CMP Associates Regulation Blog: Increasing Interest Rate Risk, Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Financial Repression, World Economic Slowdown and Global Recession Risk: Part I

Increasing Interest Rate Risk, Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Financial Repression, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Mediocre and Decelerating United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

II Stagnating Real Disposable Income and Consumption Expenditures

IIA1 Stagnating Real Disposable Income and Consumption Expenditures

IIA2 Financial Repression

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

Contents of Executive Summary

ESI Increasing Interest Rate Risk, Tapering Quantitative Easing, Duration Dumping, Steepening Yield Curve and Global Financial and Economic Risk

ESII Mediocre United States Economic Growth

ESIII Contracting Real Private Fixed Investment

ESIV Swelling Undistributed Corporate Profits

ESV Stagnating Real Disposable Income

ESVI Financial Repression

ESVII US Long-term Prices and Fear of Deflation

ESI Increasing Interest Rate Risk, Tapering Quantitative Easing, Duration Dumping, Steepening Yield Curve and 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 for both 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:

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 10.4 percent in IIQ2011 to 7.4 percent in IVQ2011 and 6.2 percent in IQ2012, rebounding to 8.7 percent in IIQ2012, 8.2 percent in IIIQ2012 and 7.8 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.6 percent and to 7.0 percent in IIQ2013 (See Subsection VC and earlier at http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and_7005.html and earlier 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).
United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 28.7 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining real wages.
Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.
World Inflation Waves. Inflation continues in repetitive waves globally (http://cmpassocregulationblog.blogspot.com/2013/08/duration-dumping-and-peaking-valuations_18.html

A list of financial uncertainties includes:

Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk.
Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.
Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.
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.
Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy (Sargent and Silber 2012Mar20).
Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path with fluctuations caused by intermittent risk aversion

Professionals use a variety of techniques in measuring interest rate risk (Fabozzi, Buestow and Johnson, 2006, Chapter Nine, 183-226):

Full valuation approach in which securities and portfolios are shocked by 50, 100, 200 and 300 basis points to measure their impact on asset values
Stress tests requiring more complex analysis and translation of possible events with high impact even if with low probability of occurrence into effects on actual positions and capital
Value at Risk (VaR) analysis of maximum losses that are likely in a time horizon
Duration and convexity that are short-hand convenient measurement of changes in prices resulting from changes in yield captured by duration and convexity
Yield volatility

Analysis of these methods is in Pelaez and Pelaez (International Financial Architecture (2005), 101-162) and Pelaez and Pelaez, Globalization and the States, Vol. (I) (2008a), 78-100). Frederick R. Macaulay (1938) introduced the concept of duration in contrast with maturity for analyzing bonds. Duration is the sensitivity of bond prices to changes in yields. In economic jargon, duration is the yield elasticity of bond price to changes in yield, or the percentage change in price after a percentage change in yield, typically expressed as the change in price resulting from change of 100 basis points in yield, with the mathematical formula being the negative of the yield elasticity of the bond price or –[dB/d(1+y)]((1+y)/B), where d is the derivative operator of calculus, B the bond price, y the yield and the elasticity does not have dimension (Hallerbach 2001). The duration trap of unconventional monetary policy is that duration is higher the lower the coupon and higher the lower the yield, other things being constant. Coupons and yields are historically low because of unconventional monetary policy. Duration dumping during a rate increase may trigger the same crossfire selling of high duration positions that magnified the credit crisis. Traders reduced positions because capital losses in one segment, such as mortgage-backed securities, triggered haircuts and margin increases that reduced capital available for positioning in all segments, causing fire sales in multiple segments (Brunnermeier and Pedersen 2009; see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 217-24). Financial markets are currently experiencing fear of duration resulting from the debate within and outside the Fed on tapering quantitative easing. Table VIII-2 provides the yield curve of Treasury securities on Aug 30, 2013, Aug 22, 2013, May 1, 2013, Aug 30, 2012 and Aug 30, 2006. There is ongoing steepening of the yield curve for longer maturities, which are also the ones with highest duration. The 10-year yield increased from 1.45 percent on Jul 26, 2012 to 2.90 percent on Aug 22, 2013, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Aug 22, 2013 at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 87.4912 with instantaneous increase of the yield to 2.90 percent for loss of 12.5 percent and far more with leverage. Losses absorb capital available for positioning, triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). Chris Dieterich, writing on “Bond investors turn to cash,” on Jul 25, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323971204578625900935618178.html), uses data of the Investment Company Institute (http://www.ici.org/) in showing withdrawals of $43 billion in taxable mutual funds in Jun, which is the largest in history, with flows into cash investments such as $8.5 billion in the week of Jul 17 into money-market funds.

Table VIII-2, United States, Treasury Yields

	8/30/13	8/22/13	5/01/13	8/30/12	8/30/06
1 M	0.02	0.01	0.03	0.12	5.16
3 M	0.03	0.03	0.06	0.10	5.05
6 M	0.05	0.06	0.08	0.14	5.14
1 Y	0.13	0.14	0.11	0.17	5.03
2 Y	0.39	0.42	0.20	0.27	4.83
3 Y	0.79	0.82	0.30	0.35	4.76
5 Y	1.62	1.71	0.65	0.66	4.72
7 Y	2.24	2.34	1.07	1.08	4.72
10 Y	2.78	2.90	1.66	1.63	4.76
20 Y	3.46	3.63	2.44	2.36	4.98
30 Y	3.70	3.88	2.83	2.75	4.91

Source: United States Treasury http://www.treasury.gov/resource-center/data-chart-center/Pages/index.aspx

Interest rate risk is increasing in the US. Chart VI-13 of the Board of Governors provides the conventional mortgage rate for a fixed-rate 30-year mortgage. The rate stood at 5.87 percent on Jan 8, 2004, increasing to 6.79 percent on Jul 6, 2006. The rate bottomed at 3.35 percent on May 2, 2013. Fear of duration risk in longer maturities such as mortgage-backed securities caused continuing increases in the conventional mortgage rate that rose to 4.51 percent on Jul 11, 2013 and 4.51 percent on Aug 29, 2013, which is the last data point in Chart VI-13.

Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Jan 29, 2013

Source: Board of Governors of the Federal Reserve System

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

The major reason and channel of transmission of unconventional monetary policy is through expectations of inflation. Fisher (1930) provided theoretical and historical relation of interest rates and inflation. Let i_n be the nominal interest rate, i_r the real or inflation-adjusted interest rate and π^e the expectation of inflation in the time term of the interest rate, which are all expressed as proportions. The following expression provides the relation of real and nominal interest rates and the expectation of inflation:

(1 + i_r) = (1 + i_n)/(1 + π^e) (1)

That is, the real interest rate equals the nominal interest rate discounted by the expectation of inflation in time term of the interest rate. Fisher (1933) analyzed the devastating effect of deflation on debts. Nominal debt contracts remained at original principal interest but net worth and income of debtors contracted during deflation. Real interest rates increase during declining inflation. For example, if the interest rate is 3 percent and prices decline 0.2 percent, equation (1) calculates the real interest rate as:

(1 +0.03)/(1 – 0.02) = 1.03/(0.998) = 1.032

That is, the real rate of interest is (1.032 – 1) 100 or 3.2 percent. If inflation were 2 percent, the real rate of interest would be 0.98 percent, or about 1.0 percent {[(1.03/1.02) -1]100 = 0.98%}.

The yield of the one-year Treasury security was quoted in the Wall Street Journal at 0.114 percent on Fri May 17, 2013 (http://online.wsj.com/mdc/page/marketsdata.html?mod=WSJ_topnav_marketdata_main). The expected rate of inflation π^e in the next twelve months is not observed. Assume that it would be equal to the rate of inflation in the past twelve months estimated by the Bureau of Economic Analysis (BLS) at 1.1 percent (http://www.bls.gov/cpi/). The real rate of interest would be obtained as follows:

(1 + 0.00114)/(1 + 0.011) = (1 + r_r) = 0.9902

That is, i_r is equal to 1 – 0.9902 or minus 0.98 percent. Investing in a one-year Treasury security results in a loss of 0.98 percent relative to inflation. The objective of unconventional monetary policy of zero interest rates is to induce consumption and investment because of the loss to inflation of riskless financial assets. Policy would be truly irresponsible if it intended to increase inflationary expectations or π^e. The result could be the same rate of unemployment with higher inflation (Kydland and Prescott 1977).

Current focus is on “tapering” quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “tapering” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What really matters in the statement of the Federal Open Market Committee (FOMC) on Jul 31, 2013, is interest rates of fed funds at 0 to ¼ percent for the foreseeable future, even with paring of purchases of longer term bonds for the portfolio of the Fed (http://www.federalreserve.gov/newsevents/press/monetary/20130731a.htm):

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.” (emphasis added).

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

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 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 14,810.31

