the 12 months ending in Jan 2012 and marginal increase of 0.1 percent in the 12 months ending in Feb 2012. The significant difference is continuing growth of 12-month percentage changes of RDPI with 1.3 percent in Jun 2012, 1.5 percent in both Jul and Aug 2012 and 1.6 percent in Sep 2012 but 1.2 percent in Oct 2012. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 1.6 percent in Mar 2012 and 1.3 percent in Oct 2012. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 5.5 to 8.9 percent in Jan-Oct 2012. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.0 to 3.7 percent in Jan-Oct 2012. There are limits to sustained growth on the basis of financial repression in an environment of weak labor markets and real labor remuneration.
Table IIA-2, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2012 | |||||
| Oct | 1.2 | 1.3 | 2.0 | 5.5 | 1.0 |
| Sep | 1.6 | 1.9 | 3.6 | 8.8 | 1.0 |
| Aug | 1.5 | 1.8 | 3.7 | 8.9 | 0.9 |
| Jul | 1.5 | 1.8 | 3.1 | 7.3 | 1.2 |
| Jun | 1.3 | 2.0 | 3.5 | 8.6 | 1.3 |
| May | 1.3 | 1.9 | 3.0 | 7.4 | 1.4 |
| Apr | 0.7 | 1.8 | 2.4 | 6.5 | 1.5 |
| Mar | 0.7 | 1.6 | 2.6 | 6.6 | 1.1 |
| Feb | 0.1 | 1.9 | 2.7 | 7.4 | 1.5 |
| Jan | -0.2 | 1.8 | 2.6 | 6.8 | 1.4 |
| 2011 | |||||
| Dec | 0.0 | 1.7 | 2.5 | 6.0 | 1.3 |
| Nov | 0.3 | 1.9 | 2.6 | 5.8 | 1.5 |
| Oct | 0.7 | 2.3 | 3.2 | 5.9 | 1.8 |
| Sep | 0.5 | 2.4 | 3.4 | 7.0 | 2.0 |
| Aug | 0.4 | 2.1 | 2.6 | 5.3 | 1.9 |
| Jul | 0.9 | 2.8 | 4.1 | 6.4 | 2.1 |
| Jun | 0.9 | 2.4 | 3.4 | 5.3 | 1.9 |
| May | 1.0 | 2.6 | 3.9 | 6.5 | 2.0 |
| Apr | 1.8 | 3.0 | 4.7 | 8.2 | 2.1 |
| Mar | 2.6 | 3.0 | 4.2 | 7.8 | 2.4 |
| Feb | 3.4 | 3.1 | 5.5 | 11.3 | 1.9 |
| Jan | 3.5 | 3.1 | 5.5 | 11.0 | 1.9 |
| 2010 | |||||
| Dec | 3.3 | 2.8 | 4.7 | 9.0 | 1.9 |
| Nov | 3.5 | 3.2 | 5.1 | 8.8 | 2.2 |
| Oct | 3.7 | 2.7 | 5.3 | 10.8 | 1.5 |
| Sep | 3.2 | 2.5 | 4.7 | 9.1 | 1.5 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2012. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.
Chart IIA-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IIA-2 from 1995 to 2012. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IIA-2 that the average rate of growth of RPCE was higher before the recession than during the past twelve quarters of expansion that began in IIIQ2009.
Chart IIA-2, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Personal income and its disposition are shown in Table IIA-3. The latest revisions have changed movements in two forms: (1) more dynamism in personal and disposable income; (2) stronger trend of increase of the savings rate with decline into Aug and Sep and marginal increase in Oct 2012. Disposable personal income in current dollars or without adjusting for inflation increased from the annual rate of $11,609.1 billion in Dec 2011 to $11,954.9 billion in Oct 2012, by 3.0 percent or at annual equivalent 3.6 percent. Nominal wage and salary disbursements increased from the annual rate of $6687.6 billion in Dec 2011 to $$6879.6 billion in Oct 2012, by 2.9 percent or at annual equivalent rate of 3.5 percent. From Dec 2010 to Dec 2011, wage and salary disbursements increased 3.2 percent and disposable personal income 2.5 percent. Personal savings as percent of disposable personal income, or savings rate, fell from 4.9 percent in Dec 2010 to 3.4 percent in Dec 2011 but climbed back to 4.1 percent in Jul 2012 but declined to 3.7 percent in Aug 2012 and 3.3 percent in Sep 2012, increasing marginally to 3.4 percent in Oct 2012. Revised data suggest that economic weakness originates in increasing savings but fractured labor markets (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) are ignored in such interpretation.
