Thirty One Million Unemployed or Underemployed, Stagnating Real Wages, Global Financial and Economic Risk, United States International Trade, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
Executive Summary
IA Thirty One Million Unemployed or Underemployed
IA1 Summary of the Employment Situation
IA2 Number of People in Job Stress
IA3 Long-term and Cyclical Comparison of Employment
IA4 Job Creation
IA5 Stagnating Real Wages
II United States International Trade
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
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
ESI Thirty One Million Unemployed or Underemployed. Table ESI-1 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12.3 percent and the number of people in job stress could be around 30.8 million, which is 19.0 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Feb 2012, Jan 2013 and Feb 2013 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table ESI-2 provides the yearly labor force participation rate from 1979 to 2013. The objective of Table ESI-1 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the noninstitutional civilian population in Feb 2012 and Jan and Feb 2013 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.6 percent by Feb 2012 and was 63.3 percent in Jan 2013 and 63.2 percent in Feb 2013, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 7.349 million unemployed in Feb 2013 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 19.849 million (Total UEM) and not 12.500 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 12.3 percent (Total UEM%) and not 8.1 percent, not seasonally adjusted, or 7.7 percent seasonally adjusted; and (4) the number of people in job stress is close to 30.8 million by adding the 7.349 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table ESI-1 provides the number of people in job stress not seasonally adjusted at 30.8 million in Feb 2013, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table ESI-1 shows that the number of people in job stress is equivalent to 19.0 percent of the labor force in Feb 2013. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.0 percent in Feb 2012, 57.9 percent in Jan 2013 and 58.1 percent in Feb 2013; the number employed (EMP) dropped from 144 million in 2006 to 142.228 million in Feb 2013 while population increased from 229.420 million in Sep 2006 to 244.828 million in Feb 2013 or by 15.408 million. The number employed in the US fell from 146.743 million in Oct 2007 to 142.228 million in Feb 2013, by 4.515 million, or decline by 3.1 percent, while the noninstitutional population increased from 229.420 million in Sep 2006 to 244.828 million in Jan 2013, by 12.113 million or increase of 6.7 percent, using not seasonally adjusted data. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are several million fewer people working in 2013 than in 2006 and the number employed is not increasing while population increased 15.408 million. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table ESI-1, US, Population, Labor Force and Unemployment, NSA
| 2006 | Feb 2012 | Jan 2013 | Feb 2013 | |
| POP | 229 | 242,435 | 244,663 | 244,828 |
| LF | 151 | 154,114 | 154,794 | 154,727 |
| PART% | 66.2 | 63.6 | 63.3 | 63.2 |
| EMP | 144 | 140,684 | 141,614 | 142,228 |
| EMP/POP% | 62.9 | 58.0 | 57.9 | 58.1 |
| UEM | 7 | 13,430 | 13,181 | 12,500 |
| UEM/LF Rate% | 4.6 | 8.7 | 8.5 | 8.1 |
| NLF | 77 | 88,332 | 89,868 | 90,100 |
| LF PART 66.2% | 160,492 | 161,967 | 162,076 | |
| ∆NLF UEM | 6,378 | 7,173 | 7,349 | |
| Total UEM | 19,808 | 20,354 | 19,849 | |
| Total UEM% | 12.3 | 12.6 | 12.3 | |
| Part Time Economic Reasons | 8,455 | 8,628 | 8,298 | |
| Marginally Attached to LF | 2,608 | 2,443 | 2,614 | |
| In Job Stress | 30,871 | 31,425 | 30,761 | |
| People in Job Stress as % Labor Force | 19.2 | 19.4 | 19.0 |
Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%
Sources: US Bureau of Labor Statistics http://www.bls.gov/data/
In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts; and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share si of a demographic group in an industry i and unemployment rate yi of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):
Y = ∑isiyi (1)
This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):
∆Y = ∑i∆siy*i + ∑i∆yis*i (2)
The first term in (2) captures changes in the demographic and industrial composition of the economy ∆si multiplied by the average rate of unemployment y*i , or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆yi, multiplied by the average share of the group s*i, or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:
“The analysis in this paper and in others that we review do not provides any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”
Table ESI-2 and Chart ESI-1 provide the US labor force participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels. The civilian labor force participation rate dropped from the peak of 66.9 percent in Jul 2006 to 63.2 percent in Feb 2013. The civilian labor force participation rate was 63.7 percent on an annual basis in 1979 and 63.4 percent in Dec 1980 and Dec 1981, reaching even 62.9 percent in both Apr and May 1979. The civilian labor force participation rate jumped with the recovery to 64.8 percent on an annual basis in 1985 and 65.9 percent in Jul 1985. Structural factors cannot explain these sudden changes vividly shown visually in the final segment of Chart ESI-1. Seniors would like to delay their retiring especially because of the adversities of financial repression on their savings. Labor force statistics are capturing the disillusion of potential workers of their chances in finding a job in what Lazear and Spletzer (2012JHJul22) characterize as accentuated cyclical factors.
Table ESI-2, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
| Year | Jan | Feb | Mar | Apr | Oct | Nov | Dec | Annual |
| 1979 | 62.9 | 63.0 | 63.2 | 62.9 | 64.0 | 63.8 | 63.8 | 63.7 |
| 1980 | 63.3 | 63.2 | 63.2 | 63.2 | 63.9 | 63.7 | 63.4 | 63.8 |
| 1981 | 63.2 | 63.2 | 63.5 | 63.6 | 64.0 | 63.8 | 63.4 | 63.9 |
| 1982 | 63.0 | 63.2 | 63.4 | 63.3 | 64.1 | 64.1 | 63.8 | 64.0 |
| 1983 | 63.3 | 63.2 | 63.3 | 63.2 | 64.1 | 64.1 | 63.8 | 64.0 |
| 1984 | 63.3 | 63.4 | 63.6 | 63.7 | 64.6 | 64.4 | 64.3 | 64.4 |
| 1985 | 64.0 | 64.0 | 64.4 | 64.3 | 65.1 | 64.9 | 64.6 | 64.8 |
| 1986 | 64.2 | 64.4 | 64.6 | 64.6 | 65.5 | 65.4 | 65.0 | 65.3 |
| 1987 | 64.7 | 64.8 | 65.0 | 64.9 | 65.9 | 65.7 | 65.5 | 65.6 |
| 1988 | 65.1 | 65.2 | 65.2 | 65.3 | 66.1 | 66.2 | 65.9 | 65.9 |
| 1989 | 65.8 | 65.6 | 65.7 | 65.9 | 66.6 | 66.7 | 66.3 | 66.5 |
| 1990 | 66.0 | 66.0 | 66.2 | 66.1 | 66.5 | 66.3 | 66.1 | 66.5 |
| 1991 | 65.5 | 65.7 | 65.9 | 66.0 | 66.1 | 66.0 | 65.8 | 66.2 |
| 1992 | 65.7 | 65.8 | 66.0 | 66.0 | 66.2 | 66.2 | 66.1 | 66.4 |
| 1993 | 65.6 | 65.8 | 65.8 | 65.6 | 66.4 | 66.3 | 66.2 | 66.3 |
| 1994 | 66.0 | 66.2 | 66.1 | 66.0 | 66.8 | 66.7 | 66.5 | 66.6 |
| 1995 | 66.1 | 66.2 | 66.4 | 66.4 | 66.7 | 66.5 | 66.2 | 66.6 |
| 1996 | 65.8 | 66.1 | 66.4 | 66.2 | 67.1 | 67.0 | 66.7 | 66.8 |
| 1997 | 66.4 | 66.5 | 66.9 | 66.7 | 67.1 | 67.1 | 67.0 | 67.1 |
| 1998 | 66.6 | 66.7 | 67.0 | 66.6 | 67.1 | 67.1 | 67.0 | 67.1 |
| 1999 | 66.7 | 66.8 | 66.9 | 66.7 | 67.0 | 67.0 | 67.0 | 67.1 |
| 2000 | 66.8 | 67.0 | 67.1 | 67.0 | 66.9 | 66.9 | 67.0 | 67.1 |
| 2001 | 66.8 | 66.8 | 67.0 | 66.7 | 66.7 | 66.6 | 66.6 | 66.8 |
| 2002 | 66.2 | 66.6 | 66.6 | 66.4 | 66.6 | 66.3 | 66.2 | 66.6 |
| 2003 | 66.1 | 66.2 | 66.2 | 66.2 | 66.1 | 66.1 | 65.8 | 66.2 |
| 2004 | 65.7 | 65.7 | 65.8 | 65.7 | 66.0 | 66.1 | 65.8 | 66.0 |
| 2005 | 65.4 | 65.6 | 65.6 | 65.8 | 66.2 | 66.1 | 65.9 | 66.0 |
| 2006 | 65.5 | 65.7 | 65.8 | 65.8 | 66.4 | 66.4 | 66.3 | 66.2 |
| 2007 | 65.9 | 65.8 | 65.9 | 65.7 | 66.0 | 66.1 | 65.9 | 66.0 |
| 2008 | 65.7 | 65.5 | 65.7 | 65.7 | 66.1 | 65.8 | 65.7 | 66.0 |
| 2009 | 65.4 | 65.5 | 65.4 | 65.4 | 64.9 | 64.9 | 64.4 | 65.4 |
| 2010 | 64.6 | 64.6 | 64.8 | 64.9 | 64.4 | 64.4 | 64.1 | 64.7 |
| 2011 | 63.9 | 63.9 | 64.0 | 63.9 | 64.1 | 63.9 | 63.8 | 64.1 |
| 2012 | 63.4 | 63.6 | 63.6 | 63.4 | 63.8 | 63.5 | 63.4 | 63.7 |
| 2013 | 63.3 | 63.2 |
Sources: US Bureau of Labor Statistics
Chart ESI-1, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
Source: Bureau of Labor Statistics
Broader perspective is provided by Chart ESI-2 of the US Bureau of Labor Statistics. The United States civilian noninstitutional population has increased along a consistent trend since 1948 that continued through earlier recessions and the global recession from IVQ2007 to IIQ2009 and the cyclical expansion after IIIQ2009.
Chart ESI-2, US, Civilian Population, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
The labor force of the United States in Chart ESI-3 has increased along a trend similar to that of the civilian noninstitutional population in Chart ESI-2. There is an evident stagnation of the civilian labor force in the final segment of Chart ESI-3 during the current economic cycle. This stagnation is explained by cyclical factors similar to those analyzed by Lazear and Spletzer (2012JHJul22) that motivated an increasing population to drop out of the labor force instead of structural factors. Large segments of the potential labor force are not observed, constituting unobserved unemployment and of more permanent nature because those afflicted have been seriously discouraged from working by the lack of opportunities.
Chart ESI-3, US, Labor Force, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
ESII Insufficiency of Job Creation. Total nonfarm payroll employment seasonally adjusted (SA) increased 236,000 in Feb 2013 and private payroll employment rose 246,000. The number of nonfarm jobs and private jobs created has been declining in 2012 from 311,000 in Jan 2012 to 87,000 in Jun, 138,000 in Sep, 160,000 in Oct, 247,000 in Nov and 219,000 in Dec 2012 for total nonfarm jobs and from 323,000 in Jan 2012 to 78,000 in Jun, 118,000 in Sep, 217,000 in Oct, 256,000 in Nov and 224,000 in Dec 2012 for private jobs. Average new nonfarm jobs in the quarter Dec 2011 to Feb 2012 were 270,667 per month, declining to average 157,273 per month in the eleven months from Mar 2012 to Jan 2013. Average new private jobs in the quarter Dec 2011 to Feb 2012 were 279,000 per month, declining to average 165,545 per month in the eleven months from Mar 2012 to Jan 2013. The number of 140,000 new private new jobs created in Jan 2013 is lower than the average 165,545 per month in Mar 2012 to Jan 2013. New farm jobs created in Feb 2013 were 236,000 and 246,000 in private jobs, which exceeds the average for the prior eleven months. The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the six months from Sep 2012 to Feb 2013 was 186,500, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 30.8 million unemployed or underemployed. The difference between the average increase of 186,500 new private nonfarm jobs per month in the US from Sep 2012 to Feb 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,333 monthly new jobs net of absorption of new entrants in the labor force. There are 30.8 million in job stress in the US currently. The provision of 73,333 new jobs per month net of absorption of new entrants in the labor force would require 419 months to provide jobs for the unemployed and underemployed (30.761 million divided by 73,333) or 34.9 years (419 divided by 12). The civilian labor force of the US in Feb 2013 not seasonally adjusted stood at 154.727 million with 12.500 million unemployed or effectively 19.849 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.076 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 73,333 by 12, which is 879,996). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.736 million (0.05 times labor force of 154.727 million) for new net job creation of 4.764 million (12.500 million unemployed minus 7.736 million unemployed at rate of 5 percent) that at the current rate would take 5.4 years (4.764 million divided by 879,996). Under the calculation in this blog there are 19.849 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.076 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 12.614 million jobs net of labor force growth that at the current rate would take 13.3 years (19.849 million minus 0.05(162.076 million) or 11.745 million divided by 879,996, using LF PART 66.2% and Total UEM in Table ESI-1). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.118 million in Nov 2007 to 142.228 million in Feb 2013, by 4.890 million, or decline of 3.3 percent, while the noninstitutional population increased from 232.939 million in Nov 2007 to 244.828 million in Feb 2013, by 11.889 million or increase of 5.1 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs. What is striking about the data in Table ESII-1 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Growth at 2.1 percent has been mediocre in the fourteen quarters of expansion beginning in IIIQ2009 in comparison with 6.2 percent in earlier expansions (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html) and also in terms of what is required to reduce the job stress of at around 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table ESII-1 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.
Table ESII-1, US, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | 14 | -794 | -13 | -17 |
| Feb | 67 | -6 | -78 | -85 | -695 | -40 | -26 |
| Mar | 104 | -129 | 173 | -79 | -830 | 154 | 111 |
| Apr | 74 | -281 | 276 | -215 | -704 | 229 | 170 |
| May | 10 | -45 | 277 | -186 | -352 | 521 | 102 |
| Jun | 196 | -243 | 378 | -169 | -472 | -130 | 94 |
| Jul | 112 | -343 | 418 | -216 | -351 | -86 | 103 |
| Aug | -36 | -158 | -308 | -270 | -210 | -37 | 129 |
| Sep | -87 | -181 | 1114 | -459 | -233 | -43 | 113 |
| Oct | -100 | -277 | 271 | -472 | -170 | 228 | 188 |
| Nov | -209 | -124 | 352 | -775 | -21 | 144 | 154 |
| Dec | -278 | -14 | 356 | -705 | -220 | 95 | 114 |
| 1984 | 2011 | Private | |||||
| Jan | 447 | 69 | 80 | ||||
| Feb | 479 | 196 | 243 | ||||
| Mar | 275 | 205 | 223 | ||||
| Apr | 363 | 304 | 303 | ||||
| May | 308 | 115 | 183 | ||||
| Jun | 379 | 209 | 177 | ||||
| Jul | 312 | 78 | 206 | ||||
| Aug | 241 | 132 | 129 | ||||
| Sep | 311 | 225 | 256 | ||||
| Oct | 286 | 166 | 174 | ||||
| Nov | 349 | 174 | 197 | ||||
| Dec | 127 | 230 | 249 | ||||
| 1985 | 2012 | Private | |||||
| Jan | 266 | 311 | 323 | ||||
| Feb | 124 | 271 | 265 | ||||
| Mar | 346 | 205 | 208 | ||||
| Apr | 195 | 112 | 120 | ||||
| May | 274 | 125 | 152 | ||||
| Jun | 145 | 87 | 78 | ||||
| Jul | 189 | 153 | 177 | ||||
| Aug | 193 | 165 | 131 | ||||
| Sep | 204 | 138 | 118 | ||||
| Oct | 187 | 160 | 217 | ||||
| Nov | 209 | 247 | 256 | ||||
| Dec | 168 | 219 | 224 | ||||
| 1985 | 2013 | Private | |||||
| Jan | 123 | 119 | 140 | ||||
| Feb | 107 | 236 | 246 | ||||
| Mar | 93 | ||||||
| Apr | 188 | ||||||
| May | 125 | ||||||
| Jun | -93 | ||||||
| Jul | 318 | ||||||
| Aug | 113 | ||||||
| Sep | 346 | ||||||
| Oct | 187 | ||||||
| Nov | 186 | ||||||
| Dec | 204 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
ESIII Declining Real Wages. Calculations using BLS data of inflation-adjusted average hourly earnings are shown in Table ESIII-1. The final column of Table ESIII-1 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in four months in 2010 and in all but the first month in 2011 and the loss accelerated at 1.8 percent in Sep 2011, declining to a real loss of 1.1 percent in Feb 2012 and 0.6 percent in Mar 2012. There was a gain of 0.6 percent in Apr 2012 in inflation-adjusted average hourly earnings but another fall of 0.5 percent in May 2012 followed by increases of 0.3 percent in Jun and 1.0 percent in Jul 2012. Real hourly earnings stagnated in the 12 months ending in Aug 2012 with increase of only 0.1 percent and increased 0.7 percent in the 12 months ending in Sep 2012. Real hourly earnings fell 1.3 percent in Oct 2012 and gained 1.1 percent in Dec 2012 but declined 0.2 percent in Jan 2012. Real hourly earnings are oscillating in part because of world inflation waves caused by carry trades from zero interest rates to commodity futures (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) and in part because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table ESIII-1, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA
| AHE ALL | 12 Month | ∆% 12 Month CPI | 12 Month | |
| 2007 | ||||
| Jan* | $20.70* | 4.2* | 2.1 | 2.1* |
| Feb* | $20.79* | 4.1* | 2.4 | 1.7* |
| Mar | $20.82 | 3.7 | 2.8 | 0.9 |
| Apr | $21.05 | 3.3 | 2.6 | 0.7 |
| May | $20.83 | 3.7 | 2.7 | 1.0 |
| Jun | $20.82 | 3.8 | 2.7 | 1.1 |
| Jul | $20.99 | 3.4 | 2.4 | 1.0 |
| Aug | $20.85 | 3.5 | 2.0 | 1.5 |
| Sep | $21.19 | 4.1 | 2.8 | 1.3 |
| Oct | $21.07 | 2.7 | 3.5 | -0.8 |
| Nov | $21.13 | 3.3 | 4.3 | -0.9 |
| Dec | $21.37 | 3.7 | 4.1 | -0.4 |
| 2010 | ||||
| Jan | $22.55 | 1.9 | 2.6 | -0.7 |
| Feb | $22.61 | 1.4 | 2.1 | -0.7 |
| Mar | $22.52 | 1.2 | 2.3 | -1.1 |
| Apr | $22.57 | 1.8 | 2.2 | -0.4 |
| May | $22.64 | 2.5 | 2.0 | 0.5 |
| Jun | $22.38 | 1.8 | 1.1 | 0.7 |
| Jul | $22.44 | 1.8 | 1.2 | 0.6 |
| Aug | $22.58 | 1.7 | 1.1 | 0.6 |
| Sep | $22.63 | 1.8 | 1.1 | 0.7 |
| Oct | $22.73 | 1.9 | 1.2 | 0.7 |
| Nov | $22.72 | 1.0 | 1.1 | 0.0 |
| Dec | $22.79 | 1.7 | 1.5 | 0.2 |
| 2011 | ||||
| Jan | $23.20 | 2.9 | 1.6 | 1.3 |
| Feb | $23.03 | 1.9 | 2.1 | -0.2 |
| Mar | $22.93 | 1.8 | 2.7 | -0.9 |
| Apr | $22.99 | 1.9 | 3.2 | -1.3 |
| May | $23.09 | 2.0 | 3.6 | -1.5 |
| Jun | $22.84 | 2.1 | 3.6 | -1.4 |
| Jul | $22.97 | 2.4 | 3.6 | -1.2 |
| Aug | $22.88 | 1.3 | 3.8 | -2.4 |
| Sep | $23.08 | 2.0 | 3.9 | -1.8 |
| Oct | $23.33 | 2.6 | 3.5 | -0.9 |
| Nov | $23.18 | 2.0 | 3.4 | -1.4 |
| Dec | $23.25 | 2.0 | 3.0 | -1.0 |
| 2012 | ||||
| Jan | $23.59 | 1.7 | 2.9 | -1.2 |
| Feb | $23.44 | 1.8 | 2.9 | -1.1 |
| Mar | $23.42 | 2.1 | 2.7 | -0.6 |
| Apr | $23.65 | 2.9 | 2.3 | 0.6 |
| May | $23.36 | 1.2 | 1.7 | -0.5 |
| Jun | $23.30 | 2.0 | 1.7 | 0.3 |
| Jul | $23.52 | 2.4 | 1.4 | 1.0 |
| Aug | $23.30 | 1.8 | 1.7 | 0.1 |
| Sep | $23.70 | 2.7 | 2.0 | 0.7 |
| Oct | $23.55 | 0.9 | 2.2 | -1.3 |
| Nov | $23.62 | 1.9 | 1.8 | 0.1 |
| Dec | $23.89 | 2.8 | 1.7 | 1.1 |
| 2013 | ||||
| Jan | 23.91 | 1.4 | 1.6 | -0.2 |
| Feb | 23.94 | 2.1 |
Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available
*AHE of production and nonsupervisory employees because of unavailability of data for all employees for Jan-Feb 2006
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table ESIII-2. Average hourly earnings fell 0.5 percent after adjusting for inflation in the 12 months ending in Mar 2012 and gained 0.6 percent in the 12 months ending in Apr 2011 but then lost 0.6 percent in the 12 months ending in May 2012 with a gain of 0.3 percent in the 12 months ending in Jun 2012 and 1.0 percent in Jul 2012 followed by 0.1 percent in Aug 2012 and 0.7 percent in Sep 2012. Average hourly earnings adjusted by inflation fell 1.2 percent in the 12 months ending in Oct 2012. Average hourly earnings adjusted by inflation increased 0.1 percent in the 12 months ending in Nov 2012 and 1.1 percent in the 12 months ending in Dec 2012 but fell 0.3 percent in the 12 months ending in Jan 2013. Table ESIII-2 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011 and into 2012 with 12-month percentage declines in three of the first four months of 2012 (-1.1 percent in Jan, -1.1 percent in Feb and -0.5 percent in Mar), declines of 0.6 percent in May and 1.2 percent in Oct and increase in five (0.6 percent in Apr, 0.3 percent in Jun, 1.0 percent in Jul, 0.7 percent in Sep and 1.0 percent in Dec) and stagnation in two (0.1 percent in Aug and 0.1 percent in Nov). Average hourly earnings adjusted for inflation fell 0.3 percent in the 12 months ending in Jan 2013. Annual data are revealing: -0.7 percent in 2008 during carry trades into commodity futures in a global recession, 3.2 percent in 2009 with reversal of carry trades, no change in 2010 and 2012 and decline by 1.1 percent in 2011. Annual average hourly earnings of all employees in the United States adjusted for inflation increased 1.4 percent from 2007 to 2012 at the yearly average rate of 0.3 percent (from $10.11 in 2007 to $10.25 in 2012 in dollars of 1982-1984 using data in http://www.bls.gov/data/). Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html).