on Fri Aug 30, 2013, which is higher by 4.6 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 4.3 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 DJIA has increased 52.9 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Aug 30, 2013; S&P 500 has gained 59.7 percent; and DAX 42.9 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 8/30/13” 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 11.9 percent below the trough; Japan’s Nikkei Average is 51.7 percent above the trough; DJ Asia Pacific TSM is 16.2 percent above the trough; Dow Global is 28.1 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 16.3 percent above the trough; and NYSE Financial Index is 34.2 percent above the trough. DJ UBS Commodities is 5.2 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 42.9 percent above the trough. Japan’s Nikkei Average is 51.7 percent above the trough on Aug 31, 2010 and 17.5 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 13,388.86 on Fri Aug 30, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 30.6 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 10.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 8/30/13” in Table VI-4 shows increase of 2.0 percent in the week for China’s Shanghai Composite. DJ Asia Pacific decreased 1.2 percent. NYSE Financial decreased 3.1 percent in the week. DJ UBS Commodities increased 0.2 percent. Dow Global decreased 2.7 percent in the week of Aug 30, 2013. The DJIA decreased 1.3 percent and S&P 500 decreased 1.8 percent. DAX of Germany decreased 3.7 percent. STOXX 50 decreased 2.0 percent. The USD appreciated 1.2 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 8/30/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Aug 30, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 8/30/13” but also relative to the peak in column “∆% Peak to 8/30/13.” There are now several equity indexes above the peak in Table VI-4: DJIA 32.2 percent, S&P 500 34.1 percent, DAX 28.0 percent, Dow Global 4.5 percent, DJ Asia Pacific 1.7 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 6.9 percent and Nikkei Average 17.5 percent. There are two equity index below the peak: Shanghai Composite by 33.7 percent and STOXX 50 by 1.5 percent. DJ UBS Commodities Index is now 10.1 percent below the peak. The US dollar strengthened 12.6 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. Alexandra Scaggs, writing on “Tepid profits, roaring stocks,” on May 16, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323398204578487460105747412.html), analyzes stabilization of earnings growth: 70 percent of 458 reporting companies in the S&P 500 stock index reported earnings above forecasts but sales fell 0.2 percent relative to forecasts of increase of 0.5 percent. Paul Vigna, writing on “Earnings are a margin story but for how long,” on May 17, 2013, published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2013/05/17/earnings-are-a-margin-story-but-for-how-long/), analyzes that corporate profits increase with stagnating sales while companies manage costs tightly. More than 90 percent of S&P components reported moderate increase of earnings of 3.7 percent in IQ2013 relative to IQ2012 with decline of sales of 0.2 percent. Earnings and sales have been in declining trend. In IVQ2009, growth of earnings reached 104 percent and sales jumped 13 percent. Net margins reached 8.92 percent in IQ2013, which is almost the same at 8.95 percent in IIIQ2006. Operating margins are 9.58 percent. There is concern by market participants that reversion of margins to the mean could exert pressure on earnings unless there is more accelerated growth of sales. Vigna (op. cit.) finds sales growth limited by weak economic growth. 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. Future company cash flows derive from investment projects. In IQ1980, gross private domestic investment in the US was $951.6 billion of 2009 dollars, growing to $1,143.0 billion in IVQ1986 or 20.1 percent. Real gross private domestic investment in the US decreased 2.9 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,529.2 billion in IIQ2013. Real private fixed investment fell 5.0 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,455.8 billion in IIQ2013. Growth of real private investment in is mediocre for all but four quarters from IIQ2011 to IQ2012 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 100.3 percent in nominal terms from IVQ2007 to IQ2013 while net dividends increased 24.6 percent and undistributed corporate profits swelled 280.2 percent from $107.7 billion in IQ2007 to $409.5 billion in IIQ2013 and changed signs from minus $55.9 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Corporate profits with IVA and CCA fell $26.6 billion in IQ2013 after increasing $34.9 billion in IVQ2012 and $13.9 billion in IIIQ2012. Corporate profits with IVA and CCA rebounded with $78.3 billion in IIQ2013. Profits after tax with IVA and CCA fell $1.7 billion in IQ2013 after increasing $40.8 billion in IVQ2012 and $4.5 billion in IIIQ2012. In IIQ2013, profits after tax with IVA and CCA increased $67.8 billion. Anticipation of higher taxes in the “fiscal cliff” episode caused increase of $120.9 billion in net dividends in IVQ2012 followed with adjustment in the form of decrease of net dividends by $103.8 billion in IQ2013, rebounding with $273.8 billion in IIQ2013. There is similar decrease of $80.1 billion in undistributed profits with IVA and CCA in IVQ2012 followed by increase of $102.1 billion in IQ2013 and decline of $205.9 billion in IIQ2013. Undistributed profits of US corporations swelled 280.2 percent from $107.7 billion IQ2007 to $409.5 billion in IIQ2013 and changed signs from minus $55.9 billion in billion in IVQ2007 (Section IA2). In IQ2013, corporate profits with inventory valuation and capital consumption adjustment fell $26.6 billion relative to IVQ2012, from $2047.2 billion to $2020.6 billion at the quarterly rate of minus 1.3 percent. In IIQ2013, corporate profits with IVA and CCA increased $78.3 billion from $2020.6 billion in IQ2013 to $2098.9 billion at the quarterly rate of 3.9 percent (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf). Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. The investment decision of US business is fractured.

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

declines. Equally, decline in expected revenue from the stock or project, R_τ, 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 VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 8/30/ /13	∆% Week 8/30/13	∆% Trough to 8/30/ 13
DJIA	4/26/ 10	7/2/10	-13.6	32.2	-1.3	52.9
S&P 500	4/23/ 10	7/20/ 10	-16.0	34.1	-1.8	59.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	6.9	-3.1	34.2
Dow Global	4/15/ 10	7/2/10	-18.4	4.5	-2.7	28.1
Asia Pacific	4/15/ 10	7/2/10	-12.5	1.7	-1.2	16.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	17.5	-2.0	51.7
China Shang.	4/15/ 10	7/02 /10	-24.7	-33.7	2.0	-11.9
STOXX 50	4/15/10	7/2/10	-15.3	-1.5	-2.0	16.3
DAX	4/26/ 10	5/25/ 10	-10.5	28.0	-3.7	42.9
Dollar Euro	11/25 2009	6/7 2010	21.2	12.6	1.2	-10.9
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-10.1	0.2	5.2
10-Year T Note	4/5/ 10	4/6/10	3.986	2.784

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

ESII Mediocre United States Economic Growth. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2012 and at 3.2 percent from 1947 to 2012. There were periodic contractions or recessions in this period but the economy grew at faster rates in the subsequent expansions, maintaining long-term economic growth at trend.
Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.7 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IQ1986 was 5.7 percent. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IIQ2013 was only 2.7 percent. The US appears to have lost its dynamism of income growth and employment creation.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2012	3.3
1947-2012	3.2
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IQ1986	5.7
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IIQ2013	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2012	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2012	1.4	0.6

Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.8 to 1.9 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Six Quarters. GDP growth in the four quarters of 2012 and the first two quarters of 2013 accumulated to 2.9 percent. This growth is equivalent to 1.9 percent per year, obtained by dividing GDP in IIQ2013 of $15,681.0 by GDP in IVQ2011 of $15,242.1 and compounding by 4/6: {[($15,681.0/$15,242.1)^4/6 -1]100 = 1.9.