Table IIA-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions
| Personal | Wages & | Personal | DPI | Savings | |
| Oct 2012 | 13,434.4 | 6,879.6 | 1,479.6 | 11,954.9 | 3.4 |
| Sep 2012 | 13,434.0 | 6,896.6 | 1,479.9 | 11,954.1 | 3.3 |
| Change Oct/Sep | 0.4 ∆% 0.0 | -17.0 ∆% -0.2 | -0.3 ∆% 0.0 | 0.8 ∆% 0.0 | |
| Aug 2012 | 13,386.2 | 6,872.6 | 1,474.2 | 11,912.0 | 3.7 |
| Change Sep/Aug | 47.8 ∆% 0.4 | 24.0 ∆% 0.3 | 5.7 ∆% 0.4 | 42.1 ∆% 0.4 | |
| Jul 2012 | 13,375.0 | 6,869.8 | 1,472.4 | 11,902.6 | 3.9 |
| Change Aug/Jul | 11.2 ∆% 0.1 | 2.8 ∆% 0.0 | 1.8 ∆% 0.1 | 9.4 ∆% 0.1 | |
| Jun 2012 | 13,355.9 | 6,858.5 | 1,470.0 | 11,885.9 | 4.1 |
| Change Jul/Jun | 19.1 ∆% 0.1 | 11.3 ∆% 0.2 | 2.4 ∆% 0.2 | 16.7 ∆% 0.1 | |
| May 2012 | 13,322.3 | 6,840.3 | 1,464.1 | 11,858.2 | 3.9 |
| Change Jun/ May | 33.6 ∆% 0.3 | 18.2 ∆% 0.3 | 5.9 ∆% 0.4 | 27.7 ∆% 0.2 | |
| Apr 2012 | 13,302.9 | 6,848.9 | 1,461.6 | 11,841.3 | 3.5 |
| Change May/ Apr | 19.4 ∆% 0.1 | -8.6 ∆% -0.1 | 2.5 ∆% 0.2 | 16.9 ∆% 0.1 | |
| Mar | 13,298.3 | 6,869.4 | 1,460.6 | 11,837.7 | 3.7 |
| Change Apr/ Mar | 4.6 ∆% 0.0 | -20.5 ∆% -0.3 | 1.0 ∆% 0.1 | 3.6 ∆% 0.0 | |
| Feb 2012 | 13,234.7 | 6,831.5 | 1,452.0 | 11,782.7 | 3.5 |
| Change Mar/ Feb | 63.6 ∆% 0.5 | 37.9 ∆% 0.6 | 8.6 ∆% 0.6 | 55.0 ∆% 0.5 | |
| Jan | 13,148.4 | 6,776.7 | 1,439.6 | 11,708.8 | 3.7 |
| Change Feb/Jan | 86.3 ∆% 0.7 | 54.8 ∆% 0.8 | 12.4 ∆% 0.9 | 73.9 ∆% 0.6 | |
| Dec 2011 | 13,032.2 | 6,687.6 | 1,423.1 | 11,609.1 | 3.4 |
| Change Jan/Dec | 116.2 ∆% 0.9 | 89.1 ∆% 1.3 | 16.5 | 99.7 | |
| Dec 2010 | 12,574.1 | 6,482.8 | 1,243.5 | 11,330.6 | 4.9 |
| Change Dec 2011/ Dec 2010 | 458.1 ∆% 3.6 | 204.8 ∆% 3.2 | 179.6 ∆% 14.4 | 278.5 ∆% 2.5 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.
Chart IIA-3, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
A different evolution of personal income is shown in Chart IIA-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions.
Chart IIA-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2012
Source:
http://www.bea.gov/iTable/index_nipa.cfm
Real or inflation-adjusted disposable personal income is provided in Chart IIA-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.
Chart IIA-5, US, Real Disposable Income, Billions of Chained 2005 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Much weaker performance of real disposable income is evident in Chart IIA-6. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. There is more dynamism with the new revisions for the first half of 2012.
Chart IIA-6, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.
Chart IIA-7, US, Real Disposable Income Percentage Change from Preceding Period at Quarterly Seasonally-Adjusted Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2012. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not recovered the dynamism of the brief early phase of expansion.
Chart, IIA-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in 2012 at the seasonally adjusted annual rate of $13,434.4 billion, as shown in Table IIA-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1012.pdf). The major portion of personal income is compensation of employees of $8,573.7 billion, or 63.8 percent of the total. Wage and salary disbursements are $6,879.6 billion, of which $5,673.9 billion by private industries and supplements to wages and salaries of $1,694.1 billion (employer contributions to pension and insurance funds are $1,182.2 billion and contributions to social insurance are $511.8 billion). In Oct 1985, US personal income was $3,549.8 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,459.1 billion, or 69.3 percent of the total. Wage and salary disbursement were $2.022.9 billion of which $1642.6 billion by private industries. Supplements to wages and salaries were $436.2 billion with employer contributions to pension and insurance funds of $285.9 billion and $150.3 billion to government social insurance. Chart IIA-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.
Chart IIA-9, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-10 shows US wage and salary disbursement of private industries from 2007 to 2012. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011 and 2012.
Chart IIA-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-11 provides finer detail with monthly wage and salary disbursement of private industries from 2007 to 2012. There is decline during the contraction and a period of mild recovery followed by stagnation and recent recovery that is weaker than in earlier expansion periods of the business cycle.
Chart IIA-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of well being in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capital grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.
Chart IIA-12, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-13 provides monthly real disposable personal per capita income from 2007 to 2012. There was initial recovery from the drop during the global recession followed by stagnation.
Chart IIA-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IIC Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.
Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 2.2 percent in the 12 months ending in Oct (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:
“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”
Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:
“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”
Friedman (1970, 26-7) predicted the future:
“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”
In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:
“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”
Chart IIA-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2012. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IIA-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.