Table ESIII-2, US, Average Hourly Earnings of All Employees NSA in Constant Dollars of 1982-1984
| Year | Jan | Feb | Mar | Sep | Oct | Nov | Dec |
| 2006 | 10.05 | 10.03 | 10.17 | 10.15 | 10.21 | ||
| 2007 | 10.23 | 10.22 | 10.14 | 10.16 | 10.08 | 10.05 | 10.17 |
| 2008 | 10.11 | 10.12 | 10.11 | 9.94 | 10.06 | 10.37 | 10.47 |
| 2009 | 10.48 | 10.50 | 10.47 | 10.30 | 10.32 | 10.40 | 10.38 |
| 2010 | 10.41 | 10.43 | 10.35 | 10.36 | 10.39 | 10.38 | 10.40 |
| 2011 | 10.53 | 10.41 | 10.26 | 10.17 | 10.30 | 10.25 | 10.30 |
| 2012 | 10.41 | 10.30 | 10.21 | 10.24 | 10.18 | 10.26 | 10.41 |
| ∆% 12M | -1.1 | -1.1 | -0.5 | 0.7 | -1.2 | 0.1 | 1.1 |
| 2013 | 10.38 | ||||||
| ∆% 12M | -0.3 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart ESIII-1 of the US Bureau of Labor Statistics plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from annual earnings of $10.36 in 2010 to $10.25 in 2012 or loss of 1.1 percent (data in http://www.bls.gov/data/).
Chart ESIII-1, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart ESIII-2 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011 and now into 2012 with temporary increase in Apr 2012 that was reversed in May with another gain in Jun and Jul 2012 followed by stagnation in Aug 2012 and marginal gain in Sep 2012 with sharp decline in Oct 2012, stagnation in Nov 2012, increase in Dec 2012 and renewed decrease in Jan 2013.
Chart ESIII-2, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, NSA 2007-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table ESIII-3. Average weekly earnings fell 3.2 percent after adjusting for inflation in the 12 months ending in Aug 2011, decreased 0.9 percent in the 12 months ending in Sep, increased 0.9 percent in the 12 months ending in Oct, fell 1.0 percent in the 12 months ending in Nov and 0.3 in the 12 months ending in Dec 2011, declining 0.3 percent in the 12 months ending in Jan 2012 and 0.5 percent in the 12 months ending in Feb 2012. Average weekly earnings in constant dollars were virtually flat in Mar 2012 relative to Mar 2011, increasing 0.1 percent. Average weekly earnings in constant dollars increased 1.7 percent in Apr 2012 relative to Apr 2011 but fell 1.4 percent in May 2012 relative to May 2011, increasing 0.3 percent in the 12 months ending in Jun and 2.1 percent in Jul 2012. Real weekly earnings increased 0.4 percent in the 12 months ending in Aug 2012 and 2.1 percent in the 12 months ending in Sep 2012. Real weekly earnings fell 2.9 percent in the 12 months ending in Oct 2012 and increased 0.1 percent in the 12 months ending in Nov 2012 and 2.5 percent in the 12 months ending in Dec 2012. Real weekly earnings fell 1.7 percent in the 12 months ending in Jan 2013. Table ESIII-3 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011 and into 2012 with oscillations according to carry trades causing world inflation waves (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html). On an annual basis, average weekly earnings in constant 1982-1984 dollars increased from $349.78 in 2007 to $353.66 in 2012, by 1.1 percent or at the average rate of 0.2 percent per year (data in http://www.bls.gov/data/). Annual average weekly earnings in constant dollars of $353.50 in 2010 were virtually unchanged at $353.66 in 2012. Those who still work bring back home a paycheck that buys fewer high-quality goods than a year earlier. The fractured US job market does not provide an opportunity for advancement as in past booms following recessions (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table ESIII-3, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2013
| Year | Jan | Feb | Mar | Oct | Nov | Dec |
| 2006 | 343.71 | 354.88 | 349.12 | 353.37 | ||
| 2007 | 348.72 | 349.40 | 347.76 | 347.92 | 346.85 | 356.11 |
| 2008 | 345.92 | 346.21 | 351.70 | 345.95 | 358.83 | 357.17 |
| 2009 | 354.10 | 360.31 | 355.81 | 348.83 | 356.59 | 351.95 |
| 2010 | 350.71 | 350.51 | 349.76 | 356.47 | 355.12 | 355.61 |
| 2011 | 360.29 | 353.81 | 349.90 | 359.60 | 351.44 | 354.41 |
| 2012 | 359.06 | 352.12 | 350.19 | 349.20 | 351.91 | 363.13 |
| ∆% 12M | -0.3 | -0.5 | 0.1 | -2.9 | 0.1 | 2.5 |
| 2013 | 353.02 | |||||
| ∆% 12M | -1.7 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart ESIII-3 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall with oscillations caused by carry trades from zero interest rates into commodity futures from 2010 to 2011 and into 2012 and 2013.
Chart ESIII-3, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart ESIII-4 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 and 2012 (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html).
Chart ESIII-4, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change, NSA 2007-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
ESIV Decline of Real Hourly Worker Compensation. Table ESIV-1 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 5.2 percent in IQ2011 but fell at annual rates of 5.0 percent in IIQ2011, 3.8 percent in IIIQ2011 and 2.4 percent in IVQ2011. Real hourly compensation increased at 3.4 percent in IQ2012 and at 0.2 percent in IIQ2012, declining at 0.9 percent in IIIQ2012 and increasing at 0.4 percent in IVQ2012. Real hourly compensation fell 0.6 percent in 2011 and declined 0.6 percent in 2012.
Table ESIV-1, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2012
| Year | Qtr1 | Qtr2 | Qtr3 | Qtr4 | Annual |
| 1999 | 5.5 | -2.0 | 0.3 | 5.5 | 2.2 |
| 2000 | 11.4 | -2.0 | 4.7 | -0.2 | 3.9 |
| 2001 | 5.6 | -1.6 | 0.0 | 4.5 | 1.7 |
| 2002 | 2.9 | 0.3 | 0.1 | -0.4 | 1.5 |
| 2003 | 2.2 | 7.7 | 2.7 | 1.7 | 2.4 |
| 2004 | -5.1 | 2.7 | 3.3 | -0.6 | 0.6 |
| 2005 | 1.5 | -0.2 | -0.4 | -1.3 | 0.6 |
| 2006 | 3.6 | -2.0 | -2.8 | 11.7 | 0.5 |
| 2007 | -0.2 | -3.1 | 0.2 | 1.3 | 1.1 |
| 2008 | 1.5 | -6.1 | -3.0 | 12.2 | -0.4 |
| 2009 | -0.4 | 4.4 | -1.6 | -2.2 | 1.8 |
| 2010 | 0.9 | 3.1 | 0.2 | -2.6 | 0.4 |
| 2011 | 5.2 | -5.0 | -3.8 | -2.4 | -0.6 |
| 2012 | 3.4 | 0.2 | -0.9 | 0.4 | -0.6 |
Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/
Chart ESIV-1 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation from 1999 to 2012. There are significant fluctuations in quarterly percentage changes oscillating between positive and negative. There is no clear pattern in the two contractions in the 2000s.
Chart VA-3, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/
ESV Global Financial and Economic Risk. The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF (2012WEOOct) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSROct) (http://www.imf.org/external/pubs/ft/gfsr/2012/02/index.htm) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMOct) (http://www.imf.org/external/pubs/ft/fm/2012/02/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider a summary of global economic and financial risks, which are analyzed in detail in the comments of this blog in Section VI Valuation of Risk Financial Assets, Table VI-4.
Economic risks include the following:
1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012, 9.1 percent in IIIQ2012 and 8.2 percent in IVQ2012. (See Subsection VC at http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united_21.html).
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 30.8 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically-low hiring and declining real wages.
3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.
4. World Inflation Waves. Inflation continues in repetitive waves globally (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html).
A list of financial uncertainties includes:
1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk.
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.
4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012.
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy (Sargent and Silber 2012Mar20).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path with fluctuations caused by intermittent risk aversion.
The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). A competing risk event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14198.10 reached on Oct 11, 2007. The DJIA closed at 14397.07 on Fri Mar 8, 2013, which is higher by 1.6 percent than the value of 14,164.52 reached on Oct 9, 2007 and higher by 1.4 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. The highest valuations in column “∆% Trough to 3/8/13” of Table ESV-1 are by US equities indexes: DJIA 48.6 percent and S&P 500 51.7 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. DAX of Germany is now 40.8 percent above the trough. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 3/8/13” had double digit gains relative to the trough around Jul 2, 2010 followed by negative performance but now some valuations of equity indexes show varying behavior: China’s Shanghai Composite is 2.7 percent below the trough; Japan’s Nikkei Average is 39.2 percent above the trough; DJ Asia Pacific TSM is 20.6 percent above the trough; Dow Global is 24.9 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 17.6 percent above the trough; and NYSE Financial Index is 30.1 percent above the trough. DJ UBS Commodities is 10.7 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 40.8 percent above the trough. Japan’s Nikkei Average is 39.2 percent above the trough on Aug 31, 2010 and 7.8 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 12283.62 on Fri Mar 8, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 19.8 percent higher than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 9.1 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 3/8/13” in Table ESV-1 shows that there were decreases of valuations of risk financial assets in the week of Mar 8, 2013 such as 1.7 percent for China’s Shanghai Composite. Nikkei Average increased 5.8 percent in the week. DJ UBS Commodities increased 1.1 percent. Dow Global increased 2.3 percent in the week of Mar 8, 2013. The DJIA increased 2.2 percent and S&P 500 increased 2.2 percent. There were increases in several indexes such as 0.7 percent for DJ Asia Pacific. DAX of Germany increased 3.6 percent. NYSE Financial increased 2.4 percent. The USD appreciated 0.1 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table ESV-1 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 3/8/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Mar 8, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 3/8/13” but also relative to the peak in column “∆% Peak to 3/8/13.” There are now several equity indexes above the peak in Table ESV-1: DJIA 28.5 percent, S&P 500 27.4 percent, DAX 26.1 percent, DJ Asia Pacific 5.6 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 3.6 percent, Nikkei Average 7.8 percent and Dow Global 1.9 percent. There are several indexes below the peak: Shanghai Composite by 26.7 percent and STOXX 50 by 0.4 percent. DJ UBS Commodities Index is now 5.4 percent below the peak. The US dollar strengthened 14.1 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. It may be quite painful to exit QE→∞ or use of the balance sheet of the central together with zero interest rates forever. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image018[1]](http://lh4.ggpht.com/-KRgVbbJqNnQ/UT6DBsLn5uI/AAAAAAAASH8/9kZS5CL0FkM/s1600-h/clip_image018%25255B1%25255D%25255B2%25255D.gif "clip_image018[1]"){kind=small}
declines. Equally, decline in expected revenue from the stock or project, Rτ, causes decline in valuation. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.
Table ESV-1, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 3/8/ /13 | ∆% Week 3/8/13 | ∆% Trough to 3/8/ 13 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 28.5 | 2.2 | 48.6 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 27.4 | 2.2 | 51.7 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | 3.6 | 2.4 | 30.1 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 1.9 | 2.3 | 24.9 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | 5.6 | 0.7 | 20.6 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | 7.8 | 5.8 | 39.2 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -26.7 | -1.7 | -2.7 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -0.4 | 2.4 | 17.6 |
| DAX | 4/26/ | 5/25/ | -10.5 | 26.1 | 3.6 | 40.8 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 14.1 | 0.1 | -9.1 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -5.4 | 1.1 | 10.7 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 2.056 |
T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
IA1 Summary of the Employment Situation. The Bureau of Labor Statistics (BLS) of the US Department of Labor provides both seasonally-adjusted (SA) and not-seasonally adjusted (NSA) or unadjusted data with important uses (Bureau of Labor Statistics 2012Feb3; 2011Feb11):
“Most series published by the Current Employment Statistics program reflect a regularly recurring seasonal movement that can be measured from past experience. By eliminating that part of the change attributable to the normal seasonal variation, it is possible to observe the cyclical and other nonseasonal movements in these series. Seasonally adjusted series are published monthly for selected employment, hours, and earnings estimates.”
Requirements of use of best available information and updating seasonality factors affect the comparability over time of United States employment data. In the first month of the year, the BLS revises data for several years by adjusting benchmarks and seasonal factors (page 4 at http://www.bls.gov/news.release/pdf/empsit.pdf), which is the case of the data for Jan 2013 released on Feb 1, 2013:
“In accordance with annual practice, the establishment survey data released today have been benchmarked to reflect comprehensive counts of payroll jobs. These counts are derived principally from unemployment insurance tax records for March 2012. The benchmark process results in revisions to not seasonally adjusted data from April 2011 forward. Seasonally adjusted data from January 2008 forward are subject to revision. In addition, data for some series prior to 2008, both seasonally adjusted and unadjusted, incorporate minor revisions.
The total nonfarm employment level for March 2012 was revised upward by 422,000 (424,000 on a not seasonally adjusted basis). Table A presents revised total nonfarm employment data on a seasonally adjusted basis for January through December 2012.”
The range of differences in total nonfarm employment in revisions in Table A of the current employment situation report (page 4 at http://www.bls.gov/news.release/pdf/empsit.pdf) is from 348,000 for Jan 2012 to 647,000 for Dec 2012. There are also adjustments of population that affect comparability of labor statistics over time (page 5 at http://www.bls.gov/news.release/pdf/empsit.pdf):
“Effective with data for January 2013, updated population estimates have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population since the previous decennial census. The change in population reflected in the new estimates results from adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. In accordance with usual practice, BLS will not revise the official household survey estimates for December 2012 and earlier months. To show the impact of the population adjustment, however, differences in selected December 2012 labor force series based on the old and new population estimates are shown in table B.
The adjustment increased the estimated size of the civilian noninstitutional population in December by 138,000, the civilian labor force by 136,000, employment by 127,000, unemployment by 9,000, and persons not in the labor force by 2,000. The total unemployment rate, employment-population ratio, and labor force participation rate were unaffected.
Data users are cautioned that these annual population adjustments affect the comparability of household data series over time. Table C shows the effect of the introduction of new population estimates on the comparison of selected labor force measures between December 2012 and January 2013. Additional information on the population adjustments and their effect on national labor force estimates are available at www.bls.gov/cps/cps13adj.pdf (emphasis added).”
There are also adjustments of benchmarks and seasonality factors for establishment data that affect comparability over time (page 1 at http://www.bls.gov/news.release/pdf/empsit.pdf):
“Establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors.”
All comparisons over time are affected by yearly adjustments of benchmarks and seasonality factors. All data in this blog comment use revised data released by the BLS on Mar 8, 2013 (http://www.bls.gov/).