2. Average Annual Growth in the First Two Quarters of 2013. GDP growth in the first two quarters of 2013 accumulated to 0.9 percent that is equivalent to 1.8 percent in a year. This is obtained by dividing GDP in IIQ2013 of $15,681.0 by GDP in IVQ2012 of $15,539.6 and compounding by 4/2: {[($15,681.0/$15,539.6)^4/2 -1]100 =1.8%}. The US economy grew 1.6 percent in IIQ2013 relative to the same quarter a year earlier in IIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is just at the borderline of contraction.

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IVQ2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,681.0	4.6	0.6	1.6
Cumulative ∆% IQ2012 to IIQ2013	2.9		2.8
Annual Equivalent ∆%	1.9		1.9

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf

ESIII Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/08/interest-rate-risks-duration-dumping.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). (http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html).

Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 14.7 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 2.2 percent in the following eight quarters from IQ1985 to IVQ1986. There were only two quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the sixteen quarters of cyclical expansion from IIIQ2009 to IIQ2013. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 3.3 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 10.5 percent. Growth has fallen from the SAAR of 14.8 percent in IIIQ2011 to 2.7 percent in IIIQ2012, recovering to 11.6 percent in IVQ2012 and falling to minus 1.5 percent in IQ2013. The SAAR of fixed investment rose to 6.0 percent in IIQ2013. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012. The SAAR of real private fixed investment jumped to 11.6 percent in IVQ2012 but declined to minus 1.5 percent in IQ2013, recovering to 6.0 percent in IIQ2013.

Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	3.8	-12.2	9.4	13.1	-7.1	-27.4	0.8
II	3.2	-12.1	16.0	16.6	-5.5	-14.2	13.6
III	0.1	-9.3	24.4	8.2	-12.1	-0.5	-0.4
IV	-1.5	0.2	24.3	7.3	-23.9	-2.8	8.5
				1985			2011
I				3.7			-0.5
II				5.2			8.6
III				-1.6			14.8
IV				7.8			10.0
				1986			2012
I				1.1			8.6
II				0.1			4.7
III				-1.8			2.7
IV				3.1			11.6
				1987			2013
I				-6.7			-1.5
II				6.3			6.0
III				7.1
IV				-0.2

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally adjusted annual rates of growth of real private fixed investment from 1981 to 1986. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and underemployment accumulated during the contractions.

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1986

Source: US Bureau of Economic Analysis

	Real PFI, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2586.3	NA	-1.2	-1.4
IQ2008	2539.1	-1.8	-1.8	-3.0
IIQ2008	2503.4	-3.2	-1.4	-4.6
IIIQ2008	2424.1	-6.3	-3.2	-7.1
IV2008	2263.8	-12.5	-6.6	-12.5
IQ2009	2089.3	-19.2	-7.7	-17.7
IIQ2009	2011.0	-22.2	-3.7	-19.7
IIIQ2009	2008.4	-22.3	-0.1	-17.1
IVQ2009	1994.1	-22.9	-0.7	-11.9
IQ2010	1997.9	-22.8	0.2	-4.4
IIQ2010	2062.8	-20.2	3.2	2.6
IIIQ2010	2060.8	-20.3	-0.1	2.6
IVQ2010	2103.1	-18.7	2.1	5.5
IQ2011	2100.7	-18.8	-0.1	5.1
IIQ2011	2144.4	-17.1	2.1	4.0
IIIQ2011	2219.8	-14.2	3.5	7.7
IVQ2011	2273.4	-12.1	2.4	8.1
IQ2012	2320.8	-10.3	2.1	10.5
IIQ2012	2347.9	-9.2	1.2	9.5
IIIQ2012	2363.5	-8.6	0.7	6.5
IVQ2012	2429.1	-6.1	2.8	6.8
IQ2013	2420.0	-6.4	-0.4	4.3
IIQ2013	2455.8	-5.0	1.5	4.6

	IVQ2007	IIQ2013	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	8,165.9	9,417.0	15.3
Consumption of Fixed Capital	1,216.5	1,415.7	16.4
Net Value Added	6,949.4	8,001.3	15.1
Compensation of Employees	4,945.8	5,349.9	8.2
Taxes on Production and Imports Less Subsidies	688.5	752.4	9.3
Net Operating Surplus	1,315.1	1,899.0	44.4
Net Interest and Misc	204.2	114.1	-44.1
Business Current Transfer Payment Net	68.9	98.1	42.4
Corporate Profits with IVA and CCA Adjustments	1,042.0	1,686.8	61.9
Taxes on Corporate Income	408.8	418.7	2.4
Profits after Tax with IVA and CCA Adjustment	633.2	1,268.1	100.3
Net Dividends	689.1	858.6	24.6
Undistributed Profits with IVA and CCA Adjustment	-55.9	409.5	NA
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	7,519.3	7,886.8	4.9
Consumption of Fixed Capital	1,066.0	1,164.7	9.3
Net Value Added	6,453.4	6,722.1	4.2

	IQ1980	IIIQ1986	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	1,654.1	2,713.5	64.0
Consumption of Fixed Capital	200.5	352.7	75.9
Net Value Added	1,453.6	2,360.9	62.4
Compensation of Employees	1,072.9	1,732.1	61.4
Taxes on Production and Imports Less Subsidies	121.5	220.9	81.8
Net Operating Surplus	259.2	408.0	57.4
Net Interest and Misc.	50.4	105.4	109.1
Business Current Transfer Payment Net	11.5	26.4	129.6
Corporate Profits with IVA and CCA Adjustments	197.2	276.2	40.1
Taxes on Corporate Income	97.0	107.3	10.6
Profits after Tax with IVA and CCA Adjustment	100.2	168.9	68.6
Net Dividends	40.9	85.9	110.0
Undistributed Profits with IVA and CCA Adjustment	59.3	83.0	40.0
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	2,952.3	3,651.9	23.7
Consumption of Fixed Capital	315.6	423.6	34.2
Net Value Added	2,636.7	3,228.3	22.4