Chart IIA-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Oct 2012. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.3 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second highest ratio occurred at 6.7 percent in May 2009. There was another rising trend until 5.8 percent in Jun 2010 and then steady downward trend until trough of 3.2 percent in Jan 2012, which was followed by an upward trend with 4.1 percent in Jun 2012 but decline to 3.7 percent in Aug 2012, 3.3 percent in Sep 2012 and 3.4 percent in Oct2012. Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.
Chart IIA-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IIB United States Housing Collapse. The objective of this section is to provide the latest data and analysis of US housing. Subsection IIB1 United New House Sales analyzes the collapse of US new house sales. Subsection IIB2 United States House Prices considers the latest available data on house prices. Subsection IIB3 Factors of US Housing Collapse provides the analysis of the causes of the housing crisis of the US.
IIB1 United States New House Sales. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective with recent improvement at the margin. Table IIB-1 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). House sales fell in nine of twenty two months from Jan 2011 to Sep 2012 but mostly concentrated in Jan-Feb 2011 and May-Aug 2011. In Jan-Apr 2012, house prices increased at the annual equivalent rate of 17.6 percent and at 5.8 percent in May-Oct 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 56.4 percent. The annual equivalent rate in May-Aug 2011 was minus 18.1 percent and minus 12.2 percent in Jan-Apr 2011 but after increase of 13.6 percent in Dec 2010.
Table IIB-1, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %
| SA Annual Rate | ∆% | |
| Oct 2012 | 368 | -0.3 |
| Sep | 369 | 0.8 |
| Aug | 366 | 0.0 |
| Jul | 366 | 1.7 |
| Jun | 360 | -2.4 |
| May | 369 | 3.1 |
| AE ∆% May-Oct | 5.8 | |
| Apr | 358 | 1.7 |
| Mar | 352 | -3.8 |
| Feb | 366 | 7.9 |
| Jan | 339 | 0.0 |
| AE ∆% Jan-Apr | 17.6 | |
| Dec 2011 | 339 | 3.7 |
| Nov | 327 | 4.1 |
| Oct | 314 | 2.6 |
| Sep | 306 | 4.8 |
| AE ∆% Sep-Dec | 56.4 | |
| Aug | 292 | -1.7 |
| Jul | 297 | -2.3 |
| Jun | 304 | -1.3 |
| May | 308 | -1.3 |
| AE ∆% May-Aug | -18.1 | |
| Apr | 312 | 3.7 |
| Mar | 301 | 10.3 |
| Feb | 273 | -11.4 |
| Jan | 308 | -5.5 |
| AE ∆% Jan-Apr | -12.2 | |
| Dec 2010 | 326 | 13.6 |
AE: Annual Equivalent
Source: US Census Bureau http://www.census.gov/construction/nrs/
There is additional information of the report of new house sales in Table IIB-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.5 in Jul and Aug 2012, increasing to 4.8 in Oct 2012. Median and average house prices oscillate. In Oct 2012, median prices of new houses sold not seasonally adjusted (NSA) decreased 4.2 percent but after increasing revised 7.0 percent in Aug and increasing 2.1 percent in Jul. Average prices decreased 4.3 percent in Oct 2012 and 3.2 percent in Sep 2012 but after increasing 6.6 percent in Aug and 3.9 percent in Jul. Between Dec 2010 and Oct 2012, median prices decreased 1.5 percent and average prices decreased 4.4 percent. Median house prices increased 8.7 percent from Dec 2011 to Oct 2012 while average price houses increased 6.1 percent. Price increases concentrated in 2012. There are only seven months with price increases in both median and average house prices: Apr 2011 with 1.9 percent in median prices and 3.1 percent in average prices, Jun 2011 with 8.2 percent in median prices and 3.9 percent in average prices, Oct 2011 with 3.6 percent in median prices and 1.1 percent in average prices, Dec 2011 with 2.0 percent in median prices and 5.2 percent in average prices, Jan 2012 with 1.4 percent in median prices and 1.1 percent in average prices, Feb 2012 with 8.2 percent in median prices and 3.1 percent in average prices, Jul with 2.1 percent in median and 3.9 percent in average and Aug 2012 with 7.0 percent in median prices and 6.6 percent in average prices. Median prices of new houses sold in the US fell in eleven of the 22 months from Jan 2011 to Oct 2012 and average prices fell in twelve months.