Table I-1 provides summary statistics of the employment situation report of the BLS. The first four rows provide the data from the establishment report of creation of nonfarm payroll jobs and remuneration of workers (for analysis of the differences in employment between the establishment report and the household survey see Abraham, Haltiwanger, Sandusky and Spletzer 2009). Total nonfarm payroll employment seasonally adjusted (SA) increased 236,000 in Feb 2013 and private payroll employment rose 246,000. The number of nonfarm jobs and private jobs created has been declining in 2012 from 311,000 in Jan 2012 to 87,000 in Jun, 138,000 in Sep, 160,000 in Oct, 247,000 in Nov and 219,000 in Dec 2012 for total nonfarm jobs and from 323,000 in Jan 2012 to 78,000 in Jun, 118,000 in Sep, 217,000 in Oct, 256,000 in Nov and 224,000 in Dec 2012 for private jobs. Average new nonfarm jobs in the quarter Dec 2011 to Feb 2012 were 270,667 per month, declining to average 157,273 per month in the eleven months from Mar 2012 to Jan 2013. Average new private jobs in the quarter Dec 2011 to Feb 2012 were 279,000 per month, declining to average 165,545 per month in the eleven months from Mar 2012 to Jan 2013. The number of 140,000 new private new jobs created in Jan 2013 is lower than the average 165,545 per month in Mar 2012 to Jan 2013. New farm jobs created in Feb 2013 were 236,000 and 246,000 in private jobs, which exceeds the average for the prior eleven months. The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the six months from Sep 2012 to Feb 2013 was 186,500, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 30.8 million unemployed or underemployed. The difference between the average increase of 186,500 new private nonfarm jobs per month in the US from Sep 2012 to Feb 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,333 monthly new jobs net of absorption of new entrants in the labor force. There are 30.8 million in job stress in the US currently. The provision of 73,333 new jobs per month net of absorption of new entrants in the labor force would require 419 months to provide jobs for the unemployed and underemployed (30.761 million divided by 73,333) or 34.9 years (419 divided by 12). The civilian labor force of the US in Feb 2013 not seasonally adjusted stood at 154.727 million with 12.500 million unemployed or effectively 19.849 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.076 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 73,333 by 12, which is 879,996). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.736 million (0.05 times labor force of 154.727 million) for new net job creation of 4.764 million (12.500 million unemployed minus 7.736 million unemployed at rate of 5 percent) that at the current rate would take 5.4 years (4.764 million divided by 879,996). Under the calculation in this blog there are 19.849 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.076 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 12.614 million jobs net of labor force growth that at the current rate would take 13.3 years (19.849 million minus 0.05(162.076 million) or 11.745 million divided by 879,996, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.118 million in Nov 2007 to 142.228 million in Feb 2013, by 4.890 million, or decline of 3.3 percent, while the noninstitutional population increased from 232.939 million in Nov 2007 to 244.828 million in Feb 2013, by 11.889 million or increase of 5.1 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs. Subsection IA4 Job Creation analyzes the types of jobs created, which are lower paying than earlier. Average hourly earnings in Feb 2013 were $23.82 seasonally adjusted (SA), increasing 2.1 percent not seasonally adjusted (NSA) relative to Feb 2012 and increasing 0.2 percent relative to Jan 2013 seasonally adjusted. In Jan 2013, average hourly earnings seasonally adjusted were $23.78, increasing 1.4 percent relative to Jan 2012 not seasonally adjusted and increasing 0.1 percent seasonally adjusted relative to Nov 2012. These are nominal changes in workers’ wages. The following row “average hourly earnings in constant dollars” provides hourly wages in constant dollars calculated by the BLS or what is called “real wages” adjusted for inflation. Data are not available for Feb 2013 because the prices indexes of the BLS for Dec will only be released on Mar 15, 2013 (http://www.bls.gov/cpi/), which will be covered in this blog’s comment on Mar 17, 2013, together with world inflation. The second column provides changes in real wages for Jan 2013. Average hourly earnings adjusted for inflation or in constant dollars decreased 0.2 percent in Jan 2013 relative to Jan 2012 but have been decreasing during many consecutive months. World inflation waves in bouts of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) mask declining trend of real wages. The fractured labor market of the US is characterized by high levels of unemployment and underemployment together with falling real wages or wages adjusted for inflation in a recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). The following section IA5 Stagnating Real Wages provides more detailed analysis. Average weekly hours of US workers not seasonally adjusted remained virtually unchanged at 34.2. Another headline number widely followed is the unemployment rate or number of people unemployed as percent of the labor force. The unemployment rate calculated in the household survey decreased from 7.9 percent in Jan 2013 to 7.7 percent in Feb 2013, seasonally adjusted, decrease of the labor force by 130,000 while the number unemployed decreased 300,000. The labor force increased 143,000 in Jan 2012 while the number unemployed increased 126,000. This blog provides with every employment situation report the number of people in the US in job stress or unemployed plus underemployed calculated without seasonal adjustment (NSA) at 30.8 million in Feb 2013 and 31.4 million in Jan 2013. The final row in Table I-1 provides the number in job stress as percent of the actual labor force calculated at 19.2 percent in Feb 2013 and 19.4 percent in Jan 2013. Almost one in every five workers in the US is unemployed or underemployed. The combination of thirty million people in job stress, falling or stagnating real wages, collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html), declining household net worth by one trillion dollars, household median income adjusted for inflation back to 1996 levels, real disposable income lower in IIIQ2012 by 0.4 percent relative to IVQ2007 (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) and only 1.0 percent higher in IVQ2012 relative to IVQ2007, federal deficits of $5.092 trillion in four years and debt/GDP of 72.6 percent in 2012 in the unsustainable path to 89.7 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and forty-eight million people in poverty and without health insurance (http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html) constitutes a socio-economic disaster.
Table I-1, US, Summary of the Employment Situation Report SA
| Feb 2013 | Jan 2013 | |
| New Nonfarm Payroll Jobs | 236,000 | 119,000 |
| New Private Payroll Jobs | 246,000 | 140,000 |
| Average Hourly Earnings | Feb 13 $23.82 SA ∆% Feb 13/Feb 12 NSA: 2.1 ∆% Feb 13/Jan 12 SA: 0.2 | Jan 13 $23.78 SA ∆% Jan 13/Jan 12 NSA: 1.4 ∆% Jan 13/Dec 12 SA: 0.1 |
| Average Hourly Earnings in Constant Dollars | ∆% Jan 2013/Jan 2012: -0.2 | |
| Average Weekly Hours | 34.5 SA 34.2 NSA | 34.4 SA 34.0 NSA |
| Unemployment Rate Household Survey % of Labor Force SA | 7.7 | 7.9 |
| Number in Job Stress Unemployed and Underemployed Blog Calculation | 30.8 million NSA | 31.4 million NSA |
| In Job Stress as % Labor Force | 19.2 | 19.4 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/data/ http://www.bls.gov/cps/
See Tables I-2, I-3, I-4, I-8, IB-1, IB-3 and IB-4.
IA2 Number of People in Job Stress. There are two approaches to calculating the number of people in job stress. The first approach consists of calculating the number of people in job stress unemployed or underemployed with the raw data of the employment situation report as in Table I-2. The data are seasonally adjusted (SA). The first three rows provide the labor force and unemployed in millions and the unemployment rate of unemployed as percent of the labor force. There is decrease in the number unemployed from 12.206 million in Dec 2012 to 12.332 million Jan 2013 or by 126,000 but then decline to 12.032 million in Feb 2013 or decrease by 300,000 in one month. The rate of unemployment increases from 7.8 percent in Dec 2012 to 7.9 percent with the increase in unemployed by 126,000 and increase of the labor force by 143,000. The rate of unemployment decreased to 7.7 with decrease of the unemployed by 300,000 while the labor force decreased 130,000. An important aspect of unemployment is its persistence for more than 27 weeks with 4.797 million in Feb 2013, corresponding to 39.9 percent of the unemployed. The longer the period of unemployment the lower are the chances of finding another job with many long-term unemployed ceasing to search for a job. Another key characteristic of the current labor market is the high number of people trying to subsist with part-time jobs because they cannot find full-time employment or part-time for economic reasons. The BLS explains as follows: “these individuals were working part time because their hours had been cut back or because they were unable to find a full-time job” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number of part-time for economic reasons increased from 7.973 million in Jan 2013 to 7.988 million in Feb 2013. Another important fact is the marginally attached to the labor force. The BLS explains as follows: “these individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number in job stress unemployed or underemployed of 22.608 million in Feb 2013 is composed of 12.032 million unemployed (of whom 4.797 million, or 39.9 percent, unemployed for 27 weeks or more) compared with 12.332 million unemployed in Jan 2013 (of whom 4.708 million, or 38.2 percent, unemployed for 27 weeks or more), 7.988 million employed part-time for economic reasons in Feb 2013 (who suffered reductions in their work hours or could not find full-time employment) compared with 7.973 million in Jan 2013 and 2.588 million who were marginally attached to the labor force in Feb 2013 (who were not in the labor force but wanted and were available for work) compared with 2.443 million in Jan 2013. The final row in Table I-2 provides the number in job stress as percent of the labor force: 14.5 percent in Feb 2013, which is about equal to 14.6 percent in Jan 2013 and 14.6 percent in Dec 2012.
Table I-2, US, People in Job Stress, Millions and % SA
| 2012 | Feb 2013 | Jan 2013 | Dec 2012 |
| Labor Force Millions | 155.524 | 155.654 | 155.511 |
| Unemployed | 12.032 | 12.332 | 12.206 |
| Unemployment Rate (unemployed as % labor force) | 7.7 | 7.9 | 7.8 |
| Unemployed ≥27 weeks | 4.797 | 4.708 | 4.766 |
| Unemployed ≥27 weeks % | 39.9 | 38.2 | 39.1 |
| Part Time for Economic Reasons | 7.988 | 7.973 | 7.918 |
| Marginally | 2.588 | 2.443 | 2.614 |
| Job Stress | 22.608 | 22.748 | 22.738 |
| In Job Stress as % Labor Force | 14.5 | 14.6 | 14.6 |
Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Table I-3 repeats the data in Table I-2 but including Nov and additional data. What really matters is the number of people with jobs or the total employed. The final row of Table I-3 provides people employed as percent of the population or employment to population ratio. The number has remained relatively constant around 58.6 percent. The employment to population ratio fell from an annual level of 63.1 percent in 2006 to 58.6 percent in 2012 with the lowest level at 58.4 percent in 2011
Table I-3, US, Unemployment and Underemployment, SA, Millions and Percent
| Feb 2013 | Jan 2013 | Dec 2012 | Nov 2012 | |
| Labor Force | 155.524 | 155.654 | 155.511 | 155.319 |
| Unemployed | 12.032 | 12.332 | 12.206 | 12.042 |
| UNE Rate % | 7.7 | 7.9 | 7.8 | 7.8 |
| Part Time Economic Reasons | 7.988 | 7.973 | 7.918 | 8.138 |
| Marginally Attached to Labor Force | 2.588 | 2.443 | 2.614 | 2.505 |
| In Job Stress | 22.608 | 22.748 | 22.738 | 22.685 |
| In Job Stress % Labor Force | 14.5 | 14.6 | 14.6 | 14.6 |
| Employed | 143.492 | 143.322 | 143.305 | 143.277 |
| Employment % Population | 58.6 | 58.6 | 58.6 | 58.7 |
Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
The second approach is considered in the balance of this subsection. Charts I-1 to I-12 explain the reasons for considering another approach to calculating job stress in the US. Chart I-1 of the Bureau of Labor Statistics provides the level of employment in the US from 2001 to 2013. There was a big drop of the number of people employed from 147.315 million at the peak in Jul 2007 (NSA) to 136.809 million at the trough in Jan 2010 (NSA) with 10.506 million fewer people employed. Recovery has been anemic compared with the shallow recession of 2001 that was followed by nearly vertical growth in jobs. The number employed in Feb 2013 was 142.228 million (NSA) or 5.087 million fewer people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population increased from 231.958 million in Jul 2007 to 244.828 million in Feb 2013 or by 12.870 million.
Chart I-1, US, Employed, Thousands, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-2 of the Bureau of Labor Statistics provides 12-month percentage changes of the number of people employed in the US from 2001 to 2013. There was recovery in 2010 and 2011 but not sufficient to recover lost jobs. There are many people in the US who had jobs before the global recession who are not working now.
Chart I-2, US, Employed, 12-Month Percentage Change NSA, 2001-2013
Source: Bureau of Labor Statistics
The foundation of the second approach derives from Chart I-3 of the Bureau of Labor Statistics providing the level of the civilian labor force in the US. The civilian labor force consists of people who are available and willing to work and who have searched for employment recently. The labor force of the US grew from 142.828 million in Jan 2001 to 156.255 million in Jul 2009 but has declined to 154.727 million in Feb 2013, all numbers not seasonally adjusted. Chart 1-3 shows the flattening of the curve of expansion of the labor force and its decline in 2010 and 2011. The ratio of the labor force of 154.871 million in Jul 2007 to the noninstitutional population of 231.958 million in Jul 2007 was 66.8 percent while the ratio of the labor force of 154.727 million in Feb 2013 to the noninstitutional population of 244.828 million in Feb 2013 was 63.2 percent. The labor force of the US in Feb 2013 corresponding to 66.8 percent of participation in the population would be 163.545 million (0.668 x 244.828). The difference between the measured labor force in Feb 2013 of 154.727 million and the labor force with participation rate of 66.8 percent as in Jul 2007 of 163.545 million is 8.818 million. The level of the labor force in the US has stagnated and is 8.818 million lower than what it would have been had the same participation rate been maintained. There are millions of people who have abandoned their search for employment because they believe there are no jobs available for them. The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job.
Chart I-3, US, Civilian Labor Force, Thousands, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-4 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of the labor force in the US. The rate of growth fell almost instantaneously with the global recession and became negative from 2009 to 2011. The labor force of the US collapsed and did not recover.
Chart I-4, US, Civilian Labor Force, Thousands, NSA, 12-month Percentage Change, 2001-2013
Source: Bureau of Labor Statistics
Chart I-5 of the Bureau of Labor Statistics provides the labor force participation rate in the US or labor force as percent of the population. The labor force participation rate of the US fell from 66.8 percent in Jan 2001 to 63.2 percent NSA in Feb 2013, all numbers not seasonally adjusted. The annual labor force participation rate for 1979 was 63.7 percent and also 63.7 percent in Nov 1980 during sharp economic contraction. This comparison is further elaborated below. Chart I-5 shows an evident downward trend beginning with the global recession that has continued throughout the recovery beginning in IIIQ2009. The critical issue is whether people left the workforce of the US because they believe there is no longer a job for them.
Chart I-5, Civilian Labor Force Participation Rate, Percent of Population in Labor Force SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-6 of the Bureau of Labor Statistics provides the level of unemployed in the US. The number unemployed rose from the trough of 6.272 million in Oct 2006 to the peak of 16.147 million in Jan 2010, declining to 13.400 million in Jul 2012, 12.696 million in Aug 2012, 11.742 million in Sep 2012, 11.741 million in Oct 2012, 11.404 million in Nov 2012, 11.844 million in Dec 2012, 13.181 million in Jan 2013 and 12.500 million in Feb 2013, all numbers not seasonally adjusted.
Chart I-6, US, Unemployed, Thousands, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-7 of the Bureau of Labor Statistics provides the rate of unemployment in the US or unemployed as percent of the labor force. The rate of unemployment of the US rose from 4.7 percent in Jan 2001 to 6.5 percent in Jun 2003, declining to 4.1 percent in Oct 2006. The rate of unemployment jumped to 10.6 percent in Jan 2010 and declined to 7.6 percent in Dec 2012 but increased to 8.5 percent in Jan 2013 and 8.1 percent in Feb 2013, all number not seasonally adjusted.
Chart I-7, US, Unemployment Rate, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-8 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of unemployed. There was a jump of 81.8 percent in Apr 2009 with subsequent decline and negative rates since 2010. On an annual basis, the level of unemployed rose 59.8 percent in 2009 and 26.1 percent in 2008 with increase of 3.9 percent in 2010, decline of 7.3 percent in 2011, decrease of 9.0 percent in 2012 and decrease of 6.9 percent in Feb 2013 relative to Feb 2012.
Chart I-8, US, Unemployed, 12-month Percentage Change, NSA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-9 of the Bureau of Labor Statistics provides the number of people in part-time occupations because of economic reasons, that is, because they cannot find full-time employment. The number underemployed in part-time occupations not seasonally adjusted rose from 3.732 million in Jan 2001 to 5.270 million in Jan 2004, falling to 3.787 million in Apr 2006. The number underemployed seasonally adjusted jumped to 9.103 million in Nov 2009, falling to 8.168 million in Dec 2011 but increasing to 8.220 million in Jan 2012 and 8.127 million in Feb 2012 but then falling to 7.918 million in Dec 2012 and increasing to 7.988 million in Feb 2013. Without seasonal adjustment the number employed part-time for economic reasons reached 9.354 million in Dec 2009, declining to 8.918 million in Jan 2012 and 8.166 million in Dec 2012 but increasing to 8.298 million in Feb 2013. The longer the period in part-time jobs the worst are the chances of finding another full-time job.
Chart I-9, US, Part-Time for Economic Reasons, Thousands, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-10 of the Bureau of Labor Statistics repeats the behavior of unemployment. The 12-month rate of the level of people at work part-time for economic reasons jumped 84.7 percent in Mar 2009 and declined subsequently. The declines have been insufficient to reduce significantly the number of people who cannot shift from part-time to full-time employment. On an annual basis, the number of part-time for economic reasons increased 33.5 percent in 2008 and 51.7 percent in 2009, declining 0.4 percent in 2010, 3.5 percent in 2011 and 5.1 percent in 2012. The number of part-time for economic reasons fell 1.9 percent in Feb 2013 relative to Feb 2012.
Chart I-10, US, Part-Time for Economic Reasons NSA 12-Month Percentage Change, 2001-2013
Source: Bureau of Labor Statistics
Chart I-11 of the Bureau of Labor Statistics provides the same pattern of the number marginally attached to the labor force jumping to significantly higher levels during the global recession and remaining at historically high levels. The number marginally attached to the labor force not seasonally adjusted increased from 1.295 million in Jan 2001 to 1.691 million in Feb 2004. The number of marginally attached to the labor force fell to 1.299 million in Sep 2006 and increased to 2.609 million in Dec 2009 and 2.800 million in Jan 2011. The number marginally attached to the labor force was 2.540 million in Dec 2011, increasing to 2.809 million in Jan 2012, falling to 2.608 million in Feb 2012, 2.352 million in Mar 2012, 2.363 million in Apr 2012, 2.483 million in May 2012, 2.483 million in Jun 2012, 2.529 million in Jul 2012, 2.561 million in Aug 2012, 2.517 million in Sep 2012, 2.433 million in Oct 2012, 2.505 million in Nov 2012 and 2.614 million in Dec 2012. The number marginally attached to the labor force fell to 2.588 million in Feb 2013.