RDPI Average ∆%
1929-2012	3.2
1947-1999	3.7
1999-2012	2.4
1999-2006	3.2
1980-1989	3.5
2006-2012	1.4
RDPIPC Average ∆%
1929-2012	2.0
1947-1999	2.3
1999-2012	1.5
1999-2006	2.2
1980-1989	2.6
2006-2012	0.6

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2013
Jul	1.4	0.3	-1.8	2.0	1.2	1.2	4.8
Jun	1.3	0.0	-1.8	2.0	1.2	1.0	3.2
May	1.1	-0.7	-1.9	2.0	1.2	1.0	-0.9
Apr	0.9	-1.1	-1.8	1.9	1.2	1.2	-4.1
Mar	1.2	-0.5	-1.7	2.1	1.4	1.1	-1.6
Feb	1.5	0.4	-1.7	2.1	1.5	1.2	2.4
Jan	1.4	0.0	-1.6	2.1	1.5	1.1	-0.8
2012
Dec	1.5	0.4	-1.6	2.1	1.6	1.3	1.1
Nov	1.6	0.5	-1.5	2.1	1.7	1.3	0.8
Oct	1.8	1.3	-1.6	2.1	1.8	1.0	4.4
Sep	1.7	1.0	-1.5	2.0	1.7	0.9	2.7
Aug	1.6	0.6	-1.7	2.1	1.7	1.5	-0.2
Jul	1.5	0.2	-1.6	2.2	1.9	2.0	-4.6
Jun	1.6	0.5	-1.4	2.2	1.9	2.4	-3.3
May	1.6	0.7	-1.1	2.1	1.9	2.4	-3.3
Apr	2.0	1.6	-1.2	2.1	1.9	2.9	1.5
Mar	2.3	2.5	-0.6	2.0	2.0	3.3	4.9
Feb	2.4	2.9	-0.6	2.2	2.0	3.9	7.3
Jan	2.5	3.0	-0.4	2.2	2.0	4.7	6.8
Annual ∆%
2012	1.8	1.3	-1.2	2.2	1.8	2.3	1.4
2011	2.4	3.6	-1.0	1.8	1.4	4.0	15.8
2010	1.7	1.6	-1.4	1.7	1.3	0.3	10.1
2009	-0.1	-2.3	-1.7	1.1	1.2	1.2	-19.0
2008	3.1	3.0	-1.9	3.1	2.1	5.6	14.3
2007	2.5	1.1	-2.0	3.2	2.2	3.9	6.0
2006	2.7	1.4	-1.6	3.4	2.2	3.1	11.3
2005	2.9	2.0	-1.0	3.3	2.2	1.7	17.3
2004	2.4	1.4	-1.9	3.0	1.9	3.1	11.3
2003	2.0	-0.1	-3.6	3.1	1.5	1.9	12.6
2002	1.3	-0.9	-2.5	2.6	1.7	1.5	-5.8
2001	1.9	-0.1	-2.0	3.1	1.8	2.9	2.5
2000	2.5	2.0	-1.8	2.8	1.7	2.3	18.3
Average ∆%
2000-2012	2.0	1.0	-19.8*	2.6	1.8	2.5	6.0
1929-2012	2.9	3.4	1.4	3.3	2.9	2.9	3.4
1947-2012	3.2	2.4	1.2	3.9	3.2	3.1	4.3
1960-1981	6.8	6.4	4.9	7.2	6.3	7.3	11.1

	∆% Month NSA	∆% 12-Month NSA
Jul 2013	0.2	0.7
Jun	0.0	0.2
May	0.1	-0.3
Apr	0.3	-0.7
Mar	0.2	-0.9
Feb	-0.2	-0.7
Jan	0.0	-0.3
Dec 2012	0.0	-0.1
Nov	-0.4	-0.2
Oct	0.0	-0.4
Sep	0.1	-0.3
Aug	0.1	-0.4
Jul	-0.3	-0.4
Jun	-0.5	-0.2
May	-0.3	0.2
Apr	0.1	0.4
Mar	0.5	0.5
Feb	0.2	0.3
Jan	0.2	0.1
Dec 2011	0.0	-0.2
Nov	-0.6	-0.5
Oct	0.1	-0.2
Sep	0.0	0.0
Aug	0.1	0.2
Jul	0.0	0.2
Jun	-0.2	-0.4
May	0.0	-0.4
Apr	0.1	-0.5
Mar	0.3	-0.5
Feb	0.0	-0.5
Jan	-0.1	-0.6
Dec 2010	–0.3	0.0
	CPI All Items USA	CPI All Items Japan
Annual
2012	2.1	0.0
2011	3.2	-0.3
2010	1.6	-0.7
2009	-0.4	-1.4
2008	3.8	1.4
2007	2.8	0.0
2006	3.2	0.3
2005	3.4	-0.3
2004	2.7	0.0
2003	2.3	-0.3
2002	1.6	-0.9
2001	2.8	-0.7
2000	3.4	-0.7
1999	2.2	-0.3
1998	1.6	0.6
1997	2.3	1.8
1996	3.0	0.1
1995	2.8	-0.1
1994	2.6	0.7
1993	3.0	1.3
1992	3.0	1.6
1991	4.2	3.3
1990	5.4	3.1
1989	4.8	2.3
1988	4.1	0.7
1987	3.6	0.1
1986	1.9	0.6
1985	3.6	2.0
1984	4.3	2.3
1983	3.2	1.9
1982	6.2	2.8
1981	10.3	4.9
1980	13.5	7.7
1979	11.3	3.7
1978	7.6	4.2
1977	6.5	8.1
1976	5.8	9.4
1975	9.1	11.7
1974	11.0	23.2
1973	6.2	11.7
1972	3.2	4.9
1971	4.4	6.3