Table IIB-2, US, New House Stocks and Median and Average New Homes Sales Price
| Unsold* | Median | Month | Average New House Sales Price USD | Month | |
| Oct 2012 | 4.8 | 237,700 | -4.2 | 278,900 | -4.3 |
| Sep | 4.7 | 248,000 | -2.4 | 291,400 | -3.2 |
| Aug | 4.7 | 254,000 | 7.0 | 300,900 | 6.6 |
| Jul | 4.7 | 237,400 | 2.1 | 282,300 | 3.9 |
| Jun | 4.8 | 232,600 | -2.8 | 271,800 | -3.2 |
| May | 4.7 | 239,200 | 1.2 | 280,900 | -2.4 |
| Apr | 4.9 | 236,400 | -1.4 | 287,900 | 1.5 |
| Mar | 4.9 | 239,800 | 0.0 | 283,600 | 3.5 |
| Feb | 4.8 | 239,900 | 8.2 | 274,000 | 3.1 |
| Jan | 5.3 | 221,700 | 1.4 | 265,700 | 1.1 |
| Dec 2011 | 5.4 | 218,600 | 2.0 | 262,900 | 5.2 |
| Nov | 5.7 | 214,300 | -4.7 | 250,000 | -3.2 |
| Oct | 6.1 | 224,800 | 3.6 | 258,300 | 1.1 |
| Sep | 6.3 | 217,000 | -1.2 | 255,400 | -1.5 |
| Aug | 6.6 | 219,600 | -4.5 | 259,300 | -4.1 |
| Jul | 6.7 | 229,900 | -4.3 | 270,300 | -1.0 |
| Jun | 6.6 | 240,200 | 8.2 | 273,100 | 3.9 |
| May | 6.6 | 222,000 | -1.2 | 262,700 | -2.3 |
| Apr | 6.7 | 224,700 | 1.9 | 268,900 | 3.1 |
| Mar | 7.1 | 220,500 | 0.2 | 260,800 | -0.8 |
| Feb | 8.0 | 220,100 | -8.3 | 262,800 | -4.7 |
| Jan | 7.3 | 240,100 | -0.5 | 275,700 | -5.5 |
| Dec 2010 | 7.0 | 241,200 | 9.8 | 291,700 | 3.5 |
*Percent of new houses for sale relative to houses sold
Source: US Census Bureau
http://www.census.gov/construction/nrs/
There is additional information of the report of new house sales in Table IIB-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.5 in Jul and Aug 2012, increasing to 4.8 in Oct 2012. Median and average house prices oscillate. In Oct 2012, median prices of new houses sold not seasonally adjusted (NSA) decreased 4.2 percent but after increasing revised 7.0 percent in Aug and increasing 2.1 percent in Jul. Average prices decreased 4.3 percent in Oct 2012 and 3.2 percent in Sep 2012 but after increasing 6.6 percent in Aug and 3.9 percent in Jul. Between Dec 2010 and Oct 2012, median prices decreased 1.5 percent and average prices decreased 4.4 percent. Median house prices increased 8.7 percent from Dec 2011 to Oct 2012 while average price houses increased 6.1 percent. Price increases concentrated in 2012. There are only seven months with price increases in both median and average house prices: Apr 2011 with 1.9 percent in median prices and 3.1 percent in average prices, Jun 2011 with 8.2 percent in median prices and 3.9 percent in average prices, Oct 2011 with 3.6 percent in median prices and 1.1 percent in average prices, Dec 2011 with 2.0 percent in median prices and 5.2 percent in average prices, Jan 2012 with 1.4 percent in median prices and 1.1 percent in average prices, Feb 2012 with 8.2 percent in median prices and 3.1 percent in average prices, Jul with 2.1 percent in median and 3.9 percent in average and Aug 2012 with 7.0 percent in median prices and 6.6 percent in average prices. Median prices of new houses sold in the US fell in eleven of the 22 months from Jan 2011 to Oct 2012 and average prices fell in twelve months.
Table IIB-3, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %
| Not Seasonally Adjusted Thousands | |
| Jan-Oct 2012 | 312 |
| Jan-Oct 2011 | 259 |
| ∆% | 20.5 |
| Jan-Oct 2010 | 279 |
| ∆% Jan-Oct 2012/ | 11.8 |
| Jan-Oct 2009 | 324 |
| ∆% Jan-Oct 2012/ | -3.7 |
| Jan-Oct 2008 | 432 |
| ∆% Jan-Oct 2012/ | -27.8 |
| Jan-Oct 2007 | 687 |
| ∆% Jan-Oct 2012/ | -54.6 |
| Jan-Oct 2006 | 909 |
| ∆% Jan-Oct 2012/Jan-Oct 2006 | -65.7 |
| Jan-Oct 2005 | 1,110 |
| ∆% Jan-Oct 2012/Jan-Oct 2005 | -71.6 |
| Jan-Oct 2004 | 1,036 |
| ∆% Jan-Oct 2012/Jan-Oct 2004 | -69.9 |
| Jan-Oct 2003 | 935 |
| ∆% Jan-Oct 2012/ | -66.6 |
| Jan-Oct 2002 | 829 |
| ∆% Jan-Oct 2012/ | -62.4 |
| Jan-Oct 2001 | 775 |
| ∆% Jan-Oct 2012/ | -59.7 |
| Jan-Oct 2000 | 749 |
| ∆% Jan-Oct 2012/ | -58.3 |
| Jan-Oct 1995 | 574 |
| ∆% Jan-Oct 2012/ | -45.6 |
| Jan-Oct 1963 | 495 |
| ∆% Jan-Oct 2012/ | -37.0 |
Source: US Census Bureau http://www.census.gov/construction/nrs/
Table IIB-4 provides the entire available annual series of new house sales from 1963 to 2011. The revised level of 306 thousand new houses sold in 2011 is the lowest since 560,000 in 1963 in the 48 years of available data. In that period, the population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. In fact, there is no year from 1963 to 2011 in Table IIB-4 with sales of new houses below 400 thousand with the exception of the immediately preceding years of 2009 and 2010.