Chart I-11, US, Marginally-Attached to the Labor Force, Thousands, NSA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-12 provides 12-month percentage changes of the marginally attached to the labor force from 2001 to 2013. There was a jump of 56.1 percent in May 2009 during the global recession followed by declines in percentage changes but insufficient negative changes. On an annual basis, the number of marginally attached to the labor force increased in four consecutive years: 15.7 percent in 2008, 37.9 percent in 2009, 11.7 percent in 2010 and 3.5 percent in 2011. The number marginally attached to the labor force fell 2.2 percent on annual basis in 2012 but increased 2.9 percent in the 12 months ending in Dec 2012, fell 13.0 percent in the 12 months ending in Jan 2013 and fell 0.8 percent in the 12 months ending in Feb 2013.
Chart I-12, US, Marginally-Attached to the Labor Force 12-Month Percentage Change, NSA, 2001-2013
Source: Bureau of Labor Statistics
Table I-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12.3 percent and the number of people in job stress could be around 30.8 million, which is 19.0 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Feb 2012, Jan 2013 and Feb 2013 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table I-4b provides the yearly labor force participation rate from 1979 to 2013. The objective of Table I-4 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the noninstitutional civilian population in Feb 2012 and Jan and Feb 2013 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.6 percent by Feb 2012 and was 63.3 percent in Jan 2013 and 63.2 percent in Feb 2013, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 7.349 million unemployed in Feb 2013 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 19.849 million (Total UEM) and not 12.500 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 12.3 percent (Total UEM%) and not 8.1 percent, not seasonally adjusted, or 7.7 percent seasonally adjusted; and (4) the number of people in job stress is close to 30.8 million by adding the 7.349 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table I-4 provides the number of people in job stress not seasonally adjusted at 30.8 million in Feb 2013, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table I-4 shows that the number of people in job stress is equivalent to 19.0 percent of the labor force in Feb 2013. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.0 percent in Feb 2012, 57.9 percent in Jan 2013 and 58.1 percent in Feb 2013; the number employed (EMP) dropped from 144 million in 2006 to 142.228 million in Feb 2013 while population increased from 229.420 million in Sep 2006 to 244.828 million in Feb 2013 or by 15.408 million. The number employed in the US fell from 146.743 million in Oct 2007 to 142.228 million in Feb 2013, by 4.515 million, or decline by 3.1 percent, while the noninstitutional population increased from 229.420 million in Sep 2006 to 244.828 million in Jan 2013, by 12.113 million or increase of 6.7 percent, using not seasonally adjusted data. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are several million fewer people working in 2013 than in 2006 and the number employed is not increasing while population increased 15.408 million. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table I-4, US, Population, Labor Force and Unemployment, NSA
| 2006 | Feb 2012 | Jan 2013 | Feb 2013 | |
| POP | 229 | 242,435 | 244,663 | 244,828 |
| LF | 151 | 154,114 | 154,794 | 154,727 |
| PART% | 66.2 | 63.6 | 63.3 | 63.2 |
| EMP | 144 | 140,684 | 141,614 | 142,228 |
| EMP/POP% | 62.9 | 58.0 | 57.9 | 58.1 |
| UEM | 7 | 13,430 | 13,181 | 12,500 |
| UEM/LF Rate% | 4.6 | 8.7 | 8.5 | 8.1 |
| NLF | 77 | 88,332 | 89,868 | 90,100 |
| LF PART 66.2% | 160,492 | 161,967 | 162,076 | |
| ∆NLF UEM | 6,378 | 7,173 | 7,349 | |
| Total UEM | 19,808 | 20,354 | 19,849 | |
| Total UEM% | 12.3 | 12.6 | 12.3 | |
| Part Time Economic Reasons | 8,455 | 8,628 | 8,298 | |
| Marginally Attached to LF | 2,608 | 2,443 | 2,614 | |
| In Job Stress | 30,871 | 31,425 | 30,761 | |
| People in Job Stress as % Labor Force | 19.2 | 19.4 | 19.0 |
Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%
Sources: US Bureau of Labor Statistics http://www.bls.gov/data/
In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts; and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share si of a demographic group in an industry i and unemployment rate yi of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):
Y = ∑isiyi (1)
This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):
∆Y = ∑i∆siy*i + ∑i∆yis*i (2)
The first term in (2) captures changes in the demographic and industrial composition of the economy ∆si multiplied by the average rate of unemployment y*i , or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆yi, multiplied by the average share of the group s*i, or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:
“The analysis in this paper and in others that we review do not provides any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”
Table I-4b and Chart 12-b provide the US labor force participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels. The civilian labor force participation rate dropped from the peak of 66.9 percent in Jul 2006 to 63.2 percent in Feb 2013. The civilian labor force participation rate was 63.7 percent on an annual basis in 1979 and 63.4 percent in Dec 1980 and Dec 1981, reaching even 62.9 percent in both Apr and May 1979. The civilian labor force participation rate jumped with the recovery to 64.8 percent on an annual basis in 1985 and 65.9 percent in Jul 1985. Structural factors cannot explain these sudden changes vividly shown visually in the final segment of Chart 12b. Seniors would like to delay their retiring especially because of the adversities of financial repression on their savings. Labor force statistics are capturing the disillusion of potential workers of their chances in finding a job in what Lazear and Spletzer (2012JHJul22) characterize as accentuated cyclical factors.
Table I-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
| Year | Jan | Feb | Mar | Apr | Oct | Nov | Dec | Annual |
| 1979 | 62.9 | 63.0 | 63.2 | 62.9 | 64.0 | 63.8 | 63.8 | 63.7 |
| 1980 | 63.3 | 63.2 | 63.2 | 63.2 | 63.9 | 63.7 | 63.4 | 63.8 |
| 1981 | 63.2 | 63.2 | 63.5 | 63.6 | 64.0 | 63.8 | 63.4 | 63.9 |
| 1982 | 63.0 | 63.2 | 63.4 | 63.3 | 64.1 | 64.1 | 63.8 | 64.0 |
| 1983 | 63.3 | 63.2 | 63.3 | 63.2 | 64.1 | 64.1 | 63.8 | 64.0 |
| 1984 | 63.3 | 63.4 | 63.6 | 63.7 | 64.6 | 64.4 | 64.3 | 64.4 |
| 1985 | 64.0 | 64.0 | 64.4 | 64.3 | 65.1 | 64.9 | 64.6 | 64.8 |
| 1986 | 64.2 | 64.4 | 64.6 | 64.6 | 65.5 | 65.4 | 65.0 | 65.3 |
| 1987 | 64.7 | 64.8 | 65.0 | 64.9 | 65.9 | 65.7 | 65.5 | 65.6 |
| 1988 | 65.1 | 65.2 | 65.2 | 65.3 | 66.1 | 66.2 | 65.9 | 65.9 |
| 1989 | 65.8 | 65.6 | 65.7 | 65.9 | 66.6 | 66.7 | 66.3 | 66.5 |
| 1990 | 66.0 | 66.0 | 66.2 | 66.1 | 66.5 | 66.3 | 66.1 | 66.5 |
| 1991 | 65.5 | 65.7 | 65.9 | 66.0 | 66.1 | 66.0 | 65.8 | 66.2 |
| 1992 | 65.7 | 65.8 | 66.0 | 66.0 | 66.2 | 66.2 | 66.1 | 66.4 |
| 1993 | 65.6 | 65.8 | 65.8 | 65.6 | 66.4 | 66.3 | 66.2 | 66.3 |
| 1994 | 66.0 | 66.2 | 66.1 | 66.0 | 66.8 | 66.7 | 66.5 | 66.6 |
| 1995 | 66.1 | 66.2 | 66.4 | 66.4 | 66.7 | 66.5 | 66.2 | 66.6 |
| 1996 | 65.8 | 66.1 | 66.4 | 66.2 | 67.1 | 67.0 | 66.7 | 66.8 |
| 1997 | 66.4 | 66.5 | 66.9 | 66.7 | 67.1 | 67.1 | 67.0 | 67.1 |
| 1998 | 66.6 | 66.7 | 67.0 | 66.6 | 67.1 | 67.1 | 67.0 | 67.1 |
| 1999 | 66.7 | 66.8 | 66.9 | 66.7 | 67.0 | 67.0 | 67.0 | 67.1 |
| 2000 | 66.8 | 67.0 | 67.1 | 67.0 | 66.9 | 66.9 | 67.0 | 67.1 |
| 2001 | 66.8 | 66.8 | 67.0 | 66.7 | 66.7 | 66.6 | 66.6 | 66.8 |
| 2002 | 66.2 | 66.6 | 66.6 | 66.4 | 66.6 | 66.3 | 66.2 | 66.6 |
| 2003 | 66.1 | 66.2 | 66.2 | 66.2 | 66.1 | 66.1 | 65.8 | 66.2 |
| 2004 | 65.7 | 65.7 | 65.8 | 65.7 | 66.0 | 66.1 | 65.8 | 66.0 |
| 2005 | 65.4 | 65.6 | 65.6 | 65.8 | 66.2 | 66.1 | 65.9 | 66.0 |
| 2006 | 65.5 | 65.7 | 65.8 | 65.8 | 66.4 | 66.4 | 66.3 | 66.2 |
| 2007 | 65.9 | 65.8 | 65.9 | 65.7 | 66.0 | 66.1 | 65.9 | 66.0 |
| 2008 | 65.7 | 65.5 | 65.7 | 65.7 | 66.1 | 65.8 | 65.7 | 66.0 |
| 2009 | 65.4 | 65.5 | 65.4 | 65.4 | 64.9 | 64.9 | 64.4 | 65.4 |
| 2010 | 64.6 | 64.6 | 64.8 | 64.9 | 64.4 | 64.4 | 64.1 | 64.7 |
| 2011 | 63.9 | 63.9 | 64.0 | 63.9 | 64.1 | 63.9 | 63.8 | 64.1 |
| 2012 | 63.4 | 63.6 | 63.6 | 63.4 | 63.8 | 63.5 | 63.4 | 63.7 |
| 2013 | 63.3 | 63.2 |
Sources: US Bureau of Labor Statistics
Chart 12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
Source: Bureau of Labor Statistics
Broader perspective is provided by Chart 12c of the US Bureau of Labor Statistics. The United States civilian noninstitutional population has increased along a consistent trend since 1948 that continued through earlier recessions and the global recession from IVQ2007 to IIQ2009 and the cyclical expansion after IIIQ2009.
Chart 12c, US, Civilian Population, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
The labor force of the United States in Chart 12d has increased along a trend similar to that of the civilian noninstitutional population in Chart 12c. There is an evident stagnation of the civilian labor force in the final segment of Chart 12d during the current economic cycle. This stagnation is explained by cyclical factors similar to those analyzed by Lazear and Spletzer (2012JHJul22) that motivated an increasing population to drop out of the labor force instead of structural factors. Large segments of the potential labor force are not observed, constituting unobserved unemployment and of more permanent nature because those afflicted have been seriously discouraged from working by the lack of opportunities.
Chart 12d, US, Labor Force, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
IA3 Long-term and Cyclical Comparison of Employment. There is initial discussion here of long-term employment trends followed by cyclical comparison. Growth and employment creation have been mediocre in the expansion beginning in Jul IIIQ2009 from the contraction between Dec IVQ2007 and Jun IIQ2009 (http://www.nber.org/cycles.html). A series of charts from the database of the Bureau of Labor Statistics (BLS) provides significant insight. Chart I-13 provides the monthly employment level of the US from 1948 to 2013. The number of people employed has trebled. There are multiple contractions throughout the more than six decades but followed by resumption of the strong upward trend. The contraction after 2007 is deeper and followed by a flatter curve of job creation. Economic growth is much lower in the current expansion at 2.1 percent relative to average 6.2 percent in expansions following earlier contractions (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html).
Chart I-13, US, Employment Level, Thousands, SA, 1948-2013
Source: US Bureau of Labor Statistics
The steep and consistent curve of growth of the US labor force is shown in Chart I-14. The contraction beginning in Dec 2007 flattened the path of the US civilian labor force and is now followed by a flatter curve during the current expansion.
Chart I-14, US, Civilian Labor Force, SA, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
Chart I-15 for the period from 1948 to 2012. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart I-15 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.
Chart I-15, US, Civilian Labor Force Participation Rate, SA, 1948-2013, %
Source: US Bureau of Labor Statistics
The number of unemployed in the US jumped seasonally adjusted from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The jump not seasonally adjusted was from 5.4 million in May 1979 to 12.5 million in Jan 1983, by 7.1 million or 131.5 percent. The number of unemployed seasonally adjusted jumped from 6.7 million in Mar 2007 to 15.4 million in Oct 2009, by 8.7 million, or 129.9 percent. The number of unemployed not seasonally adjusted jumped from 6.5 million in Apr 2006 to 16.1 million in Jan 2010, by 9.6 million or 147.7 percent. These are the two episodes with steepest increase in the level of unemployment in Chart I-16.
Chart I-16, US, Unemployed, SA, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
Chart I-17 provides the rate of unemployment of the US from 1948 to 2012. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009.
Chart I-17, US, Unemployment Rate, SA, 1948-2013
Source: US Bureau of Labor Statistics
Chart I-18 provides the number unemployed for 27 weeks and over from 1948 to 2013. The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.6 million in Jun 2010, by 5.5 million, or 500 percent.
Chart I-18, US, Unemployed for 27 Weeks or More, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
The employment-population ratio in Chart I-19 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.5 in Dec 2006 to 58.6 in Jul 2011 and stands at 58.1 NSA in Feb 2013. There is no comparable decline during an expansion in Chart I-19.
Chart I-19, US, Employment-Population Ratio, 1948-2013
Source: US Bureau of Labor Statistics
The number of people at work part-time for economic reasons because they cannot find full-time employment is provided in Chart I-20. The number of people at work part-time for economic reasons jumped from 3.7 million in Sep 2006 to a high of 9.4 million in Dec 2009 and 9.2 million in Jan 2011, or by 5.2 million, or 148.6 percent, all numbers not seasonally adjusted. Earlier increases in the 1980s and after the tough recession of 1991 were followed by rapid decrease that is still absent in the current expansion. The drop by 933,000 of seasonally-adjusted data from Aug to Dec 2011 while actual data without seasonal adjustment show decrease by 113,000 from Sep to Dec 2011 is not very credible.
Chart I-20, US, Part-Time for Economic Reasons, SA, 1955-2013, Thousands
Source: US Bureau of Labor Statistics
Table I-5 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 three years of the expansions in the 1980s and the current expansion. GDP grew at 4.5 percent in 1983, 7.2 percent in 1984 and 4.1 percent in 1985 while GDP grew, 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012. Growth in the four quarters of 2012 accumulates to 1.6 percent. The US economy is growing in 2012 at the annual equivalent rate of 2.0 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0284]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.55 percentage points and reduction of national defense expenditures of 1.28 percentage points to obtain SAAR of IVQ2012 of 2.84 percent. 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 1.8 percent in 2012 and 2.3 to 3.0 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).
Table I-5, 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 |
| 1942 | 18.5 | 1992 | 3.4 | 2012 | 2.2 |
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-6 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-6, 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: http://www.nber.org/cycles.html
US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table I-7 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.1 percent of the US economy in the fourteen quarters of the current cyclical expansion from IIIQ2009 to IVQ2012 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 decelerating to 1.8 percent annual growth in 2011, 2.2 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 1.6 percent in the four quarters of 2012 {[(1.02)1/4(1.013)1/4(1.031)1/4(1.001)1/4 – 1]100 = 1.6%} or using the SSAR of $13,647.6 billion in IVQ2012 relative to the SAAR of $13,441.0 billion in IVQ2011 {[($13656.8/$13441.00-1]100 = 1.6%}. The US economy is growing in 2012 at the annual equivalent rate of 2.0 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0284)1/4]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.55 percentage points and one-time reduction national defense expenditures of 1.28 percentage points to growth of 0.1 percent in IVQ2012 to obtain adjusted SAAR of 2.84 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.
Table I-7, 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 IQ1986 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IVQ2012 | 14 | 7.5 | 2.1 |
Sources: Business Cycle Reference Dates: http://www.nber.org/cycles.html
US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
A group of charts from the database of the Bureau of Labor Statistics facilitate the comparison of employment in the 1980s and 2000s. The long-term charts and tables from I-5 to I-7 in the discussion above confirm the view that the comparison of the current expansion should be with that in the 1980s because of similar dimensions. Chart I-21 provides the level of employment in the US between 1979 and 1989. Employment surged after the contraction and grew rapidly during the decade.
Chart I-21, US, Employed, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
The number employed in the US fell from 146.743 million in Oct 2007 to 142.228 million in Feb 2013, by 4.515 million, or decline by 3.1 percent, while the noninstitutional population increased from 232.715 million in Oct 2007 to 244.828 million in Feb 2013, by 12.113 million or increase of 5.2 percent, using not seasonally adjusted data. Chart I-22 shows tepid recovery early in 2010 followed by near stagnation and marginal expansion.
![clip_image020[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image92.png "clip_image020[1]")
Chart I-22, US, Employed, Thousands, 2001-2013
Source: US Bureau of Labor Statistics
There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart I-23. There were fluctuations but strong long-term dynamism over an entire decade.
Chart I-23, US, Civilian Labor Force, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
The civilian labor force in Chart I-24 grew steadily on an upward trend in the 2000s until it contracted together with the economy after 2007. There has not been recovery during the expansion but rather decline and marginal turn of the year 2011 into expansion in 2012.
![clip_image024[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image96.png "clip_image024[1]")
Chart I-24, US, Civilian Labor Force, Thousands, 2001-2013
Source: US Bureau of Labor Statistics
The rate of participation of the labor force in population stagnated during the stagflation and conquest of inflation in the late 1970s and early 1980s, as shown in Chart I-25. Recovery was vigorous during the expansion and lasted through the remainder of the decade.
Chart I-25, US, Civilian Labor Force Participation Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart I-26. The rate of participation in the labor force continued to decline both during the contraction after 2007 and the expansion after 2009 with marginal expansion at the turn of the year into 2012 followed by trend of decline and stability.
![clip_image028[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image100.png "clip_image028[1]")
Chart I-26, US, Civilian Labor Force Participation Rate, 2001-2013, %
Source: US Bureau of Labor Statistics
Chart I-27 provides the number unemployed during the 1980s. The number unemployed peaked at 12.051 million in Dec 1982 seasonally adjusted and 12.517 in Jan 1983 million not seasonally adjusted, declining to 8.358 million in Dec 1984 seasonally adjusted and 7.978 million not seasonally adjusted during the first two years of expansion from the contraction. The number unemployed then fell to 6.667 million in Dec 1989 seasonally adjusted and 6.300 million not seasonally adjusted.
Chart I-27, US, Unemployed Thousands 1979-1989
Source: US Bureau of Labor Statistics
Chart I-28 provides the number unemployed from 2001 to 2013. Using seasonally adjusted data, the number unemployed rose from 6.727 million in Oct 2006 to 15.382 million in Oct 2009, declining to 13.049 million in Dec 2011 and to 12.032 million in Feb 2013. Using data not seasonally adjusted, the number unemployed rose from 6.272 million in Oct 2006 to 16.147 million in Jan 2010, declining to 11.844 million in Dec 2012, increasing to 13.181 million in Jan 2013 and declining to 12.500 million in Feb 2013.