	IQ	IIQ	IIIQ	IV
R IIQ1953-IIQ1954
1953			-2.2	-5.9
1954	-1.9
E IIIQ1954-IIQ1955
1954			4.6	8.0
1955	11.9	6.7
R IIIQ1957-IIQ1958
1957				-4.1
1958	-10.0
E IIIQ1958-IIQ1959
1958			9.6	9.7
1959	7.7	10.1
R IVQ1969-IV1970
1969				-1.7
1970	-0.7
E IIQ1970-IQ1971
1970		0.7	3.6	-4.1
1971	11.2
R IVQ1973-IQ1975
1973				3.8
1974	-3.3	1.0	-3.8	-1.6
1975	-4.7
E IIQ1975-IQ1976
1975		3.1	6.8	5.5
1976	9.3
R IQ1980-IIIQ1980
1980	1.3	-7.9	-0.6
R IQ1981-IVQ1982
1981	8.5	-2.9	4.7	-4.6
1982	-6.5	2.2	-1.4	0.4
E IQ1983-IVQ1983
1983	5.3	9.4	8.1	8.5
R IVQ2007-IIQ2009
2008	-2.7	2.0	-2.0	-8.3
2009	-5.4	-0.4
E IIIQ2009-IIQ2010
2009			1.3	3.9
2010	1.6	3.9

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.5	1980	-0.2	2000	4.1
1931	-6.4	1981	2.6	2001	1.0
1932	-12.9	1982	-1.9	2002	1.8
1933	-1.3	1983	4.6	2003	2.8
1934	10.8	1984	7.3	2004	3.8
1935	8.9	1985	4.2	2005	3.4
1936	12.9	1986	3.5	2006	2.7
1937	5.1	1987	3.5	2007	1.8
1938	-3.3	1988	4.2	2008	-0.3
1930	8.0	1989	3.7	2009	-2.8
1940	8.8	1990	1.9	2010	2.5
1941	17.7	1991	-0.1	2011	1.8
1942	18.9	1992	3.6	2012	2.8

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	3	-2.4	-0.8
IIIQ1957 to IIQ1958	3	-3.0	-1.0
IVQ1973 to IQ1975	5	-3.1	-0.6
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.5	-0.64
IVQ2007 to IIQ2009	6	-4.3	-0.72

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983 to IQ1986 IQ1983 to IIIQ1986 IQ1983 to IVQ1986	13 15 16	19.9 21.6 22.3	5.7 5.4 5.2
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IIQ2013	16	9.2	2.2
First Four Quarters IIIQ2009 to IIQ2010		2.7

Q	1981	1982	1983	1984	2008	2009	2010
I	8.5	-6.5	5.3	8.2	-2.7	-5.4	1.6
II	-2.9	2.2	9.4	7.2	2.0	-0.4	3.9
III	4.7	-1.4	8.1	4.0	-2.0	1.3	2.8
IV	-4.6	0.4	8.5	3.2	-8.3	3.9	2.8
				1985			2011
I				4.0			-1.3
II				3.7			3.2
III				6.4			1.4
IV				3.0			4.9
				1986			2012
I				3.8			3.7
II				1.9			1.2
III				4.1			2.8
IV				2.1			0.1
				1987			2013
I				2.8			1.1
II				4.6			2.5
III				3.7
IV				6.8

	GDP	PCE	GDI	∆ PI	Trade	GOV
2013
I	1.1	1.54	0.71	0.93	-0.28	-0.82
II	2.5	1.21	1.48	0.59	0.00	-0.18
2012
I	3.7	1.98	1.57	0.36	0.44	-0.28
II	1.2	1.28	-0.23	-0.91	0.10	0.05
III	2.8	1.15	0.99	0.60	-0.03	0.67
IV	0.1	1.13	-0.36	-2.00	0.68	-1.31
2011
I	-1.3	1.42	-1.11	-1.06	0.01	-1.61
II	3.2	1.03	1.88	0.72	0.53	-0.25
III	1.4	1.42	0.36	-1.60	0.10	-0.52
IV	4.9	1.65	4.13	2.73	-0.60	-0.31
2010
I	1.6	1.42	1.77	1.66	-0.96	-0.63
II	3.9	2.21	2.86	1.09	-1.77	0.61
III	2.8	1.87	1.86	1.90	-0.88	-0.07
IV	2.8	2.86	-0.51	-1.64	1.32	-0.87
2009
I	-5.4	-0.83	-7.02	-2.26	2.25	0.15
II	-0.4	-1.13	-3.25	-1.12	2.40	1.56
III	1.3	1.73	-0.40	-0.38	-0.53	0.48
IV	3.9	0.05	4.05	4.40	-0.05	-0.17
1982
I	-6.5	1.61	-7.60	-5.34	-0.49	-0.05
II	2.2	0.89	-0.06	2.26	0.81	0.56
III	-1.4	1.88	-0.62	1.11	-3.22	0.53
IV	0.4	4.51	-5.37	-5.33	-0.10	1.35
1983
I	5.3	2.45	2.36	0.92	-0.29	0.82
II	9.4	5.06	5.96	3.43	-2.46	0.89
III	8.1	4.50	4.40	0.57	-2.25	1.42
IV	8.5	4.06	6.94	3.01	-1.13	-1.36
1984
I	8.2	2.26	7.23	4.94	-2.31	1.01
II	7.2	3.64	2.57	-0.29	-0.87	1.87
III	4.0	1.95	1.69	0.21	-0.35	0.70
IV	3.2	3.29	-1.08	-2.44	-0.56	1.58
1985