Table IIB-4, US, New Houses Sold, NSA Thousands
| 1963 | 560 |
| 1964 | 565 |
| 1965 | 575 |
| 1966 | 461 |
| 1967 | 487 |
| 1968 | 490 |
| 1969 | 448 |
| 1970 | 485 |
| 1971 | 656 |
| 1972 | 718 |
| 1973 | 634 |
| 1974 | 519 |
| 1975 | 549 |
| 1976 | 646 |
| 1977 | 819 |
| 1978 | 817 |
| 1979 | 709 |
| 1980 | 545 |
| 1981 | 436 |
| 1982 | 412 |
| 1983 | 623 |
| 1984 | 639 |
| 1985 | 688 |
| 1986 | 750 |
| 1987 | 671 |
| 1988 | 676 |
| 1989 | 650 |
| 1990 | 534 |
| 1991 | 509 |
| 1992 | 610 |
| 1993 | 666 |
| 1994 | 670 |
| 1995 | 667 |
| 1996 | 757 |
| 1997 | 804 |
| 1998 | 886 |
| 1999 | 880 |
| 2000 | 877 |
| 2001 | 908 |
| 2002 | 973 |
| 2003 | 1,086 |
| 2004 | 1,203 |
| 2005 | 1,283 |
| 2006 | 1,051 |
| 2007 | 776 |
| 2008 | 485 |
| 2009 | 375 |
| 2010 | 323 |
| 2011 | 306 |
Source: US Census Bureau http://www.census.gov/construction/nrs/
Chart IIB-1 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.
Chart IIB-1, US, New One-Family Houses Sold in the US, SAAR (Seasonally-Adjusted Annual Rate)
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr051.html
Chart IIB-2 of the US Bureau of the Census provides the entire monthly sample of new houses sold in the US between Jan 1963 and Sep 2012 without seasonal adjustment. The series is almost stationary until the 1990s. There is sharp upward trend from the early 1990s to 2005-2006 after which new single-family houses sold collapse to levels below those in the beginning of the series in the 1960s.
Chart IIB-2, US, New Single-family Houses Sold, NSA, 1963-2012
Source: US Census Bureau
Source: US Census Bureau http://www.census.gov/construction/nrs/
Percentage changes and average rates of growth of new house sales for selected periods are shown in Table IIB-5. The percentage change of new house sales from 1963 to 2011 is minus 45.4 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2011 fell 54.1 percent relative to the same period in 1995.
Table IIB-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses
| ∆% | Average Yearly % Rate | |
| 1963-2011 | -45.4 | NA |
| 1991-2001 | 78.4 | 5.9 |
| 1995-2005 | 92.4 | 6.8 |
| 2000-2005 | 46.3 | 7.9 |
| 1995-2011 | -54.1 | NA |
| 2000-2011 | -65.1 | NA |
| 2005-2011 | -76.1 | NA |
NA: Not Applicable
Source: US Census Bureau
http://www.census.gov/construction/nrs/
The available historical annual data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table IIB-6. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially.
Table IIB-6, US, Median and Average Prices of New Houses Sold, Annual Data
| 1963 | $18,000 | $19,300 |
| 1964 | $18,900 | $20,500 |
| 1965 | $20,000 | $21,500 |
| 1966 | $21,400 | $23,300 |
| 1967 | $22,700 | $24,600 |
| 1968 | $24,700 | $26,600 |
| 1969 | $25,600 | $27,900 |
| 1970 | $23,400 | $26,600 |
| 1971 | $25,200 | $28,300 |
| 1972 | $27,600 | $30,500 |
| 1973 | $32,500 | $35,500 |
| 1974 | $35,900 | $38,900 |
| 1975 | $39,300 | $42,600 |
| 1976 | $44,200 | $48,000 |
| 1977 | $48,800 | $54,200 |
| 1978 | $55,700 | $62,500 |
| 1979 | $62,900 | $71,800 |
| 1980 | $64,600 | $76,400 |
| 1981 | $68,900 | $83,000 |
| 1982 | $69,300 | $83,900 |
| 1983 | $75,300 | $89,800 |
| 1984 | $79,900 | $97,600 |
| 1985 | $84,300 | $100,800 |
| 1986 | $92,000 | $111,900 |
| 1987 | $104,500 | $127,200 |
| 1988 | $112,500 | $138,300 |
| 1989 | $120,000 | $148,800 |
| 1990 | $122,900 | $149,800 |
| 1991 | $120,000 | $147,200 |
| 1992 | $121,500 | $144,100 |
| 1993 | $126,500 | $147,700 |
| 1994 | $130,000 | $154,500 |
| 1995 | $133,900 | $158,700 |
| 1996 | $140,000 | $166,400 |
| 1997 | $146,000 | $176,200 |
| 1998 | $152,500 | $181,900 |
| 1999 | $161,000 | $195,600 |
| 2000 | $169,000 | $207,000 |
| 2001 | $175,200 | $213,200 |
| 2002 | $187,600 | $228,700 |
| 2003 | $195,000 | $246,300 |
| 2004 | $221,000 | $274,500 |
| 2005 | $240,900 | $297,000 |
| 2006 | $246,500 | $305,900 |
| 2007 | $247,900 | $313,600 |
| 2008 | $232,100 | $292,600 |
| 2009 | $216,700 | $270,900 |
| 2010 | $221,800 | $272,900 |
| 2011 | $227,200 | $267,900 |
Source: US Census Bureau
http://www.census.gov/construction/nrs/
Percentage changes of median and average prices of new houses sold in selected years are shown in Table IIB-7. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between 2006 and 2011, median prices of new houses sold fell 7.8 percent and average prices fell 12.4 percent. Between 2010 and 2011, median prices increased 2.4 percent and average prices fell 1.8 percent.