![clip_image030[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image104.png "clip_image030[1]")
Chart I-28, US, Unemployed Thousands 2001-2013
Source: US Bureau of Labor Statistics
The rate of unemployment peaked at 10.8 percent in both Nov and Dec 1982 seasonally adjusted, as shown in Chart I-29. The rate of unemployment dropped sharply during the expansion after 1984 and continued to decline during the rest of the decade to 5.4 percent in Dec 1989. Using not seasonally adjusted data, the rate of unemployment peaked at 11.4 percent in Jan 1983, declining to 7.0 percent in Dec 1984 and 5.1 percent in Dec 1989.
Chart I-29, US, Unemployment Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
The rate of unemployment in the US seasonally adjusted jumped from 4.4 percent in May 2007 to 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009, as shown in Chart I-30. The rate of unemployment fluctuated at around 9.0 percent in 2011, declining to 7.8 percent in Dec 2012 and 7.7 percent in Feb 2013.
![clip_image032[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image108.png "clip_image032[1]")
Chart I-30, US, Unemployment Rate, 2001-2013, %
Source: US Bureau of Labor Statistics
The employment population ratio seasonally adjusted fell from around 60.1 in Dec 1979 to 57.1 in both Feb and Mar 1983, as shown in Chart I-31. The employment population ratio seasonally adjusted rose back to 59.9 in Dec 1984 and reached 63.0 later in the decade in Dec 1989. Using not seasonally adjusted data, the employment population ratio dropped from 60.4 percent in Oct 1979 to 56.1 percent in Jan 1983, increasing to 59.8 in Dec 1984 and to 62.9 percent in Dec 1989.
Chart I-31, US, Employment Population Ratio, 1979-1989, %
Source: US Bureau of Labor Statistics
The US employment-population ratio seasonally adjusted has fallen from 63.4 in Dec 2006 to 58.6 in Dec 2011, 58.6 in Dec 2012 and 58.6 Feb 2013, as shown in Chart I-32. The employment population-ratio has stagnated during the expansion. Using not seasonally adjusted data, the employment population ratio fell from 63.6 percent in Jul 2006 to 57.6 percent in Jan 2011, 58.5 percent in Dec 2012 and 58.1 percent in Feb 2013.
Chart I-32, US, Employment Population Ratio, 2001-2013, %
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over peaked at 2.885 million in Jun 1983 as shown in Chart I-33. The number unemployed for 27 weeks or over fell sharply during the expansion to 1.393 million in Dec 1984 and continued to decline throughout the 1980s to 0.635 million in Dec 1989.
Chart I-33, US, Number Unemployed for 27 Weeks or More 1979-1989, Thousands
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over, seasonally adjusted, increased sharply during the contraction as shown in Chart I-34 from 1.131 million in Nov 2006 to 6.704 million in Apr 2010. The number of unemployed for 27 weeks remained at around 6 million during the expansion compared with somewhat above 1 million before the contraction, falling to 4.797 million in Feb 2013 seasonally adjusted and 4.791 million not seasonally adjusted.
Chart I-34, US, Number Unemployed for 27 Weeks or More, 2001-2013, Thousands
Source: US Bureau of Labor Statistics
The number of persons working part-time for economic reasons because they cannot find full-time work peaked during the contraction at 6.857 million in Oct 1982, as shown in Chart I-35. The number of persons at work part-time for economic reasons fell sharply during the expansion to 5.797 million in Dec 1984 and continued to fall throughout the decade to 4.817 million in Dec 1989.
Chart I-35, US, Part-Time for Economic Reasons, 1979-1989, Thousands
Source: US Bureau of Labor Statistics
The number of people working part-time because they cannot find full-time employment, not seasonally adjusted, increased sharply during the contraction from 3.787 million in Apr 2006, not seasonally adjusted, to 9.354 million in Dec 2009, as shown in Chart I-36. The number of people working part-time because of failure to find an alternative occupation stagnated at a very high level during the expansion, declining to 8.298 million not seasonally adjusted in Feb 2013.
![clip_image036[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image128.png "clip_image036[1]")
Chart I-36, US, Part-Time for Economic Reasons, 2001-2013, Thousands
Source: US Bureau of Labor Statistics
The number marginally attached to the labor force in Chart I-37 jumped from 1.252 million in Dec 2006 to 2.800 million in Jan 2011, remaining at a high level of 2.540 million in Dec 2011, 2.809 million in Jan 2012, 2.614 million in Dec 2012 and 2.588 million in Feb 2013.
![clip_image040[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1653DA\image132.png "clip_image040[1]")
Chart I-37, US, Marginally Attached to the Labor Force, 2001-2013
Source: US Bureau of Labor Statistics
Total nonfarm payroll employment seasonally adjusted (SA) increased 236,000 in Feb 2013 and private payroll employment rose 246,000. The number of nonfarm jobs and private jobs created has been declining in 2012 from 311,000 in Jan 2012 to 87,000 in Jun, 138,000 in Sep, 160,000 in Oct, 247,000 in Nov and 219,000 in Dec 2012 for total nonfarm jobs and from 323,000 in Jan 2012 to 78,000 in Jun, 118,000 in Sep, 217,000 in Oct, 256,000 in Nov and 224,000 in Dec 2012 for private jobs. Average new nonfarm jobs in the quarter Dec 2011 to Feb 2012 were 270,667 per month, declining to average 157,273 per month in the eleven months from Mar 2012 to Jan 2013. Average new private jobs in the quarter Dec 2011 to Feb 2012 were 279,000 per month, declining to average 165,545 per month in the eleven months from Mar 2012 to Jan 2013. The number of 140,000 new private new jobs created in Jan 2013 is lower than the average 165,545 per month in Mar 2012 to Jan 2013. New farm jobs created in Feb 2013 were 236,000 and 246,000 in private jobs, which exceeds the average for the prior eleven months. The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the six months from Sep 2012 to Feb 2013 was 186,500, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 30.8 million unemployed or underemployed. The difference between the average increase of 186,500 new private nonfarm jobs per month in the US from Sep 2012 to Feb 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,333 monthly new jobs net of absorption of new entrants in the labor force. There are 30.8 million in job stress in the US currently. The provision of 73,333 new jobs per month net of absorption of new entrants in the labor force would require 419 months to provide jobs for the unemployed and underemployed (30.761 million divided by 73,333) or 34.9 years (419 divided by 12). The civilian labor force of the US in Feb 2013 not seasonally adjusted stood at 154.727 million with 12.500 million unemployed or effectively 19.849 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.076 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 73,333 by 12, which is 879,996). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.736 million (0.05 times labor force of 154.727 million) for new net job creation of 4.764 million (12.500 million unemployed minus 7.736 million unemployed at rate of 5 percent) that at the current rate would take 5.4 years (4.764 million divided by 879,996). Under the calculation in this blog there are 19.849 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.076 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 12.614 million jobs net of labor force growth that at the current rate would take 13.3 years (19.849 million minus 0.05(162.076 million) or 11.745 million divided by 879,996, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.118 million in Nov 2007 to 142.228 million in Feb 2013, by 4.890 million, or decline of 3.3 percent, while the noninstitutional population increased from 232.939 million in Nov 2007 to 244.828 million in Feb 2013, by 11.889 million or increase of 5.1 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs. What is striking about the data in Table I-8 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Growth at 2.1 percent has been mediocre in the fourteen quarters of expansion beginning in IIIQ2009 in comparison with 6.2 percent in earlier expansions (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html) and also in terms of what is required to reduce the job stress of at around 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table I-8 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.
Table I-8, US, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | 14 | -794 | -13 | -17 |
| Feb | 67 | -6 | -78 | -85 | -695 | -40 | -26 |
| Mar | 104 | -129 | 173 | -79 | -830 | 154 | 111 |
| Apr | 74 | -281 | 276 | -215 | -704 | 229 | 170 |
| May | 10 | -45 | 277 | -186 | -352 | 521 | 102 |
| Jun | 196 | -243 | 378 | -169 | -472 | -130 | 94 |
| Jul | 112 | -343 | 418 | -216 | -351 | -86 | 103 |
| Aug | -36 | -158 | -308 | -270 | -210 | -37 | 129 |
| Sep | -87 | -181 | 1114 | -459 | -233 | -43 | 113 |
| Oct | -100 | -277 | 271 | -472 | -170 | 228 | 188 |
| Nov | -209 | -124 | 352 | -775 | -21 | 144 | 154 |
| Dec | -278 | -14 | 356 | -705 | -220 | 95 | 114 |
| 1984 | 2011 | Private | |||||
| Jan | 447 | 69 | 80 | ||||
| Feb | 479 | 196 | 243 | ||||
| Mar | 275 | 205 | 223 | ||||
| Apr | 363 | 304 | 303 | ||||
| May | 308 | 115 | 183 | ||||
| Jun | 379 | 209 | 177 | ||||
| Jul | 312 | 78 | 206 | ||||
| Aug | 241 | 132 | 129 | ||||
| Sep | 311 | 225 | 256 | ||||
| Oct | 286 | 166 | 174 | ||||
| Nov | 349 | 174 | 197 | ||||
| Dec | 127 | 230 | 249 | ||||
| 1985 | 2012 | Private | |||||
| Jan | 266 | 311 | 323 | ||||
| Feb | 124 | 271 | 265 | ||||
| Mar | 346 | 205 | 208 | ||||
| Apr | 195 | 112 | 120 | ||||
| May | 274 | 125 | 152 | ||||
| Jun | 145 | 87 | 78 | ||||
| Jul | 189 | 153 | 177 | ||||
| Aug | 193 | 165 | 131 | ||||
| Sep | 204 | 138 | 118 | ||||
| Oct | 187 | 160 | 217 | ||||
| Nov | 209 | 247 | 256 | ||||
| Dec | 168 | 219 | 224 | ||||
| 1985 | 2013 | Private | |||||
| Jan | 123 | 119 | 140 | ||||
| Feb | 107 | 236 | 246 | ||||
| Mar | 93 | ||||||
| Apr | 188 | ||||||
| May | 125 | ||||||
| Jun | -93 | ||||||
| Jul | 318 | ||||||
| Aug | 113 | ||||||
| Sep | 346 | ||||||
| Oct | 187 | ||||||
| Nov | 186 | ||||||
| Dec | 204 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Charts numbered from I-38 to I-41 from the database of the Bureau of Labor Statistics provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart I-38 provides total nonfarm payroll jobs from 2001 to 2012. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then inadequate growth in 2012.
Chart I-38, US, Total Nonfarm Payroll Jobs SA 2001-2013
Source: US Bureau of Labor Statistics
Total nonfarm payroll jobs grew rapidly during the expansion in 1983 and 1984 as shown in Chart I-39. Nonfarm payroll jobs continued to grow at high rates during the remainder of the 1980s.
Chart I-39, US, Total Nonfarm Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics
Most job creation in the US is by the private sector. Chart I-40 shows the sharp destruction of private payroll jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rates, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.
Chart I-40, US, Total Private Payroll Jobs SA 2001-2013
Source: US Bureau of Labor Statistics
In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart I-41. Rapid growth of creation of private jobs continued throughout the 1980s.
Chart I-41, US, Total Private Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics
IA4 Creation of Jobs. Types of jobs created, and not only the pace of job creation, may be important. Aspects of growth of payroll jobs from Feb 2012 to Feb 2013, not seasonally adjusted (NSA), are provided in Table I-9. Total nonfarm employment increased by 1,999,000 (row A, column Change), consisting of growth of total private employment by 2,099,000 (row B, column Change) and decrease by 100,000 of government employment (row C, column Change). Monthly average growth of private payroll employment has been 174,917, which is mediocre relative to 24 to 30 million in job stress, while total nonfarm employment has grown on average by only 166,583 per month, which barely keeps with 113,167 new entrants per month in the labor force. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 115,000, at the monthly rate of 9,583 while private service providing employment grew by 1,814,000, at the monthly rate of 151,167. An important feature in Table I-9 is that jobs in professional and business services increased by 498,000 with temporary help services increasing by 110,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. The segment leisure and hospitality added 321,000 jobs in 12 months. An important characteristic is that the loss of government jobs has stabilized in local government after heavy losses, 26,000 jobs lost in the past twelve months (row C3 Local) but 39,000 jobs lost in state (row C2 State), while there is a higher number of employees in local government, 14.3 million relative to 5.1 million in state jobs and 2.8 million in federal jobs.
Table I-9, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted, in Thousands
| Feb 2012 | Feb 2013 | Change | |
| A Total Nonfarm | 131,604 | 133,603 | 1,999 |
| B Total Private | 109,333 | 111,432 | 2,099 |
| B1 Goods Producing | 17,802 | 18,087 | 285 |
| B1a Manufacturing | 11,751 | 11,866 | 115 |
| B2 Private service providing | 91,531 | 93,345 | 1,814 |
| B2a Wholesale Trade | 5,581 | 5,684 | 103 |
| B2b Retail Trade | 14,514 | 14,771 | 257 |
| B2c Transportation & Warehousing | 4,325 | 4,411 | 86 |
| B2d Financial Activities | 7,694 | 7,798 | 104 |
| B2e Professional and Business Services | 17,486 | 17,984 | 498 |
| B2e1 Temporary help services | 2,348 | 2,458 | 110 |
| B2f Health Care & Social Assistance | 16,820 | 17,183 | 363 |
| B2g Leisure & Hospitality | 13,038 | 13,359 | 321 |
| C Government | 22,271 | 22,171 | -100 |
| C1 Federal | 2,806 | 2,771 | -35 |
| C2 State | 5,179 | 5,140 | -39 |
| C3 Local | 14,286 | 14,260 | -26 |
Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Greater detail on the types of jobs created is provided in Table I-10 with data for Jan and Feb 2013. Strong seasonal effects are shown by the significant difference between seasonally-adjusted (SA) and not-seasonally-adjusted (NSA) data. The purpose of adjusting for seasonality is to isolate nonseasonal effects. The 236,000 SA total nonfarm jobs created in Feb 2013 relative to Jan 2013 actually correspond to increase of 959,000 jobs NSA, as shown in row A. The 246,000 total private payroll jobs SA created in Feb 2013 relative to Jan 2013 actually correspond to increase of 512,000 jobs NSA. Adjustment for seasonality isolates nonseasonal effects that suggest improvement from Feb 2012 to Feb 2013. The analysis of NSA job creation in the prior Table I-9 does show improvement over the 12 months ending in Jan 2013 that is not clouded by seasonal variations but significant reduction in number of jobs created. In fact, the 12-month rate of job creation without seasonal adjustment is stronger indication of marginal improvement in the US job market but that is insufficient to even make a dent in about 30 million people unemployed or underemployed. Benchmark and seasonal adjustments affect comparability of data over time.
Table I-10, US, Employees on Nonfarm Payrolls and Selected Industry Detail, Thousands, SA
| Jan 2013 SA | Feb 2013 SA | ∆ | Jan 2013 NSA | Feb 2013 NSA | ∆ | |
| A Total Nonfarm | 134,810 | 135,046 | 236 | 132,644 | 133,603 | 959 |
| B Total Private | 112,957 | 113,203 | 246 | 110,920 | 111,432 | 512 |
| B1 Goods Producing | 18,563 | 18,630 | 67 | 18,040 | 18,087 | 47 |
| B1a Constr. | 5,736 | 5,784 | 48 | 5,341 | 5,369 | 28 |
| B Mfg | 11,963 | 11,977 | 14 | 11,854 | 11,866 | 12 |
| B2 Private Service Providing | 94,394 | 94,573 | 179 | 92,880 | 93,345 | 465 |
| B2a Wholesale Trade | 5,731 | 5,737 | 6 | 5,678 | 5,684 | 6 |
| B2b Retail Trade | 15,033 | 15,057 | 24 | 14,939 | 14,771 | -168 |
| B2c Couriers & Mess. | 540 | 538 | -2 | 543 | 526 | -17 |
| B2d Health-care & Social Assistance | 17,170 | 17,209 | 39 | 17,128 | 17,183 | 55 |
| B2De Profess. & Business Services | 18,168 | 18,241 | 73 | 17,809 | 17,984 | 175 |
| B2De1 Temp Help Services | 2,566 | 2,582 | 16 | 2,429 | 2,458 | 29 |
| B2f Leisure & Hospit. | 13,931 | 13,955 | 24 | 13,257 | 13,359 | 102 |
Notes: ∆: Absolute Change; Constr.: Construction; Mess.: Messengers; Temp: Temporary; Hospit.: Hospitality. SA aggregates do not add because of seasonality.
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Manufacturing jobs increased 14,000 in Feb 2013 relative to Jan 2013, seasonally adjusted and increased 12,000 in Feb 2013 relative to Jan 2013, not seasonally adjusted, as shown in Table I-10. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Jan 2013, United States national industrial production accumulated increase of 0.7 percent at the annual equivalent rate of 1.4 percent, which is lower than 2.1 percent growth in 12 months. Capacity utilization for total industry in the United States decreased 0.2 percentage points in Jan 2013 to 79.1 percent from 79.3 percent in Dec, which is 1.1 percentage points lower than the long-run average from 1972 to 2012. Manufacturing decreased 0.4 percent in Jan 2013 seasonally adjusted, increasing 2.0 percent not seasonally adjusted in 12 months, and increased 0.9 percent in the six months ending in Jan 2013 or at the annual equivalent rate of 1.8 percent. (Section VA at http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html). 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 Feb 2013, there were 133.603 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 111.432 million NSA in Feb 2013 accounted for 83.4 percent of total nonfarm jobs of 133.603 million, of which 11.866 million, or 10.7 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.345 million NSA in Feb 2013, or 70.0 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, 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-11, 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 | 13,976.7 | 100.0 |
| Domestic Industries | 13,586.3 | 98.2 | 13,733.6 | 98.3 |
| Private Industries | 11,933.2 | 86.3 | 12,075.0 | 86.4 |
| Agriculture | 131.7 | 0.9 | 138.6 | 1.0 |
| Mining | 208.3 | 1.5 | 205.3 | 1.5 |
| Utilities | 214.6 | 1.6 | 216.6 | 1.6 |
| Construction | 583.7 | 4.2 | 589.3 | 4.2 |
| Manufacturing | 1548.1 | 11.2 | 1548.9 | 11.1 |
| Durable Goods | 894.3 | 6.5 | 892.8 | 6.4 |
| Nondurable Goods | 653.8 | 4.7 | 656.1 | 4.7 |
| Wholesale Trade | 853.5 | 6.2 | 837.8 | 6.0 |
| Retail Trade | 951.9 | 6.9 | 957.4 | 6.9 |
| Transportation & WH | 414.5 | 3.0 | 415.5 | 3.0 |
| Information | 499.1 | 3.6 | 504.4 | 3.6 |
| Finance, Insurance, RE | 2237.5 | 16.2 | 2330.6 | 16.7 |
| Professional, BS | 1971.7 | 14.3 | 2003.4 | 14.3 |
| Education, Health Care | 1378.1 | 10.0 | 1385.6 | 9.9 |
| Arts, Entertainment | 540.4 | 3.9 | 539.4 | 3.9 |
| Other Services | 400.0 | 2.9 | 402.3 | 2.9 |
| Government | 1653.0 | 11.9 | 1658.6 | 11.9 |
| Rest of the World | 247.3 | 1.8 | 243.1 | 1.7 |
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
The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table I-12 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million from 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.728 million in 2010 relative to 2007 and fell by 959,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion. Nonfarm jobs declined from 137.645 million in 2007 to 133.739 million in 2012, by 3.906 million or 2.8 percent.