	IIQ2013
GDP	100.0
PCE	68.6
Goods	23.1
Durable	7.5
Nondurable	15.6
Services	45.5
Gross Private Domestic Investment	15.8
Fixed Investment	15.2
NRFI	12.2
Structures	2.7
Equipment & Software	5.6
Intellectual Property	3.9
RFI	3.1
Change in Private Inventories	0.5
Net Exports of Goods and Services	-3.0
Exports	13.5
Goods	9.3
Services	4.1
Imports	16.5
Goods	13.7
Services	2.8
Government	18.7
Federal	7.5
National Defense	4.7
Nondefense	2.9
State and Local	11.2

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.7	0.52	-1.16	-0.17	-0.87	0.77
1959	6.9	3.49	2.82	0.83	0.00	0.59
1975	-0.2	1.36	-2.90	-1.23	0.86	0.49
1976	5.4	3.41	2.91	1.37	-1.05	0.12
1982	-1.9	0.86	-2.55	-1.30	-0.59	0.38
1983	4.6	3.54	1.60	0.28	-1.32	0.81
1984	7.3	3.32	4.73	1.90	-1.54	0.76
1985	4.2	3.25	-0.01	-1.03	-0.39	1.38
2009	-2.8	-1.06	-3.52	-0.76	1.14	0.64
2010	2.5	1.34	1.66	1.45	-0.51	0.02
2011	1.8	1.74	0.69	-0.16	0.10	-0.68
2012	2.8	1.52	1.36	0.20	0.10	-0.20

Quarters	Revised Estimate Jul 31, 2013	Revised Estimate Jul 27, 2012	Revised Estimate Jul 29, 2011	Earlier Estimate
2008
I	-2.7		-1.8	-0.7
II	2.0		1.3	0.6
III	-2.0		-3.7	-4.0
IV	-8.3		-8.9	-6.8
2009
I	-5.4	-5.3	-6.7	-4.9
II	-0.4	-0.3	-0.7	-0.7
III	1.3	1.4	1.7	1.6
IV	3.9	4.0	3.8	5.0
2010
I	1.6	2.3	3.9	3.7
II	3.9	2.2	3.8	1.7
III	2.8	2.6	2.5	2.6
IV	2.8	2.4	2.3	3.1
2011
I	-1.3	0.1	0.4	1.9
II	3.2	2.5
III	1.4	1.3
IV	4.9	4.1
2012
I	3.7	2.0
II	1.2	1.3
III	2.8	3.1
IV	0.1	0.4
2013
I	1.1	1.8
II	2.5

	IIQ 2012	IIIQ 2012	IVQ 2012	IIQ 2013	IIQ 2013
GDP	1.2	2.8	0.1	1.1	2.5
PCE	1.9	1.7	1.7	2.3	1.8
Durable Goods	2.9	8.3	10.5	5.8	6.1
NRFI	4.5	0.3	9.8	-4.6	4.4
RFI	5.7	14.1	19.8	12.5	12.9
Exports	3.8	0.4	1.1	-1.3	8.6
Imports	2.5	0.5	-3.1	0.6	7.0
GOV	0.3	3.5	-6.5	-4.2	-0.9
Federal GOV	-0.2	8.9	-13.9	-8.4	-1.6
National Defense	-1.0	12.5	-21.6	-11.2	-0.6
Cont to GDP Growth % Points	-0.05	0.60	-1.22	-0.57	-0.03
State/Local GOV	0.6	-0.2	-1.0	-1.3	-0.5
∆ PI (PP)	-0.91	0.60	-2.00	0.93	0.59
Final Sales of Domestic Product	2.2	2.2	2.2	0.2	1.9
Gross Domestic Purchases	1.1	2.7	-0.5	1.4	2.4
Prices Gross Domestic Purchases	1.0	1.4	1.6	1.2	0.3
Prices of GDP	1.8	2.3	1.1	1.3	0.8
Prices of GDP Excluding Food and Energy	1.5	1.3	1.4	1.6	1.1
Prices of PCE	1.1	1.7	1.6	1.1	0.0
Prices of PCE Excluding Food and Energy	1.8	1.4	1.3	1.4	0.8
Prices of Market Based PCE	0.9	1.6	1.4	1.3	-0.3
Prices of Market Based PCE Excluding Food and Energy	1.7	1.3	0.9	1.6	0.6
Real Disposable Personal Income*	1.8	1.3	3.6	0.4	0.7
Personal Savings As % Disposable Income	5.5	4.9	6.6	4.1	4.5

	SAAR IQ2013	% Total	SAAR IIQ2013	% Total
National Income WCCA	14,354.5	100.0	14,480.5	100.0
Domestic Industries	14,117.1	98.3	14,223.1	98.2
Private Industries	12,432.9	86.6	12,542.6	86.6
Agriculture	226.4	1.6
Mining	247.6	1.7
Utilities	209.1	1.5
Construction	618.2	4.3
Manufacturing	1568.1	10.9
Durable Goods	878.8	6.1
Nondurable Goods	689.2	4.8
Wholesale Trade	870.0	6.1
Retail Trade	971.4	6.8
Transportation & WH	434.0	3.0
Information	496.0	3.5
Finance, Insurance, RE	2418.9	16.8
Professional, BS	1973.6	13.7
Education, Health Care	1423.7	9.9
Arts, Entertainment	569.7	4.0
Other Services	406.1	2.8
Government	1684.3	11.7	1680.5	11.6
Rest of the World	237.4	1.7	257.4	1.8