Table IIB-7, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%
| Median New | Average New Home Sales Prices ∆% | |
| ∆% 2000 to 2003 | 15.4 | 18.9 |
| ∆% 2000 to 2005 | 42.5 | 43.5 |
| ∆% 2000 to 2011 | 34.4 | 29.4 |
| ∆% 2005 to 2011 | -5.7 | -9.8 |
| ∆% 2000 to 2006 | 45.9 | 47.8 |
| ∆% 2006 to 2011 | -7.8 | -12.4 |
| ∆% 2009 to 2011 | 4.8 | -1.1 |
| ∆% 2010 to 2011 | 2.4 | -1.8 |
Source: http://www.census.gov/construction/nrs/
Chart IIB-3 of the US Census Bureau provides the entire series of new single-family sales median prices from Jan 1963 to Sep 2012. There is long-term sharp upward trend with few declines until the current collapse. Median prices increased sharply during the Great Inflation of the 1960s and 1970s and paused during the savings and loans crisis of the late 1980s and the recession of 1991. Housing subsidies throughout the 1990s caused sharp upward trend of median new house prices that accelerated after the fed funds rate of 1 percent from 2003 to 2004. There was sharp reduction of prices after 2006 with recovery recently toward earlier prices.
Chart IIB-3, US, Median Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1963-2012
Source: US Census Bureau
http://www.census.gov/construction/nrs/
Chart IIB-4 of the US Census Bureau provides average prices of new houses sold from the mid 1970s to Sep 2012. There is similar behavior as with median prices of new houses sold in Chart IIB-3. The only stress occurred in price pauses during the savings and loans crisis of the late 1980s and the collapse after 2006 with recent recovery.
Chart IIB-4, US, Average Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1975-2012
Source: US Census Bureau
http://www.census.gov/construction/nrs/
IIB2 United States House Prices. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages” (http://fhfa.gov/webfiles/24216/q22012hpi.pdf 1). Table IIB2-1 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IIIQ2000 to IIIQ2006, the index for the US as a whole rose 57.4 percent, with 68.6 percent for New England, 75.7 percent for Middle Atlantic, 71.9 percent for South Atlantic but only by 32.5 percent for East South Central. Prices fell relative to 2012 for all years from 2005 to 2007. Prices for the US increased 0.5 in IIIQ2012 relative to IIIQ2010 and 4.1 percent from IIIQ2011 to IIIQ2012. From IIIQ2000 to IIIQ2011, prices rose for the US and the four regions in Table IIB2-1.
Table IIB2-1, US, FHFA House Price Index Purchases Only NSA ∆%
| United States | New England | Middle Atlantic | South Atlantic | East South Central | |
| 3Q2000 | 23.5 | 40.4 | 35.4 | 25.1 | 10.7 |
| 3Q2000 | 50.2 | 69.7 | 68.8 | 60.7 | 23.7 |
| 3Q2000 to | 57.4 | 68.6 | 75.7 | 71.9 | 32.5 |
| 3Q2005 t0 | -11.1 | -13.5 | -4.9 | -16.0 | 2.9 |
| 3Q2006 | -15.1 | -13.0 | -8.7 | -21.5 | -3.9 |
| 3Q2007 to | -15.0 | -11.5 | -9.5 | -21.4 | -6.9 |
| 3Q2010 to | 0.5 | -2.3 | -2.5 | 0.8 | 0.0 |
| 3Q2011 to | 4.1 | 0.0 | -0.3 | 4.7 | 2.6 |
| 3Q2000 to | 33.6 | 46.7 | 60.5 | 34.9 | 27.3 |
Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14
Data of the FHFA HPI for the remaining US regions are provided in Table IIB2-2. Behavior is not very different than in Table IIB2-2 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2012, there was still appreciation relative to 2000.
Table IIB2-2, US, FHFA House Price Index Purchases Only NSA ∆%
| West South Central | West North Central | East North Central | Mountain | Pacific | |
| 3Q2000 | 11.6 | 18.3 | 14.5 | 18.4 | 42.5 |
| 3Q2000 | 22.9 | 31.3 | 24.4 | 55.4 | 109.3 |
| 3Q2000 to 3Q2006 | 31.5 | 35.8 | 26.0 | 69.3 | 117.9 |
| 3Q2005 to | 15.0 | -2.3 | -12.8 | -15.6 | -32.2 |
| 3Q2006 | 7.5 | -5.5 | -13.9 | -22.6 | -34.8 |
| 3Q2007 to | 2.6 | -6.4 | -12.2 | -23.5 | -31.0 |
| 3Q2010 to | 3.5 | 1.0 | 0.0 | 3.9 | -0.8 |
| 3Q2011 to | 5.1 | 3.5 | 2.8 | 10.6 | 6.4 |
| 3Q2000 to 3Q2012 | 41.3 | 28.3 | 8.4 | 31.1 | 42.0 |
Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14
Chart IIB2-1 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IIIQ2001 to IIIQ2012. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIQ2008 but there was another decline after IIIQ2010. The rate of decline improved in the second half of 2011 and into 2012 with movement into positive territory in IIQ2012 and IIIQ2012.