Table I-12, US, Total Nonfarm Employment in Thousands
| Year | Total Nonfarm | Year | Total Nonfarm |
| 1980 | 90,528 | 2000 | 131,881 |
| 1981 | 91,289 | 2001 | 131,919 |
| 1982 | 89,677 | 2002 | 130,450 |
| 1983 | 90,280 | 2003 | 130,100 |
| 1984 | 94,530 | 2004 | 131,509 |
| 1985 | 97,511 | 2005 | 133,747 |
| 1986 | 99,474 | 2006 | 136,125 |
| 1987 | 102,088 | 2007 | 137,645 |
| 1988 | 105,345 | 2008 | 136,852 |
| 1989 | 108,014 | 2009 | 130,876 |
| 1990 | 109,487 | 2010 | 129,917 |
| 1991 | 108,377 | 2011 | 131,497 |
| 1992 | 108,745 | 2012 | 133,739 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained in 1939 at 29 percent below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).
The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):
“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”
The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table I-13 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 7 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.
Table I-13, US, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in
Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent
| Total Nonfarm Jobs | Total Private Jobs | |
| 06/1981 # | 92,288 | 75,969 |
| 11/1982 # | 89,482 | 73,260 |
| Change # | -2,806 | -2,709 |
| Change ∆% | -3.0 | -3.6 |
| 12/1982 # | 89,383 | 73,185 |
| 05/1984 # | 94,471 | 78,049 |
| Change # | 5,088 | 4,864 |
| Change ∆% | 5.7 | 6.6 |
| 11/2007 # | 139,090 | 116,291 |
| 05/2009 # | 131,626 | 108,601 |
| Change % | -7,464 | -7,690 |
| Change ∆% | -5.4 | -6.6 |
| 12/2009 # | 130,178 | 107,338 |
| 05/2011 # | 131,753 | 108,494 |
| Change # | 1,575 | 1,156 |
| Change ∆% | 1.2 | 1.1 |
| 05/1983 # | 90,005 | 73,667 |
| 05/1984 # | 94,471 | 78,049 |
| Change # | 4,466 | 4,382 |
| Change ∆% | 4.9 | 5.9 |
| 05/2010 # | 130,801 | 107,405 |
| 05/2011 # | 131,753 | 109,203 |
| Change # | 952 | 1,798 |
| Change ∆% | 0.7 | 1.7 |
| Change # by ∆% as in 05/1984 to 05/1985 | 6,409* | 6,337** |
| Difference in Jobs that Would Have Been Created | 5,457 = | 4,539 = |
*[(130,801x1.049)-130,801] = 6,409 thousand
**[(107,405)x1.059 – 107,405] = 6,337 thousand
Source: http://www.bls.gov/data/
IA5 Stagnating Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table IA5-1 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, increasing from $23.28/hour in Jan 2012 to $23.78/hour in Jan 2013, or by 2.1 percent. There has been disappointment about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for about 71 percent of GDP (Table I-10 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html). Growth of consumption by decreasing savings by means of controlling interest rates in what is called financial repression may not be lasting and sound for personal finances (See Pelaez and Pelaez, Globalization and the State, Vol. II (2008c), 81-6 and http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening.html http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable.html http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Average hourly earnings seasonally adjusted increased 0.2 percent from $23.78 in Jan 2013 to $23.82 in Feb 2013. Average private weekly earnings increased $14.57 from $807.22 in Feb 2012 to $821.79 in Feb 2013 or 1.8 percent and increased from $818.03 in Jan 2013 to $821.79 in Feb 2013 or 0.5 percent. The inflation-adjusted wage bill can only be calculated for Jan which is the most recent month for which there are estimates of the consumer price index. Earnings per hour (not-seasonally-adjusted (NSA)) rose from $23.59 in Jan 2012 to $23.91 in Jan 2013 or by 1.4 percent (http://www.bls.gov/data/; see Table II-3 below). Data NSA are more suitable for comparison over a year. Average weekly hours NSA were 34.5 in Jan 2012 and 34.0 in Jan 2013 (http://www.bls.gov/data/; see Table II-2 below). The wage bill increased 4.2 percent in the 12 months ending in Dec 2012:
{[(wage bill in Jan 2013)/(wage bill in Jan 2012)]-1}100 =
{[($23.91x34.0)/($23.59x34.5)]-1]}100
= {[($812.94/$813.85)]-1}100 = -0.1%
CPI inflation was 1.6 percent in the 12 months ending in Jan 2012 (http://www.bls.gov/cpi/) for an inflation-adjusted wage-bill change of minus 1.7 percent :{[(0.999)/1.017)-1]100} (see Table IA5-5 below for Jan 2013). The wage bill for Feb 2013 before inflation adjustment decreased 0.2 percent relative to the wage bill for Feb 2012:
{[(wage bill in Feb 2013)/(wage bill in Feb 2012)]-1}100 =
{[($23.94x34.2)/($23.44x34.2)]-1]}100
= {[($818.75/$801.65)]-1}100 = 2.1%
Average hourly earnings increased 2.1 percent from Feb 2012 to Feb 2013 {[($23.94/23.44) – 1]100 = 2.1%} while hours worked increased 0 percent {[(34.2/34.2) – 1]100 = 0.0%}. The increase of the wage bill is the product of the increase of hourly earnings of 2.1 percent and of hours worked of 0.0 percent {[(1.021x1.00) -1]100 = 2.1%}.
Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shocks in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov 2010 with the sovereign issues in Europe triggered by Ireland, in Mar 2011 by the earthquake and tsunami in Japan and in the beginning of May 2011 by the decline in oil prices and sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/). Renewed risk aversion because of the sovereign risks in Europe had reduced the rate of increase of the DJ UBS commodity index to 14.1 percent on Dec 7, 2012, relative to Jul 2, 2010 (see Table VI-4) but there has been a shift in investor preferences into equities. Inflation has been rising in waves with carry trades driven by zero interest rates to commodity futures during periods of risk appetite with interruptions during risk aversion (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html). Inflation-adjusted wages fall sharply during carry trades from zero interest rates to long positions in commodity futures during periods of risk appetite.
Table IA5-1, US, Earnings per Hour and Average Weekly Hours SA
| Earnings per Hour | Feb 2012 | Dec 2012 | Jan 2013 | Feb 2013 |
| Total Private | $23.33 | $23.75 | $23.78 | $23.82 |
| Goods Producing | $24.59 | $24.89 | $24.88 | $24.92 |
| Service Providing | $23.03 | $23.47 | $23.52 | $23.56 |
| Average Weekly Earnings | ||||
| Total Private | $807.22 | $819.38 | $818.03 | $821.79 |
| Goods Producing | $993.44 | $1,005.56 | $1,000.18 | $1009.26 |
| Service Providing | $769.20 | $781.55 | $780.86 | $786.90 |
| Average Weekly Hours | ||||
| Total Private | 34.6 | 34.5 | 34.4 | 34.5 |
| Goods Producing | 40.4 | 40.4 | 40.2 | 40.5 |
| Service Providing | 33.4 | 33.3 | 33.2 | 33.4 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Average weekly hours fell from 35.0 in Dec 2007 at the beginning of the contraction to 33.8 in Jun 2009, which was the last month of the contraction. Average weekly hours rose to 34.4 in Dec 2011 and oscillated to 34.9 in Dec 2012 and 34.2 in Feb 2013.
Table IA5-2, US, Average Weekly Hours of All Employees, NSA 2006-2013
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| 2006 | 34.2 | 34.6 | 34.3 | 34.6 | 34.9 | 34.6 | 34.5 | 34.9 | 34.4 | 34.6 | ||
| 2007 | 34.1 | 34.2 | 34.3 | 34.7 | 34.4 | 34.7 | 34.9 | 34.7 | 35.0 | 34.5 | 34.5 | 35.0 |
| 2008 | 34.2 | 34.2 | 34.8 | 34.4 | 34.4 | 34.9 | 34.5 | 34.6 | 34.4 | 34.4 | 34.6 | 34.1 |
| 2009 | 33.8 | 34.3 | 34.0 | 33.6 | 33.7 | 33.8 | 33.8 | 34.3 | 33.7 | 33.8 | 34.3 | 33.9 |
| 2010 | 33.7 | 33.6 | 33.8 | 34.0 | 34.4 | 34.1 | 34.2 | 34.7 | 34.1 | 34.3 | 34.2 | 34.2 |
| 2011 | 34.2 | 34.0 | 34.1 | 34.3 | 34.6 | 34.4 | 34.4 | 34.4 | 34.4 | 34.9 | 34.3 | 34.4 |
| 2012 | 34.5 | 34.2 | 34.3 | 34.7 | 34.3 | 34.4 | 34.8 | 34.5 | 34.9 | 34.3 | 34.3 | 34.9 |
| 2013 | 34.0 | 34.2 |
Source: US Bureau of Labor Statistics
Chart IB-1 provides average weekly hours monthly from Mar 2006 to Jan 2013. Average weekly hours remained relatively stable in the period before the contraction and fell sharply during the contraction as business could not support lower production with the same labor input. Average weekly hours rose rapidly during the expansion but have stabilized at a level below that prevailing before the contraction.
Chart IA5-1, US, Average Weekly Hours of All Employees, SA 2006-2013
Source: US Bureau of Labor Statistics
Calculations using BLS data of inflation-adjusted average hourly earnings are shown in Table IA5-3. The final column of Table IA5-3 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in four months in 2010 and in all but the first month in 2011 and the loss accelerated at 1.8 percent in Sep 2011, declining to a real loss of 1.1 percent in Feb 2012 and 0.6 percent in Mar 2012. There was a gain of 0.6 percent in Apr 2012 in inflation-adjusted average hourly earnings but another fall of 0.5 percent in May 2012 followed by increases of 0.3 percent in Jun and 1.0 percent in Jul 2012. Real hourly earnings stagnated in the 12 months ending in Aug 2012 with increase of only 0.1 percent and increased 0.7 percent in the 12 months ending in Sep 2012. Real hourly earnings fell 1.3 percent in Oct 2012 and gained 1.1 percent in Dec 2012 but declined 0.2 percent in Jan 2012. Real hourly earnings are oscillating in part because of world inflation waves caused by carry trades from zero interest rates to commodity futures (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) and in part because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table IA5-3, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA
| AHE ALL | 12 Month | ∆% 12 Month CPI | 12 Month | |
| 2007 | ||||
| Jan* | $20.70* | 4.2* | 2.1 | 2.1* |
| Feb* | $20.79* | 4.1* | 2.4 | 1.7* |
| Mar | $20.82 | 3.7 | 2.8 | 0.9 |
| Apr | $21.05 | 3.3 | 2.6 | 0.7 |
| May | $20.83 | 3.7 | 2.7 | 1.0 |
| Jun | $20.82 | 3.8 | 2.7 | 1.1 |
| Jul | $20.99 | 3.4 | 2.4 | 1.0 |
| Aug | $20.85 | 3.5 | 2.0 | 1.5 |
| Sep | $21.19 | 4.1 | 2.8 | 1.3 |
| Oct | $21.07 | 2.7 | 3.5 | -0.8 |
| Nov | $21.13 | 3.3 | 4.3 | -0.9 |
| Dec | $21.37 | 3.7 | 4.1 | -0.4 |
| 2010 | ||||
| Jan | $22.55 | 1.9 | 2.6 | -0.7 |
| Feb | $22.61 | 1.4 | 2.1 | -0.7 |
| Mar | $22.52 | 1.2 | 2.3 | -1.1 |
| Apr | $22.57 | 1.8 | 2.2 | -0.4 |
| May | $22.64 | 2.5 | 2.0 | 0.5 |
| Jun | $22.38 | 1.8 | 1.1 | 0.7 |
| Jul | $22.44 | 1.8 | 1.2 | 0.6 |
| Aug | $22.58 | 1.7 | 1.1 | 0.6 |
| Sep | $22.63 | 1.8 | 1.1 | 0.7 |
| Oct | $22.73 | 1.9 | 1.2 | 0.7 |
| Nov | $22.72 | 1.0 | 1.1 | 0.0 |
| Dec | $22.79 | 1.7 | 1.5 | 0.2 |
| 2011 | ||||
| Jan | $23.20 | 2.9 | 1.6 | 1.3 |
| Feb | $23.03 | 1.9 | 2.1 | -0.2 |
| Mar | $22.93 | 1.8 | 2.7 | -0.9 |
| Apr | $22.99 | 1.9 | 3.2 | -1.3 |
| May | $23.09 | 2.0 | 3.6 | -1.5 |
| Jun | $22.84 | 2.1 | 3.6 | -1.4 |
| Jul | $22.97 | 2.4 | 3.6 | -1.2 |
| Aug | $22.88 | 1.3 | 3.8 | -2.4 |
| Sep | $23.08 | 2.0 | 3.9 | -1.8 |
| Oct | $23.33 | 2.6 | 3.5 | -0.9 |
| Nov | $23.18 | 2.0 | 3.4 | -1.4 |
| Dec | $23.25 | 2.0 | 3.0 | -1.0 |
| 2012 | ||||
| Jan | $23.59 | 1.7 | 2.9 | -1.2 |
| Feb | $23.44 | 1.8 | 2.9 | -1.1 |
| Mar | $23.42 | 2.1 | 2.7 | -0.6 |
| Apr | $23.65 | 2.9 | 2.3 | 0.6 |
| May | $23.36 | 1.2 | 1.7 | -0.5 |
| Jun | $23.30 | 2.0 | 1.7 | 0.3 |
| Jul | $23.52 | 2.4 | 1.4 | 1.0 |
| Aug | $23.30 | 1.8 | 1.7 | 0.1 |
| Sep | $23.70 | 2.7 | 2.0 | 0.7 |
| Oct | $23.55 | 0.9 | 2.2 | -1.3 |
| Nov | $23.62 | 1.9 | 1.8 | 0.1 |
| Dec | $23.89 | 2.8 | 1.7 | 1.1 |
| 2013 | ||||
| Jan | 23.91 | 1.4 | 1.6 | -0.2 |
| Feb | 23.94 | 2.1 |
Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available
*AHE of production and nonsupervisory employees because of unavailability of data for all employees for Jan-Feb 2006
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IA5-4. Average hourly earnings fell 0.5 percent after adjusting for inflation in the 12 months ending in Mar 2012 and gained 0.6 percent in the 12 months ending in Apr 2011 but then lost 0.6 percent in the 12 months ending in May 2012 with a gain of 0.3 percent in the 12 months ending in Jun 2012 and 1.0 percent in Jul 2012 followed by 0.1 percent in Aug 2012 and 0.7 percent in Sep 2012. Average hourly earnings adjusted by inflation fell 1.2 percent in the 12 months ending in Oct 2012. Average hourly earnings adjusted by inflation increased 0.1 percent in the 12 months ending in Nov 2012 and 1.1 percent in the 12 months ending in Dec 2012 but fell 0.3 percent in the 12 months ending in Jan 2013. Table IA5-4 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011 and into 2012 with 12-month percentage declines in three of the first four months of 2012 (-1.1 percent in Jan, -1.1 percent in Feb and -0.5 percent in Mar), declines of 0.6 percent in May and 1.2 percent in Oct and increase in five (0.6 percent in Apr, 0.3 percent in Jun, 1.0 percent in Jul, 0.7 percent in Sep and 1.0 percent in Dec) and stagnation in two (0.1 percent in Aug and 0.1 percent in Nov). Average hourly earnings adjusted for inflation fell 0.3 percent in the 12 months ending in Jan 2013. Annual data are revealing: -0.7 percent in 2008 during carry trades into commodity futures in a global recession, 3.2 percent in 2009 with reversal of carry trades, no change in 2010 and 2012 and decline by 1.1 percent in 2011. Annual average hourly earnings of all employees in the United States adjusted for inflation increased 1.4 percent from 2007 to 2012 at the yearly average rate of 0.3 percent (from $10.11 in 2007 to $10.25 in 2012 in dollars of 1982-1984 using data in http://www.bls.gov/data/). Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html).
Table IA5-4, US, Average Hourly Earnings of All Employees NSA in Constant Dollars of 1982-1984
| Year | Jan | Feb | Mar | Sep | Oct | Nov | Dec |
| 2006 | 10.05 | 10.03 | 10.17 | 10.15 | 10.21 | ||
| 2007 | 10.23 | 10.22 | 10.14 | 10.16 | 10.08 | 10.05 | 10.17 |
| 2008 | 10.11 | 10.12 | 10.11 | 9.94 | 10.06 | 10.37 | 10.47 |
| 2009 | 10.48 | 10.50 | 10.47 | 10.30 | 10.32 | 10.40 | 10.38 |
| 2010 | 10.41 | 10.43 | 10.35 | 10.36 | 10.39 | 10.38 | 10.40 |
| 2011 | 10.53 | 10.41 | 10.26 | 10.17 | 10.30 | 10.25 | 10.30 |
| 2012 | 10.41 | 10.30 | 10.21 | 10.24 | 10.18 | 10.26 | 10.41 |
| ∆% 12M | -1.1 | -1.1 | -0.5 | 0.7 | -1.2 | 0.1 | 1.1 |
| 2013 | 10.38 | ||||||
| ∆% 12M | -0.3 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart IA5-2 of the US Bureau of Labor Statistics plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from annual earnings of $10.36 in 2010 to $10.25 in 2012 or loss of 1.1 percent (data in http://www.bls.gov/data/).
Chart IA5-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart IA5-3 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011 and now into 2012 with temporary increase in Apr 2012 that was reversed in May with another gain in Jun and Jul 2012 followed by stagnation in Aug 2012 and marginal gain in Sep 2012 with sharp decline in Oct 2012, stagnation in Nov 2012, increase in Dec 2012 and renewed decrease in Jan 2013.