	IIQ2013	IIQ2006	IIQ2000
Gross Private Domestic Investment	15.8	19.5	20.1
Fixed Investment	15.2	19.0	19.3
Nonresidential	12.2	12.8	14.5
Structures	2.7	3.0	3.0
Equipment and Software	5.6	6.2	7.5
Intellectual Property	3.9	3.6	4.0
Residential	3.1	6.2	4.7
Change in Private Inventories	0.5	0.6	0.9

	GDP	GDI	PFI	NRES	BES	IPP	RES	∆INV
2013
I	1.1	0.71	-0.23	-0.57	0.09	0.14	0.34	0.93
II	2.5	1.48	0.90	0.53	0.16	-0.04	0.37	0.59
2012
I	3.7	1.57	1.21	0.68	0.45	0.05	0.53	0.36
II	1.2	-0.23	0.68	0.53	0.29	0.07	0.15	-0.91
III	2.8	0.99	0.39	0.04	-0.22	0.11	0.35	0.60
IV	0.1	-0.36	1.63	1.13	0.47	0.21	0.50	-2.00
2011
I	-1.3	-1.11	-0.05	-0.09	0.59	0.14	0.04	-1.06
II	3.2	1.88	1.16	1.09	0.23	0.18	0.07	0.72
III	1.4	0.36	1.96	1.81	0.99	0.20	0.15	-1.60
IV	4.9	4.13	1.39	1.10	0.54	0.21	0.29	2.73
2010
I	1.6	1.77	0.11	0.46	1.25	-0.07	-0.35	1.66
II	3.9	2.86	1.77	1.21	1.02	-0.08	0.56	1.09
III	2.8	1.86	-0.04	0.90	0.83	0.22	-0.94	1.90
IV	2.8	-0.51	1.13	0.94	0.57	0.19	0.19	-1.64
2009
I	-5.4	-7.02	-4.75	-3.58	-2.25	-0.23	-1.17	-2.26
II	-0.4	-3.25	-2.13	-1.46	-0.60	0.16	-0.66	-1.12
III	1.3	-0.40	-0.02	-0.54	0.25	0.04	0.52	-0.38
IV	3.9	4.05	-0.36	-0.37	0.36	0.25	0.01	4.40
1982
I	-6.5	-7.60	-2.26	-1.45	-0.83	0.14	-0.81	-5.34
II	2.2	-0.06	-2.32	-1.89	-1.20	0.08	-0.44	2.26
III	-1.4	-0.62	-1.73	-1.71	-0.55	0.06	-0.02	1.11
IV	0.4	-5.37	-0.03	-1.05	-0.57	0.00	1.01	-5.33
1983
I	5.3	2.36	1.44	-0.92	-0.27	0.16	2.36	0.92
II	9.4	5.96	2.53	0.67	1.24	0.29	1.86	3.43
III	8.1	4.40	3.82	2.13	1.43	0.31	1.70	0.57
IV	8.5	6.94	3.93	3.14	2.32	0.35	0.79	3.01
1984
I	8.2	7.23	2.29	1.71	0.46	0.30	0.58	4.94
II	7.2	2.57	2.86	2.52	1.36	0.29	0.34	-0.29
III	4.0	1.69	1.48	1.70	0.88	0.25	-0.22	0.21
IV	3.2	-1.08	1.36	1.34	0.86	0.29	0.02	-2.44
1985
I	4.0	-2.14	0.72	0.67	-0.23	0.14	0.05	-2.86
II	3.7	1.34	0.99	0.83	0.64	0.20	0.16	0.35
III	6.4	-0.43	-0.28	-0.62	-0.38	0.13	0.34	-0.15
IV	3.0	2.80	1.40	1.00	0.53	0.26	0.40	1.40
1986
I	3.8	0.04	0.21	-0.55	-0.28	0.17	0.76	-0.17
II	1.9	-1.30	0.00	-1.12	0.34	0.15	1.12	-1.30
III	4.1	-1.97	-0.34	-0.63	0.17	0.10	0.28	-1.62
IV	2.1	0.24	0.53	0.48	0.30	0.10	0.05	-0.29

	IVQ2007	IIQ2013
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.961	1.047
Compensation of Employees (Unit Labor Cost)	0.577	0.596
Unit Nonlabor Cost	0.270	0.294
Consumption of Fixed Capital	0.140	0.156
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.093	0.099
Net Interest and Misc. Payments	0.037	0.039
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.114	0.157
Taxes on Corporate Income	0.038	0.034
Profits after Tax with IVA and CCA Adjustment	0.076	0.124
	IQ1980	IIIQ1986
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.518	0.676
Compensation of Employees (Unit Labor Cost)	0.340	0.434
Unit Nonlabor Cost	0.124	0.181
Consumption of Fixed Capital	0.064	0.088
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.042	0.063
Net Interest and Misc. Payments	0.018	0.030
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.055	0.061
Taxes on Corporate Income	0.026	0.020
Profits after Tax with IVA and CCA Adjustment	0.029	0.040

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Sunday, September 1, 2013

Increasing Interest Rate Risk, Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Financial Repression, World Economic Slowdown and Global Recession Risk: Part I

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