Chart IIB2-1, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change
Source: Federal Housing Finance Agency
http://fhfa.gov/Default.aspx?Page=14
Monthly and 12-month percentage changes of the FHFA House Price Index are provided in Table IIB2-3. Percentage monthly increases of the FHFA index were positive from Apr to Jul 2011 while 12 months percentage changes improved steadily from more or equal to minus 6 percent in Mar to May 2011 to minus 4.4 percent in Jun 2011. The FHFA house price index fell 0.8 percent in Oct 2011 and fell 3.3 percent in the 12 months ending in Oct. There was significant recovery in Nov 2012 with increase in the house price index of 0.7 percent and reduction of the 12-month rate of decline to 2.1 percent. The house price index rose 0.3 percent in Dec 2011 and the 12-month percentage change fell to minus 1.3 percent. There was further improvement with revised decline of 0.4 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.1 percent. The index changed to positive change of 0.3 percent in Feb 2012 and increase of 0.2 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.5 percent and 2.5 percent in 12 months. The house price index of FHFA increased 0.7 percent in Apr 2012 and 3.0 percent in 12 months and improvement continued with increase of 0.6 percent in May 2012 and 3.7 percent in the 12 months ending in May 2012. Improvement consolidated with increase of 0.6 percent in Jun 2012 and 3.9 percent in 12 months. In Jul 2012, the house price index increased 0.1 percent and 3.8 percent in 12 months. Strong increase of 0.5 percent in Aug 2012 pulled the 12-month change to 4.6 percent. There was another increase of 0.2 percent in Sep and 4.5 percent in 12 months.
Table IIB2-3, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%
| Month ∆% SA | 12 Month ∆% NSA | |
| Sep 2012 | 0.2 | 4.5 |
| Aug | 0.5 | 4.6 |
| Jul | 0.1 | 3.8 |
| Jun | 0.6 | 3.9 |
| May | 0.6 | 3.7 |
| Apr | 0.7 | 3.0 |
| Mar | 1.5 | 2.5 |
| Feb | 0.3 | 0.2 |
| Jan | -0.4 | -1.1 |
| Dec 2011 | 0.3 | -1.3 |
| Nov | 0.7 | -2.1 |
| Oct | -0.8 | -3.3 |
| Sep | 0.3 | -2.5 |
| Aug | -0.3 | -3.8 |
| Jul | 0.2 | -3.6 |
| Jun | 0.5 | -4.4 |
| May | 0.0 | -6.0 |
| Apr | 0.2 | -6.0 |
| Mar | -0.7 | -6.1 |
| Feb | -1.1 | -5.3 |
| Jan | -0.7 | -4.7 |
| Dec 2010 | -4.0 | |
| Dec 2009 | -1.9 | |
| Dec 2008 | -9.7 | |
| Dec 2007 | -3.1 | |
| Dec 2006 | 2.5 | |
| Dec 2005 | 9.8 | |
| Dec 2004 | 10.2 | |
| Dec 2003 | 8.0 | |
| Dec 2002 | 7.8 | |
| Dec 2001 | 6.7 | |
| Dec 2000 | 7.2 | |
| Dec 1999 | 6.2 | |
| Dec 1998 | 5.9 | |
| Dec 1997 | 3.4 | |
| Dec 1996 | 2.8 | |
| Dec 1995 | 2.9 | |
| Dec 1994 | 2.6 | |
| Dec 1993 | 3.1 | |
| Dec 1992 | 2.4 |
Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14
The bottom part of Table IIB2-4 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table IIB2-4 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2011, the FHFA house price index increased 74.9 percent at the yearly average rate of 3.0 percent. In the period 1992-2000, the FHFA house price index increased 39.4 percent at the average yearly rate of 4.2 percent. The rate of price increase accelerated to 7.5 percent in the period 2000-2003 and to 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 18.6 percent between 2006 and 2011 and 16.6 percent between 2005 and 2011.