Chart IA5-3, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, NSA 2007-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IA5-5. Average weekly earnings fell 3.2 percent after adjusting for inflation in the 12 months ending in Aug 2011, decreased 0.9 percent in the 12 months ending in Sep, increased 0.9 percent in the 12 months ending in Oct, fell 1.0 percent in the 12 months ending in Nov and 0.3 in the 12 months ending in Dec 2011, declining 0.3 percent in the 12 months ending in Jan 2012 and 0.5 percent in the 12 months ending in Feb 2012. Average weekly earnings in constant dollars were virtually flat in Mar 2012 relative to Mar 2011, increasing 0.1 percent. Average weekly earnings in constant dollars increased 1.7 percent in Apr 2012 relative to Apr 2011 but fell 1.4 percent in May 2012 relative to May 2011, increasing 0.3 percent in the 12 months ending in Jun and 2.1 percent in Jul 2012. Real weekly earnings increased 0.4 percent in the 12 months ending in Aug 2012 and 2.1 percent in the 12 months ending in Sep 2012. Real weekly earnings fell 2.9 percent in the 12 months ending in Oct 2012 and increased 0.1 percent in the 12 months ending in Nov 2012 and 2.5 percent in the 12 months ending in Dec 2012. Real weekly earnings fell 1.7 percent in the 12 months ending in Jan 2013. Table IA5-5 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011 and into 2012 with oscillations according to carry trades causing world inflation waves (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html). On an annual basis, average weekly earnings in constant 1982-1984 dollars increased from $349.78 in 2007 to $353.66 in 2012, by 1.1 percent or at the average rate of 0.2 percent per year (data in http://www.bls.gov/data/). Annual average weekly earnings in constant dollars of $353.50 in 2010 were virtually unchanged at $353.66 in 2012. Those who still work bring back home a paycheck that buys fewer high-quality goods than a year earlier. The fractured US job market does not provide an opportunity for advancement as in past booms following recessions (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).
Table IA5-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2013
| Year | Jan | Feb | Mar | Oct | Nov | Dec |
| 2006 | 343.71 | 354.88 | 349.12 | 353.37 | ||
| 2007 | 348.72 | 349.40 | 347.76 | 347.92 | 346.85 | 356.11 |
| 2008 | 345.92 | 346.21 | 351.70 | 345.95 | 358.83 | 357.17 |
| 2009 | 354.10 | 360.31 | 355.81 | 348.83 | 356.59 | 351.95 |
| 2010 | 350.71 | 350.51 | 349.76 | 356.47 | 355.12 | 355.61 |
| 2011 | 360.29 | 353.81 | 349.90 | 359.60 | 351.44 | 354.41 |
| 2012 | 359.06 | 352.12 | 350.19 | 349.20 | 351.91 | 363.13 |
| ∆% 12M | -0.3 | -0.5 | 0.1 | -2.9 | 0.1 | 2.5 |
| 2013 | 353.02 | |||||
| ∆% 12M | -1.7 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart IA5-4 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall with oscillations caused by carry trades from zero interest rates into commodity futures from 2010 to 2011 and into 2012 and 2013.
Chart IA5-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart IA5-5 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 and 2012. (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html http://cmpassocregulationblog.blogspot.com/2012_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html http://cmpassocregulationblog.blogspot.com/2012_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Chart IA5-5, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change, NSA 2007-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
II United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (http://www.census.gov/foreign-trade/). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html). Data for 2012 have been revised. The US trade balance improved from deficit of $51,726 million in Mar 2012 to deficit of $49,726 million in Apr 2012 and lower deficits of $47,009 million in May, $40,921 million in Jun and $41,944 million in Jul 2012 but with increase to 42,552 million in Aug 2012. The trade deficits of Mar and Apr 2012 both end in 726 in actual data. The increase of exports in Sep 2012 of 3.1 percent was higher than increase of imports of 1.5 percent, resulting in decrease of the trade deficit in Sep to $40,345 million. Exports decreased 3.4 percent in Oct 2012 and imports decreased 2.1 percent for increase in the trade deficit to $42,046 million in Oct 2012. The increase of exports by 1.2 percent in Nov 2012 was much lower than the increase in imports of 3.8 percent, resulting in sharply increasing deficit of $48,228 million. Export growth of 2.2 with decline of imports by 2.6 resulted in lower trade deficit of $38,144 million in Dec 2012. The trade deficit increased to $44,448 million in Jan 2013 with decrease of exports of 1.2 percent while imports increased 1.8 percent. The deterioration of the trade deficit from $44,586 million in Feb 2012 to $51,726 million in Mar 2012 resulted from growth of exports of 2.5 percent while imports jumped 5.2 percent. The US trade balance had improved from deficit of $52,288 million in Jan 2012 to lower deficit of $44,586 million in Feb 2012 mostly because of decline of imports by 2.7 percent while exports increased 0.9 percent. The US trade balance deteriorated sharply from Nov 2011 to Jan 2012 with growth of imports by cumulative 2.9 percent and cumulative change of exports of 0.0 percent, resulting in deficits of $48,835 million in Nov 2011, $51,748 million in Dec 2011 and $52,288 million in Jan 2012, which are the highest since $50,234 million in Jun 2011. In the months of Jun to Oct 2011, exports increased 1.8 percent while imports increased 0.5 percent, resulting in improvement of the trade deficit from $50,234 million in Jun 2011 to $45,703 million in Oct 2011. The trade balance deteriorated from cumulative deficit of $494,737 million in Jan-Dec 2010 to deficit of $559,880 million in Jan-Dec 2011 and virtually no change to $539,514 million in Jan-Dec 2012.
Table IIA-1, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%
| Trade Balance | Exports | Month ∆% | Imports | Month ∆% | |
| Jan 2013 | -44,448 | 184,453 | -1.2 | 228,901 | 1.8 |
| Dec 2012 | -38,144 | 186,630 | 2.2 | 224,774 | -2.6 |
| Nov | -48,228 | 182,526 | 1.2 | 230,753 | 3.8 |
| Oct | -42,046 | 180,279 | -3.4 | 222,325 | -2.1 |
| Sep | -40,345 | 186,653 | 3.1 | 226,998 | 1.5 |
| Aug | -42,552 | 181,117 | -0.9 | 223,668 | -0.4 |
| Jul | -41,944 | 182,689 | -1.5 | 224,634 | -0.8 |
| Jun | -40,921 | 185,550 | 1.3 | 226,471 | -1.6 |
| May | -47,009 | 183,109 | 0.4 | 230,118 | -0.9 |
| Apr | -49,726 | 182,468 | -1.2 | 232,194 | -1.8 |
| Mar | -51,726 | 184,685 | 2.5 | 236,412 | 5.2 |
| Feb | -44,586 | 180,166 | 0.9 | 224,751 | -2.7 |
| Jan | -52,288 | 178,619 | 0.5 | 230,907 | 0.6 |
| Dec 2011 | -51,748 | 177,751 | 0.6 | 229,499 | 1.8 |
| Nov | -48,835 | 176,710 | -1.1 | 225,545 | 0.5 |
| Oct | -45,703 | 178,742 | -1.0 | 224,445 | -0.3 |
| Sep | -44,467 | 180,629 | 1.3 | 225,096 | 0.9 |
| Aug | -44,775 | 178,382 | 0.0 | 223,157 | -0.3 |
| Jul | -45,580 | 178,339 | 3.3 | 223,919 | 0.4 |
| Jun | -50,234 | 172,664 | -1.7 | 222,988 | -0.2 |
| May | -47,669 | 175,673 | 0.0 | 223,343 | 1.9 |
| Apr | -43,556 | 175,662 | 0.9 | 219,218 | 0.1 |
| Mar | -44,902 | 174,169 | 4.6 | 219,071 | 3.7 |
| Feb | -44,801 | 166,545 | -0.9 | 211,346 | -2.0 |
| Jan | -47,523 | 168,098 | 1.6 | 215,621 | 4.6 |
| Dec 2010 | -40,677 | 165,499 | 2.0 | 206,176 | 2.5 |
| Jan-Dec 2012 | -539,514 | 2,194,491 | 2,734,005 | ||
| Jan-Dec | -559,880 | 2,103,367 | 2,663,247 | ||
| Jan-Dec | -494,737 | 1,842,485 | 2,337,222 |
Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding and seasonality. Source: US Census Bureau http://www.census.gov/foreign-trade/
Table IIA-2 provides the US international trade balance, exports and imports on an annual basis from 1992 to 2012. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $128.2 billion in IIIQ2011, or 3.4 percent of GDP to $128.3 billion in IIIQ2012, or 3.3 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The last row of Table IIA-2 shows marginal improvement of the trade deficit from $559,880 million in 2011 to lower $539,514 million in 2012 with exports growing 4.4 percent and imports 2.7 percent. Growth and commodity shocks under alternating inflation waves (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) have deteriorated the trade deficit from the low of $379,154 million in 2009.
Table IIA-2, US, International Trade Balance, Exports and Imports SA, Millions of Dollars
| Year | Balance | Exports | Imports |
| 1960 | 3,508 | 25,940 | 22,432 |
| 1961 | 4,195 | 26,403 | 22,208 |
| 1962 | 3,370 | 27,722 | 24,352 |
| 1963 | 4,210 | 29,620 | 25,410 |
| 1964 | 6,022 | 33,341 | 27,319 |
| 1965 | 4,664 | 35,285 | 30,621 |
| 1966 | 2,939 | 38,926 | 35,987 |
| 1967 | 2,604 | 41,333 | 38,729 |
| 1968 | 250 | 45,543 | 45,293 |
| 1969 | 91 | 49,220 | 49,129 |
| 1970 | 2,254 | 56,640 | 54,386 |
| 1971 | -1,302 | 59,677 | 60,979 |
| 1972 | -5,443 | 67,222 | 72,665 |
| 1973 | 1,900 | 91,242 | 89,342 |
| 1974 | -4,293 | 120,897 | 125,190 |
| 1975 | 12,404 | 132,585 | 120,181 |
| 1976 | -6,082 | 142,716 | 148,798 |
| 1977 | -27,246 | 152,301 | 179,547 |
| 1978 | -29,763 | 178,428 | 208,191 |
| 1979 | -24,565 | 224,131 | 248,696 |
| 1980 | -19,407 | 271,834 | 291,241 |
| 1981 | -16,172 | 294,398 | 310,570 |
| 1982 | -24,156 | 275,236 | 299,391 |
| 1983 | -57,767 | 266,106 | 323,874 |
| 1984 | -109,072 | 291,094 | 400,166 |
| 1985 | -121,880 | 289,070 | 410,950 |
| 1986 | -138,538 | 310,033 | 448,572 |
| 1987 | -151,684 | 348,869 | 500,552 |
| 1988 | -114,566 | 431,149 | 545,715 |
| 1989 | -93,141 | 487,003 | 580,144 |
| 1990 | -80,864 | 535,233 | 616,097 |
| 1991 | -31,135 | 578,344 | 609,479 |
| 1992 | -39,212 | 616,882 | 656,094 |
| 1993 | -70,311 | 642,863 | 713,174 |
| 1994 | -98,493 | 703,254 | 801,747 |
| 1995 | -96,384 | 794,387 | 890,771 |
| 1996 | -104,065 | 851,602 | 955,667 |
| 1997 | -108,273 | 934,453 | 1,042,726 |
| 1998 | -166,140 | 933,174 | 1,099,314 |
| 1999 | -263,160 | 967,008 | 1,230,168 |
| 2000 | -376,749 | 1,072,783 | 1,449,532 |
| 2001 | -361,771 | 1,007,726 | 1,369,496 |
| 2002 | -417,432 | 980,879 | 1,398,311 |
| 2003 | -490,984 | 1,023,519 | 1,514,503 |
| 2004 | -605,357 | 1,163,146 | 1,768,502 |
| 2005 | -708,624 | 1,287,441 | 1,996,065 |
| 2006 | -753,288 | 1,459,823 | 2,213,111 |
| 2007 | -696,728 | 1,654,561 | 2,351,289 |
| 2008 | -698,338 | 1,842,682 | 2,541,020 |
| 2009 | -379,154 | 1,578,945 | 1,958,099 |
| 2010 | -494,737 | 1,842,485 | 2,337,222 |
| 2011 | -559,880 | 2,103,367 | 2,663,247 |
| 2012 | -539,514 | 2,194,491 | 2,734,005 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
Chart IIA-1 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. There was slight improvement at the margin from Jul to Oct 2011 but new increase in the gap from Nov 2011 to Jan 2012 and again in Mar 2012 as exports grow less rapidly than imports. There is improvement in Apr 2012 with imports declining at a faster rate of 1.8 percent than decline of exports by 1.2 percent and growth of exports of 0.4 percent in May 2012 with imports declining 0.9 percent. Further improvement occurred in Jun 2012 with imports increasing 1.3 percent and exports declining 1.6 percent. There was deterioration in Jul with exports declining 1.5 percent and imports only 0.8 percent but deterioration in Aug with exports decreasing 0.9 percent while imports declined only 0.4 percent. In Sep 2012, exports increased 3.1 percent while imports increased only 1.5 percent. Further deterioration occurred in Oct with exports declining 3.4 percent but imports falling 2.1 percent. The trade deficit widened sharply to $48,228 million in Nov 2012 with growth of imports by 3.8 percent while exports increased 1.2 percent. In Dec 2012, the trade deficit narrowed to $38,144 million with growth of exports of 2.2 percent while imports fell 2.6 percent. There was further deterioration in Jan 2013 with exports falling 1.2 percent while exports grew 1.8 percent. Weaker world and internal demand and fluctuating commodity price increases explain the declining or less dynamic changes in exports and imports in Chart IIA-1.
Chart IIA-1, US, International Trade Balance, Exports and Imports of Goods and Services USD Billions
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr042.html
Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Jan 2013. There is a long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The trend of deterioration was reversed by the global recession from IVQ2007 to IIQ2009. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks.
Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Jan 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
Chart IIA-3 of the US Census Bureau provides US exports SA from Jan 1992 to Jan 2013. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation.
Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Dec 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
Chart IIA-4 of the US Census Bureau provides US imports SA from Jan 1992 to Jan 2013. Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment resulting from weaker world economic growth and diminishing inflation because of risk aversion.
Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Jan 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
The balance of international trade in goods of the US seasonally-adjusted is shown in Table IIA-3. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The balance in international trade of goods improved from $66.9 billion in Jan 2012 to $61.8 billion in Jan 2013. The improvement of the goods balance in Jan 2013 relative to Jan 2012 occurred mostly in the petroleum balance, exports less imports of petroleum, in the magnitude of decreasing the deficit by $5503 million, while there was virtually no change in the nonpetroleum balance, exports less imports of nonpetroleum goods, in the magnitude of increasing the deficit by $810 million. US terms of trade, export prices relative to import prices, and the US trade account fluctuate in accordance with the carry trade from zero interest rates to commodity futures exposures, especially oil futures. Exports increased 2.4 percent with nonpetroleum exports increasing 2.2 percent. Total imports decreased 1.1 percent with petroleum imports declining 13.1 percent and nonpetroleum imports increasing 2.2 percent.
Table IIA-3, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA
| Jan 2013 | Jan 2012 | ∆% | |
| Total Balance | -61,762 | -66,912 | |
| Petroleum | -24,349 | -29,852 | |
| Non Petroleum | -37,002 | -36,192 | |
| Total Exports | 130,776 | 127,757 | 2.4 |
| Petroleum | 9,730 | 9,370 | 3.8 |
| Non Petroleum | 119,555 | 116,965 | 2.2 |
| Total Imports | 192,538 | 194,670 | -1.1 |
| Petroleum | 34,078 | 39,222 | -13.1 |
| Non Petroleum | 156,557 | 153,157 | 2.2 |
Details may not add because of rounding and seasonal adjustment
Source: US Census Bureau http://www.census.gov/foreign-trade/
US exports and imports of goods not seasonally adjusted in Jan 2013 and Jan 2012 are shown in Table IIA-4. The rate of growth of exports was 4.3 percent and 0.9 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 13.3 percent and of mineral fuels that increased 2.1 percent both because higher prices of raw materials and commodities increase and fall recurrently as a result of shocks of risk aversion. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose 4.9 percent while imports rose 3.6 percent. Significant part of the US trade imbalance originates in imports of mineral fuels decreasing 11.3 percent and crude oil decreasing 11.6 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html).
Table IIA-4, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %
| Jan 2013 $ Millions | Jan 2012 $ Millions | ∆% | |
| Exports | 123,311 | 118,209 | 4.3 |
| Manufactured | 91,770 | 87,518 | 4.9 |
| Agricultural | 13,024 | 11,491 | 13.3 |
| Mineral Fuels | 10,825 | 10,606 | 2.1 |
| Petroleum | 8,881 | 8,388 | 5.9 |
| Imports | 185,148 | 183,411 | 0.9 |
| Manufactured | 146,746 | 141,589 | 3.6 |
| Agricultural | 8,885 | 9,055 | -1.9 |
| Mineral Fuels | 33,967 | 38,290 | -11.3 |
| Crude Oil | 32,361 | 36,625 | -11.6 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
The current account of the US balance of payments is provided in Table IIA-5 for IIIQ2011 and IIIQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $128.2 billion in IIIQ2011, or 3.4 percent of GDP, to $128.3 billion in IIIQ2012, or 3.3 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table IIA-5, US Balance of Payments, Millions of Dollars NSA
| IIIQ2011 | IIIQ2012 | Difference | |
| Goods Balance | -202,153 | -196,249 | 5,904 |
| X Goods | 378,454 | 382,877 | 1.2 ∆% |
| M Goods | -580,607 | -579,126 | -0.3 ∆% |
| Services Balance | 48,571 | 52,218 | 3,647 |
| X Services | 161,319 | 165,492 | 2.6 ∆% |
| M Services | -112,747 | -113,273 | 0.5 ∆% |
| Balance Goods and Services | -153,581 | -144,031 | 9,550 |
| Balance Income | 57,934 | 50,271 | -7,663 |
| Unilateral Transfers | -32,525 | -34,510 | -1,985 |
| Current Account Balance | -128,172 | -128,270 | -98 |
| % GDP | IIIQ2011 | IVQ2011 | IIIQ2012 |
| 3.4 | 3.1 | 3.3 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: Bureau of Economic Analysis
http://www.census.gov/foreign-trade/
In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
The alternative fiscal scenario of the CBO (2012NovCDR) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.
The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.
This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.
The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):
“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”
The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table IIA-6 provides data on the US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012NovCDR) estimates the federal deficit in 2012 at $1089 billion or 7.7 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html). The combined record federal deficits of the US from 2009 to 2012 are $5092 billion or 33 percent of the estimate of GDP of $15,538 billion for fiscal year 2012 by the CBO (http://www.cbo.gov/publication/43542 2012AugBEO). The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5092 trillion in four years, using the fiscal year deficit of $1089.4 billion for fiscal year 2012 (http://www.fms.treas.gov/mts/mts0912.txt), which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5092 billion. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 72.5 percent of GDP in 2012 (CBO2012AugBEO, CBO2012NovCDR, CBO2013BEOFeb5). This situation may worsen in the future (CBO 2012LTBO):
“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”
Table IIA-6, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Goods & | -377 | -697 | -698 | -379 | -495 | -559 |
| Income | 19 | 101 | 147 | 119 | 184 | 227 |
| UT | -58 | -115 | -126 | -122 | -131 | -133 |
| Current Account | -416 | -710 | -677 | -382 | -442 | -466 |
| NGDP | 9951 | 14028 | 14291 | 13974 | 14499 | 15076 |
| Current Account % GDP | -3.8 | -5.1 | -4.7 | -2.7 | -3.1 | -3.1 |
| NIIP | -1337 | -1796 | -3260 | -2321 | -2474 | -4030 |
| US Owned Assets Abroad | 6239 | 18399 | 19464 | 18512 | 20298 | 21132 |
| Foreign Owned Assets in US | 7576 | 20195 | 22724 | 20833 | 22772 | 25162 |
| NIIP % GDP | -13.4 | -12.8 | -22.8 | -16.6 | -17.1 | 26.7 |
| Exports | 1425 | 2488 | 2657 | 2181 | 2519 | 2848 |
| NIIP % | -94 | -72 | -123 | -106 | -98 | -142 |
| DIA MV | 2694 | 5274 | 3102 | 4287 | 4767 | 4450 |
| DIUS MV | 2783 | 3551 | 2486 | 2995 | 3397 | 3509 |
| Fiscal Balance | +236 | -161 | -459 | -1413 | -1294 | -1297 |
| Fiscal Balance % GDP | +2.4 | -1.2 | -3.2 | -10.1 | -9.0 | -8.7 |
| Federal Debt | 3410 | 5035 | 5803 | 7545 | 9019 | 10128 |
| Federal Debt % GDP | 34.7 | 36.3 | 40.5 | 54.1 | 62.8 | 67.7 |
| Federal Outlays | 1789 | 2729 | 2983 | 3518 | 3456 | 3603 |
| ∆% | 5.1 | 2.8 | 9.3 | 17.9 | -1.8 | 4.3 |
| % GDP | 18.2 | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 |
| Federal Revenue | 2052 | 2568 | 2524 | 2105 | 2162 | 2302 |
| ∆% | 10.8 | 6.7 | -1.7 | -16.6 | 2.7 | 6.5 |
| % GDP | 20.6 | 18.5 | 17.6 | 15.1 | 15.1 | 15.4 |
Sources:
Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. These discrepancies do not alter conclusions.
Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop
Chart IIA-5 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2011. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.
Chart IIA-5, US, Balance on Current Account, 1960-2011, Millions of Dollars
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
Chart IIA-6 provides the quarterly balance of payments of the United States in millions of dollars from 1995 to IIIQ2012. The global recession appeared to be adjusting the current account deficit that rises to lower dollar values. Recovery of the economy worsened again the current account deficit. Growth at trend worsens the external imbalance of the US that combines now with unsustainable Treasury deficits/debt.
Chart IIA-6, US, Balance on Current Account, Quarterly 1995-2012, Millions of Dollars, SA
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Mar 1 and daily values throughout the week ending on Mar 8, 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Mar 1 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Mar 1, 2013”, first row “USD/EUR 1.3020 1.3%,” provides the information that the US dollar (USD) appreciated 1.3 percent to USD 1.3020/EUR in the week ending on Fri Mar 1 relative to the exchange rate on Fri Feb 22. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3020/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Mar 1, depreciating to USD 1.3051/EUR on Tue Mar 5, 2013, or by 0.2 percent. The dollar depreciated because more dollars, $1.3051, were required on Tue Mar 5 to buy one euro than $1.3020 on Mar 5. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3020/EUR on Mar 1; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Mar 1, to the last business day of the current week, in this case Fri Mar 8, such as appreciation to USD 1.3003/EUR by Mar 8; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 0.1 percent from the rate of USD 1.3020/EUR on Fri Mar 1 to the rate of USD 1.3003/EUR on Fri Mar 8 {[(1.3003/1.3020) – 1]100 = -0.1%} and appreciated (denoted by positive sign) by 0.8 percent from the rate of USD 1.3107 on Thu Mar 7 to USD 1.3003/EUR on Fri Mar 8 {[(1.3003/1.3107) -1]100 = -0.8%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.
Table III-I, Weekly Financial Risk Assets Mar 4 to Mar 8, 2013
| Fri Mar 1, 2013 | M 4 | Tue 5 | W 6 | Thu 7 | Fr 8 |
| USD/EUR 1.3020 1.3% | 1.3026 0.0% 0.0% | 1.3051 -0.2% -0.2% | 1.2966 0.4% 0.7% | 1.3107 -0.7% -1.1% | 1.3003 0.1% 0.8% |
| JPY/ USD 93.59 -0.2% | 93.48 0.1% 0.1% | 93.29 0.3% 0.2% | 94.07 -0.5% -0.8% | 94.83 -1.3% -0.8% | 96.03 -2.6% -1.3% |
| CHF/ USD 0.9428 -1.4% | 0.9409 0.2% 0.2% | 0.9408 0.2% 0.0% | 0.9488 -0.6% -0.9% | 0.9427 0.0% 0.6% | 0.9515 -0.9% -0.9% |
| CHF/ EUR 1.2280 -0.2% | 1.2256 0.2% 0.2% | 1.2279 0.0% -0.2% | 1.2308 -0.2% -0.2% | 1.2356 -0.6% -0.4% | 1.2372 -0.7% -0.1% |
| USD/ AUD 1.0204 0.9800 -1.1% | 1.0196 0.9808 -0.1% -0.1% | 1.0257 0.9749 0.5% 0.6% | 1.0234 0.9771 0.3% -0.2% | 1.0268 0.9739 0.6% 0.3% | 1.0233 0.9772 0.3% -0.3% |
| 10 Year T Note 1.842 | 1.88 | 1.896 | 1.941 | 1.995 | 2.056 |
| 2 Year T Note 0.236 | 0.236 | 0.234 | 0.244 | 0.252 | 0.256 |
| German Bond 2Y 0.03 10Y 1.41 | 2Y 0.03 10Y 1.42 | 2Y 0.06 10Y 1.45 | 2Y 0.04 10Y 1.46 | 2Y 0.09 10Y 1.49 | 2Y 0.09 10Y 1.53 |
| DJIA 14089.66 0.6% | 14127.82 0.3% 0.3% | 14253.77 1.2% 0.9% | 14296.24 1.5% 0.3% | 14329.49 1.7% 0.2% | 14397.07 2.2% 0.5% |
| Dow Global 2078.95 -0.3% | 2078.93 0.0% 0.0% | 2103.79 1.2% 1.2% | 2111.23 1.6% 0.4% | 2116.42 1.8% 0.2% | 2126.69 2.3% 0.5% |
| DJ Asia Pacific 1371.29 0.9% | 1363.54 -0.6% -0.6% | 1369.44 -0.1% 0.4% | 1384.07 0.9% 1.1% | 1377.25 0.4% -0.5% | 1380.48 0.7% 0.2% |
| Nikkei 11606.38 1.9% | 11652.29 0.4% 0.4% | 11683.45 0.7% 0.3% | 11932.27 2.8% 2.1% | 11968.08 3.1% 0.3% | 12283.62 5.8% 2.6% |
| Shanghai 2359.51 2.0% | 2273.40 -3.6% -3.6% | 2326.31 1.4% 2.3% | 2347.18 -0.5% 0.9% | 2324.29 -1.5% -1.0% | 2318.61 -1.7% -0.2% |
| DAX 7708.16 0.6% | 7691.68 -0.2% -0.2% | 7870.31 2.1% 2.3% | 7919.33 2.7% 0.6% | 7939.77 3.0% 0.3% | 7986.47 3.6% 0.6% |
| DJ UBS Comm. 135.77 -0.7% | 135.95 0.1% 0.1% | 136.50 0.5% 0.4% | 135.47 -0.2% 0.8% | 136.77 0.7% 1.0% | 137.25 1.1% 0.4% |
| WTI $ B 90.94 -2.6% | 90.10 -0.9% -0.9% | 90.61 -0.4% 0.6% | 90.43 -0.6% -0.2% | 91.56 0.7% 1.2% | 91.84 1.0% 0.3% |
| Brent $/B 110.68 -3.1% | 110.05 -0.6% -0.6% | 111.54 0.8% 1.4% | 111.05 0.3% -0.4% | 111.02 0.3% 0.0% | 110.77 0.1% -0.2% |
| Gold $/OZ 1575.4 -0.3% | 1572.8 -0.2% -0.2% | 1574.8 0.0% 0.1% | 1583.2 0.5% 0.5% | 1577.0 0.1% -0.4% | 1578.3 0.2% 0.1% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans.
A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14198.10 reached on Oct 11, 2007. The DJIA closed at 14397.07 on Fri Mar 8, 2013, which is higher by 1.6 percent than the value of 14,164.52 reached on Oct 9, 2007 and higher by 1.4 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN
), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 4.718 percent on Mar 11, 2012 and that of the ten-year sovereign bond of Italy at 4.602 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Mar 8, 2013, the yield of the two-year Treasury increased to 0.256 percent and that of the ten-year Treasury increased to 2.056 percent while the two-year bond of Germany increased to 0.09 percent and the ten-year increased to 1.53 percent; and the dollar appreciated to USD 1.3003/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is about equal to consumer price inflation of 1.6 percent in the 12 months ending in Jan 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.
Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate
| US 2Y | US 10Y | DE 2Y | DE 10Y | USD/ EUR | |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 3/1/13 | 0.236 | 1.842 | 0.03 | 1.41 | 1.3020 |
| 2/22/13 | 0.252 | 1.967 | 0.13 | 1.57 | 1.3190 |
| 2/15/13 | 0.268 | 2.007 | 0.19 | 1.65 | 1.3362 |
| 2/8/13 | 0.252 | 1.949 | 0.18 | 1.61 | 1.3365 |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.federalreserve.gov/releases/h15/data.htm
http://www.ecb.int/stats/money/long/html/index.en.html
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields together with the overnight fed funds rate and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Mar 7, 2013, with the one-month yield at 0.10 percent, the two-year at 0.25 percent, the ten-year at 2.0 percent, the fed funds rate at 0.16 percent and the corporate Baa bond at 4.89 percent.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Mar 7, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
![clip_image018[2]](http://lh3.ggpht.com/-mlR8IFkH6UM/UT6Datb2YTI/AAAAAAAASPY/M77LzLNOKFY/s1600-h/clip_image018%25255B2%25255D%25255B2%25255D.gif "clip_image018[2]"){kind=small}
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image018[3]](http://lh5.ggpht.com/-Vt4NLmz-2XU/UT6DbZbJ8CI/AAAAAAAASPo/MN1f8xy9SA8/s1600-h/clip_image018%25255B3%25255D%25255B2%25255D.gif "clip_image018[3]"){kind=small}
declines.
There was mostly strong performance in equity indexes with many indexes gaining in Table III-1 in the week ending on Mar 8, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 0.5 percent on Mar 8, increasing 2.2 percent in the week, repeatedly breaking historical highs. Germany’s Dax increased 0.6 percent on Fri Mar 8 and increased 3.6 percent in the week. Dow Global increased 0.5 percent on Mar 8 and increased 2.3 percent in the week. Japan’s Nikkei Average increased 2.6 percent on Fri Mar 8 and increased 5.8 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM increased 0.2 percent on Mar 8 and increased 0.7 percent in the week while Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2318.61 on Fri Mar 8. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were mostly stronger in the week of Mar 8, 2013. The DJ UBS Commodities Index increased 0.4 percent on Fri Mar 8 and increased 1.1 percent in the week, as shown in Table III-1. WTI increased 1.0 percent in the week of Mar 8 while Brent increased 0.1 percent in the week. Gold increased 0.1 percent on Fri Mar 8 and increased 0.2 percent in the week.
Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €946,086 million on Mar 1, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,554.110 million in the statement of Mar 1, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €87,900 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Mar 1, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 438,690 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 252,891 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 30,765 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 21,490 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 946,086 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 73,592 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 608,024 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 29,912 |
| 9 Other Assets | 278,719 | 336,574 | 279,169 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,680,619 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,554,110 |
| Capital and Reserves | 78,143 | 85,748 | 87,900 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130305.en.html
IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.6 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.2 percent in Jan-Dec 2012 relative to Jan-Dec 2011 while those to EMU are falling at 1.5 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Dec 2012 | Exports | ∆% Jan-Dec 2012/ Jan-Dec 2011 | Imports | Imports |
| EU | 56.0 | -0.7 | 53.7 | -7.2 |
| EMU 17 | 42.6 | -1.5 | 43.4 | -7.1 |
| France | 11.6 | -1.0 | 8.4 | -6.8 |
| Germany | 13.1 | -1.1 | 15.5 | -11.5 |
| Spain | 5.3 | -8.1 | 4.5 | -7.0 |
| UK | 4.7 | 8.0 | 2.7 | -12.8 |
| Non EU | 44.0 | 9.2 | 46.3 | -3.9 |
| Europe non EU | 13.3 | 8.4 | 10.8 | -1.0 |
| USA | 6.1 | 16.8 | 3.2 | -2.8 |
| China | 2.7 | -9.9 | 7.4 | -16.5 |
| OPEC | 4.7 | 24.6 | 8.5 | 19.7 |
| Total | 100.0 | 3.7 | 100.0 | -5.7 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/82327
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €1722 million with the 17 countries of the euro zone (EMU 17) in Dec 2012 and deficit of €3915 million in Jan-Dec 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €11,495 million in Jan-Dec 2012 with Europe non European Union and of €13,990 million with the US and with non European Union of €2066 million in Jan-Dec 2012. There is significant rigidity in the trade deficits in Jan-Dec of €15,692 million with China and €19,003 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Dec 2012 Millions of Euro | Trade Balance Cumulative Jan-Dec 2012 Millions of Euro |
| EU | -1,155 | 8,956 |
| EMU 17 | -1,722 | -3,915 |
| France | 582 | 11,845 |
| Germany | -1,029 | -6,501 |
| Spain | -71 | 1,443 |
| UK | 562 | 9,404 |
| Non EU | 3,317 | 2,066 |
| Europe non EU | 908 | 11,495 |
| USA | 1,275 | 13,990 |
| China | -687 | -15,692 |
| OPEC | -795 | -19,003 |
| Total | 2,162 | 11,022 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/82327
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Dec 2012 relative to Jan-Dec 2011. Growth rates in 12 months of imports are negative with the exception of 7.1 percent for energy. The higher rate of growth of exports of 3.7 percent in Jan-Dec 2012/Jan-Dec 2011 relative to imports of minus 5.7 percent may reflect weak demand in Italy with GDP declining during six consecutive quarters from IIIQ2011 through IVQ2012.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 28.9 | 5.1 | 25.0 | -3.3 |
| Durable | 5.9 | 2.6 | 3.0 | -7.1 |
| Non | 23.0 | 5.8 | 22.0 | -2.7 |
| Capital Goods | 32.3 | 1.5 | 21.1 | -12.9 |
| Inter- | 34.2 | 1.9 | 34.3 | -10.3 |
| Energy | 4.7 | 21.9 | 19.6 | 7.1 |
| Total ex Energy | 95.3 | 2.8 | 80.4 | -8.8 |
| Total | 100.0 | 3.7 | 100.0 | -5.7 |
Note: % Share for Jan-Nov 2012.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/82327
Table III-6 provides Italy’s trade balance by product categories in Dec 2012 and cumulative Jan-Dec 2012. Italy’s trade balance excluding energy generated surplus of €6814 million in Dec 2012 and €74,016 million in Jan-Dec 2012 but the energy trade balance created deficit of €4653 million in Dec 2012 and €62,994 million in Jan-Dec 2012. The overall surplus in Dec 2012 was €2162 million with surplus of €11,022 million in Jan-Dec 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table III-6, Italy, Trade Balance by Product Categories, € Millions
| Dec 2012 | Cumulative Jan-Dec 2012 | |
| Consumer Goods | 1,694 | 17,197 |
| Durable | 1,038 | 11,623 |
| Nondurable | 656 | 5,574 |
| Capital Goods | 4,454 | 49,327 |
| Intermediate Goods | 665 | 7,492 |
| Energy | -4,653 | -62,994 |
| Total ex Energy | 6,814 | 74,016 |
| Total | 2,162 | 11,022 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/82327
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2012 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 71,277 | ||
| Euro Zone | 12,065 | -0.5 | 73.4 |
| Portugal | 211 | -0.7 | 110.9 |
| Ireland | 205 | -4.4 | 103.0 |
| Greece | 255 | -1.7 | 170.7 |
| Spain | 1,340 | -4.5 | 78.6 |
| Major Advanced Economies G7 | 33,769 | -5.1 | 89.0 |
| United States | 15,653 | -6.5 | 83.8 |
| UK | 2,434 | -5.6 | 83.7 |
| Germany | 3,367 | 1.4 | 58.4 |
| France | 2,580 | -2.2 | 83.7 |
| Japan | 5,984 | -9.1 | 135.4 |
| Canada | 1,770 | -3.2 | 35.8 |
| Italy | 1,980 | 2.6 | 103.1 |
| China | 8,250 | -1.3* | 22.2** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,855.7 | ||
| B Germany | 1,996.3 | $8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4% | |
| C France | 2,159.5 | ||
| B+C | 4,155.8 | GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7% | |
| D Italy | 2,041.4 | ||
| E Spain | 1,053.2 | ||
| F Portugal | 234.0 | ||
| G Greece | 435.3 | ||
| H Ireland | 211.2 | ||
| Subtotal D+E+F+G+H | 3,975.1 |
Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Dec 2012. German exports to other European Union (EU) members are 55.9 percent of total exports in Dec 2012 and 57.1 percent in Jan-Dec 2012. Exports to the euro area are 37.1 percent in Dec and 37.5 percent in Jan-Dec. Exports to third countries are 44.1 percent of the total in Dec and 43.0 percent in Jan-Dec. There is similar distribution for imports. Exports to non-euro countries are decreasing 4.5 percent in Dec 2012 and increasing 3.3 percent in Jan-Dec 2012 while exports to the euro area are decreasing 7.3 percent in Dec and decreasing 2.1 percent in Jan-Dec 2012. Exports to third countries, accounting for 44.1 percent of the total in Dec 2012, are decreasing 7.5 percent in Dec and increasing 8.8 percent in Jan-Dec, accounting for 43.0 percent of the cumulative total in Jan-Dec 2012. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Dec 2012 | Dec 12-Month | Jan–Dec 2012 € Billions | Jan-Dec 2012/ | |
| Total | 79.0 | -6.9 | 1,097.4 | 3.4 |
| A. EU | 44.2 % 55.9 | -6.4 | 625.7 % 57.0 | -0.3 |
| Euro Area | 29.3 % 37.1 | -7.3 | 411.9 % 37.5 | -2.1 |
| Non-euro Area | 14.9 % 18.9 | -4.5 | 213.8 % 19.5 | 3.3 |
| B. Third Countries | 34.8 % 44.1 | -7.5 | 471.7 % 43.0 | 8.8 |
| Total Imports | 67.0 | -7.3 | 909.2 | 0.7 |
| C. EU Members | 42.6 % 63.6 | -7.1 | 577.1 % 63.5 | 0.9 |
| Euro Area | 29.9 % 44.6 | -6.8 | 402.4 % 44.3 | 0.7 |
| Non-euro Area | 12.8 % 19.1 | -7.9 | 172.9 % 19.0 | 1.4 |
| D. Third Countries | 24.4 % 36.4 | -7.6 | 332.1 % 36.5 | 0.4 |
Notes: Total Exports = A+B; Total Imports = C+D
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/02/PE13_050_51.html
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
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