Table IIB2-4, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2011
| Dec | ∆% | Average ∆% per Year |
| 1992-2011 | 74.9 | 3.0 |
| 1992-2000 | 39.4 | 4.2 |
| 2000-2003 | 24.3 | 7.5 |
| 2000-2005 | 50.4 | 8.5 |
| 2003-2005 | 21.0 | 10.0 |
| 2005-2011 | -16.6 | NA |
| 2000-2006 | 54.2 | 7.5 |
| 2003-2006 | 24.1 | 7.5 |
| 2006-2011 | -18.6 | NA |
Source: Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14
Table IIB2-5 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 95.5 percent in the 10-city composite of the Case-Shiller home price index and 80.5 percent in the 20-city composite between Sep 2000 and Sep 2005. Prices rose around 100 percent from Sep 2000 to Sep 2006, increasing 103.0 percent for the 10-city composite and 88.2 percent for the 20-city composite. House prices rose 39.2 percent between Sep 2003 and Sep 2005 for the 10-city composite and 34.9 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC) until Jun 2006, reaching 5.25 percent. Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with intended decrease in mortgage rates. Similarly, between Sep 2003 and Sep 2006 the 10-city index gained 44.5 percent and the 20-city index increased 40.7 percent. House prices have fallen from Sep 2006 to Sep 2012 by 29.4 percent for the 10-city composite and 28.9 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Sep 2012, house prices increased 2.1 percent in the 10-city composite and increased 3.0 percent in the 20-city composite. Table IIB2-5 also shows that house prices increased 44.3 percent between Sep 2000 and Sep 2012 for the 10-city composite and increased 33.7 percent for the 20-city composite. House prices are close to the lowest level since peaks during the boom before the financial crisis and global recession. The 10-city composite fell 29.8 percent from the peak in Jun 2006 to Sep 2012 and the 20-city composite fell 29.2 percent from the peak in Jul 2006 to Sep 2012. The final part of Table IIB2-5 provides average annual percentage rates of growth of the house price indexes of Standard & Poor’s Case-Shiller. The average annual growth rate between Dec 1987 and Dec 2011 for the 10-city composite was 3.2 percent. Data for the 20-city composite are available only beginning in Jan 2000. House prices accelerated in the 1990s with the average rate of the 10-city composite of 5.0 percent between Dec 1992 and Dec 2000 while the average rate for the period Dec 1987 to Dec 2000 was 3.8 percent. Although the global recession affecting the US between IVQ2007 (Dec) and IIQ2009 (Jun) caused decline of house prices of slightly above 30 percent, the average annual growth rate of the 10-city composite between Dec 2000 and Dec 2011 was 2.5 percent while the rate of the 20-city composite was 1.9 percent.
Table IIB2-5, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| ∆% Sep 2000 to Sep 2003 | 40.5 | 33.8 |
| ∆% Sep 2000 to Sep 2005 | 95.5 | 80.5 |
| ∆% Sep 2003 to Sep 2005 | 39.2 | 34.9 |
| ∆% Sep 2000 to Sep 2006 | 103.0 | 88.2 |
| ∆% Sep 2003 to Sep 2006 | 44.5 | 40.7 |
| ∆% Sep 2005 to Sep 2012 | -26.7 | -25.9 |
| ∆% Aug 2006 to Aug 2012 | -29.4 | -28.9 |
| ∆% Sep 2009 to Sep 2012 | 0.1 | -0.4 |
| ∆% Sep 2010 to Sep 2012 | -1.3 | -0.7 |
| ∆% Sep 2011 to Sep 2012 | 2.1 | 3.0 |
| ∆% Sep 2000 to Sep 2012 | 43.3 | 33.7 |
| ∆% Peak Jun 2006 Sep 2012 | -29.8 | |
| ∆% Peak Jul 2006 Sep 2012 | -29.2 | |
| Average ∆% Dec 1987-Dec 2011 | 3.2 | NA |
| Average ∆% Dec 1987-Dec 2000 | 3.8 | NA |
| Average ∆% Dec 1992-Dec 2000 | 5.0 | NA |
| Average ∆% Dec 2000-Dec 2011 | 2.5 | 1.9 |
With the exception of Apr 2011, house prices seasonally-adjusted declined in every month for both the 10-city and 20-city Case-Shiller composites from Dec 2010 to Jan 2012, as shown in Table IIB2-6. The most important seasonal factor in house prices is school changes for wealthier homeowners with more expensive houses. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug 2011 but fell in every month from Sep 2011 to Feb 2012. The not seasonally adjusted index increases from Apr 2012 to Aug 2012 for both the 10- and 20-city composites while the seasonally adjusted index also increases in every month from Apr 2012 to Sep 2012. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.
Table IIB2-6, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted and Not Seasonally Adjusted, ∆%
| 10-City Composite SA | 10-City Composite NSA | 20-City Composite SA | 20-City Composite NSA | |
| Sep 2012 | 0.3 | 0.3 | 0.4 | 0.3 |
| Aug | 0.3 | 0.8 | 0.4 | 0.8 |
| Jul | 0.2 | 1.5 | 0.3 | 1.6 |
| Jun | 0.9 | 2.1 | 0.9 | 2.3 |
| May | 0.9 | 2.2 | 1.0 | 2.4 |
| Apr | 0.8 | 1.4 | 0.8 | 1.4 |
| Mar | 0.6 | -0.1 | 0.7 | 0.0 |
| Feb | 0.1 | -0.9 | 0.2 | -0.8 |
| Jan | -0.2 | -1.1 | -0.1 | -1.0 |
| Dec 2011 | -0.5 | -1.2 | -0.4 | -1.2 |
| Nov | -0.7 | -1.4 | -0.6 | -1.3 |
| Oct | -0.6 | -1.3 | -0.6 | -1.3 |
| Sep | -0.6 | -0.6 | -0.6 | -0.7 |
| Aug | -0.3 | 0.1 | -0.3 | 0.1 |
| Jul | -0.3 | 0.9 | -0.2 | 1.0 |
| Jun | -0.1 | 1.0 | -0.1 | 1.2 |
| May | -0.2 | 1.0 | -0.3 | 1.0 |
| Apr | 0.0 | 0.6 | 0.0 | 0.6 |
| Mar | -0.3 | -1.0 | -0.4 | -1.0 |
| Feb | -0.3 | -1.3 | -0.3 | -1.2 |
| Jan | -0.3 | -1.1 | -0.2 | -1.1 |
| Dec 2010 | -0.2 | -0.9 | -0.2 | -0.9 |
© Carlos M. Pelaez, 2010, 2011, 2012
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