Global Financial Risk, Mediocre United States Economic Growth, Stagnating Real Disposable Income, Twenty Nine Million Unemployed/Underemployed, Stagnating Real Wages, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
Executive Summary
I Mediocre and Decelerating United States Economic Growth
IA Mediocre and Decelerating United States Economic Growth
IA1 Contracting Real Private Fixed Investment
IA2 Swelling Undistributed Corporate Profits
IB Stagnating Real Disposable Income and Consumption Expenditures
IB1 Stagnating Real Disposable Income and Consumption Expenditures
IB2 Financial Repression
II Twenty Nine Million Unemployed or Underemployed
IIA1 Summary of the Employment Situation
IIA2 Number of People in Job Stress
IIA3 Long-term and Cyclical Comparison of Employment
IIA4 Job Creation
IIB Stagnating Real Wages
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 Economic Growth
ESIII Contracting Real Private Fixed Investment
ESIV Twenty Nine Million Unemployed/Underemployed
ESV Job Creation
ESVI Stagnating Real Wages
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 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 (2013WEOOct) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2013/02/), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2013GFSROct) (http://www.imf.org/External/Pubs/FT/GFSR/2013/02/index.htm) and of fiscal affairs with the Fiscal Monitor (IMF 2013FMOct) (http://www.imf.org/external/pubs/ft/fm/2013/02/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 10.8 percent in IIQ2011 to 7.4 percent in IVQ2011 and 5.7 percent in IQ2012, rebounding to 9.1 percent in IIQ2012, 8.2 percent in IIIQ2012 and 7.8 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.1 percent and to 7.8 percent in IIQ2013, rebounding to 9.1 percent in IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html 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 28.9 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining/stagnating 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/2013/11/global-financial-risk-world-inflation.htm and earlier http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.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
Chart A of the Board of Governors of the Federal Reserve System provides the rate on the overnight fed funds rate and the yields of the 10-year constant maturity Treasury and the Baa seasoned corporate bond. Table A provides the data for selected points in Chart A. The Federal Open Market Committee (FOMC) lowered the fed funds rate after the recession of 2001 with the fear that growth would not be sufficiently robust to promote full employment. The FOMC set the fed funds rate at one percent from Jun 2003 to Jun 2004 while Treasury suspended the auctions of 30-year bonds with the objective of lowering mortgage rates. The FOMC raised the fed funds rate by 25 basis points in 17 consecutive meetings from Jun 2004 to Jun 2006. On Oct 31, 2008, the Baa corporate bond traded at 9.54 percent in a flight toward obligations of the US government. The FOMC fixed the fed funds rate at 0 to ¼ percent since its last meeting in Dec 2008. Chart A shows multiple oscillations with downward trend of the yields of the 10-year Treasury constant maturity and the Baa corporate bond. There is current uncertainty if the FOMC will taper the amount of monthly purchases of bonds with resulting increases in yields such as is occurring in the final segment of Chart A. The uncertainty is whether there is an orderly exit from unconventional monetary policy of zero interest rates and massive purchases of bonds for the portfolio of the Fed. “Orderly” is as imprecise as unconventional monetary policy, reflecting concern if increases in interest rates can cause stress in financial markets with adverse effects on production, investment and employment.
Chart A, Fed Funds Rate and Yields of Ten-year Treasury Constant Maturity and Baa Seasoned Corporate Bond
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
Table A, Selected Data Points in Chart A, % per Year
| 1-2-2001 | 7-3-2003 | 6-22 2004 | 6-28 2006 | 10-31 | 12-26 2008 | 1-7 2013 | |
| Fed Funds | 6.67 | 0.96 | 1.00 | 5.06 | 0.22 | 0.09 | 0.08 |
| 10 Year TCM | 4.92 | 3.67 | 4.72 | 5.25 | 4.01 | 2.16 | 2.63 |
| Baa | 7.91 | 6.39 | 6.77 | 6.94 | 9.54 | 8.00 | 5.33 |
Notes: Fed Funds Overnight Rate; TCM: Treasury Constant Maturity; Baa: Baa Seasoned Corporate Bond
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
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. The mathematical formula is 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 Nov 8, 2013, Sep 5, 2013, May 1, 2013, Nov 8, 2012 and Nov 8, 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 2.98 percent on Sep 5, 2013, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Sep 5, 2013 at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.8530 with instantaneous increase of the yield to 2.98 percent for loss of 13.1 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 2.65 percent as occurred on Nov 8, 2013 would jump instantaneously from 2.77 percent on Nov 8, 2013 to 4.64 percent as occurred on Nov 8 2006 when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 2.77 percent would drop from 100 to 85.1732 after an instantaneous increase of the yield to 4.64 percent. The price loss would be 14.8 percent. Losses absorb capital available for positioning, triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). What is the path of adjustment of zero interest rates on fed funds and artificially low bond yields? There is no painless exit from unconventional monetary policy. 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
| 11/8/13 | 9/05/13 | 5/01/13 | 11/8/12 | 11/8/06 | |
| 1 M | 0.04 | 0.03 | 0.03 | 0.13 | 5.20 |
| 3 M | 0.06 | 0.02 | 0.06 | 0.10 | 5.10 |
| 6 M | 0.09 | 0.06 | 0.08 | 0.15 | 5.16 |
| 1 Y | 0.12 | 0.16 | 0.11 | 0.20 | 5.02 |
| 2 Y | 0.32 | 0.52 | 0.20 | 0.27 | 4.75 |
| 3 Y | 0.62 | 0.97 | 0.30 | 0.35 | 4.65 |
| 5 Y | 1.42 | 1.85 | 0.65 | 0.65 | 4.61 |
| 7 Y | 2.12 | 2.45 | 1.07 | 1.04 | 4.61 |
| 10 Y | 2.77 | 2.98 | 1.66 | 1.62 | 4.64 |
| 20 Y | 3.55 | 3.64 | 2.44 | 2.35 | 4.82 |
| 30 Y | 3.84 | 3.88 | 2.83 | 2.77 | 4.73 |
Source: United States Treasury http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
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, 4.58 percent on Aug 22, 2013 and 4.16 percent on Nov 7, 2013, which is the last data point in Chart VI-13.
Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Nov 7, 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 in be the nominal interest rate, ir the real or inflation-adjusted interest rate and πe 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 + ir) = (1 + in)/(1 + πe) (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 πe 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 + rr) = 0.9902
That is, ir 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 πe. 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 “paring” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Oct 30, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20131030a.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” (emphasis added).
There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful?
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 σy and prices σp. 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 15,761.78 on Fri Nov 8, 2013, which is higher by 11.3 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 11.0 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 62.7 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Nov 8, 2013; S&P 500 has gained 73.2 percent and DAX 60.1 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 11/8/13” 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 11.6 percent below the trough. Japan’s Nikkei Average is 59.6 percent above the trough. DJ Asia Pacific TSM is 24.3 percent above the trough. Dow Global is 40.6 percent above the trough. STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 25.5 percent above the trough. NYSE Financial Index is 44.8 percent above the trough. DJ UBS Commodities is 0.6 percent below the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 60.1 percent above the trough. Japan’s Nikkei Average is 59.6 percent above the trough on Aug 31, 2010 and 23.6 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 14,086.80 on Fri Nov 8, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 37.4 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 12.2 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 11/8/13” in Table VI-4 shows decrease of 2.0 percent in the week for China’s Shanghai Composite. DJ Asia Pacific decreased 1.5 percent. NYSE Financial decreased 0.1 percent in the week. DJ UBS Commodities decreased 0.5 percent. Dow Global decreased 0.4 percent in the week of Nov 8, 2013. The DJIA increased 0.9 percent and S&P 500 increased 0.5 percent. DAX of Germany increased 0.8 percent. STOXX 50 increased 0.3 percent. The USD appreciated 0.9 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 11/8/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Nov 8, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 11/8/13” but also relative to the peak in column “∆% Peak to 11/8/13.” There are now several equity indexes above the peak in Table VI-4: DJIA 40.7 percent, S&P 500 45.5 percent, DAX 43.4 percent, Dow Global 14.7 percent, DJ Asia Pacific 8.8 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 15.3 percent, Nikkei Average 23.6 percent and STOXX 50 6.3 percent. There is only one equity index below the peak: Shanghai Composite by 33.5 percent. DJ UBS Commodities Index is now 15.0 percent below the peak. The US dollar strengthened 11.6 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 3.1 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,524.9 billion in IIQ2013. Real private fixed investment fell 4.9 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,458.4 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/2013/09/increasing-interest-rate-risk.html). 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 $66.8 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 $56.9 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 $273.5 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 $216.6 billion in IIQ2013. Undistributed profits of US corporations swelled 263.4 percent from $107.7 billion IQ2007 to $391.4 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 $66.8 billion from $2020.6 billion in IQ2013 to $2087.4 billion at the quarterly rate of 3.3 percent (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.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 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_image003[1]](http://lh5.ggpht.com/-9f2wwYC1dKw/UoBji20VybI/AAAAAAAAkeQ/FrdgeAeocfU/s1600-h/clip_image003%25255B1%25255D%25255B2%25255D.gif "clip_image003[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 VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 11/8/ /13 | ∆% Week 11/8/13 | ∆% Trough to 11/8/ 13 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 40.7 | 0.9 | 62.7 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 45.5 | 0.5 | 73.2 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | 15.3 | -0.1 | 44.8 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 14.7 | -0.4 | 40.6 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | 8.8 | -1.5 | 24.3 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | 23.6 | -0.8 | 59.6 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -33.5 | -2.0 | -11.6 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | 6.3 | 0.3 | 25.5 |
| DAX | 4/26/ | 5/25/ | -10.5 | 43.4 | 0.8 | 60.1 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 11.6 | 0.9 | -12.2 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -15.0 | -0.5 | -0.6 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 2.784 | 2.750 |
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 Economic Growth. Valuations of risk financial assets approach historical highs. 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011 to 2.8 percent in 2012. The following calculations show that actual growth is around 2.0 to 2.2 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May).
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/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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 IIIQ2013 was only 2.3 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 IQ1983-IIIQ1986 IQ1983-IQ1986 IQ1983-IQ1987 | 5.7 5.4 5.2 5.0 | |
| First Four Quarters IQ1983 to IVQ1983 | 7.8 | |
| IIIQ2009 to IIIQ2013 | 2.3 | |
| 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://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf
http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 2.0 to 2.2 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 three quarters of 2013 accumulated to 3.6 percent. This growth is equivalent to 2.0 percent per year, obtained by dividing GDP in IIIQ2013 of $15,790.1 by GDP in IVQ2011 of $15,242.1 and compounding by 4/7: {[($15,790.1/$15,242.1)4/6 -1]100 = 2.0.
2. Average Annual Growth in the First Three Quarters of 2013. GDP growth in the first three quarters of 2013 accumulated to 1.6 percent that is equivalent to 2.2 percent in a year. This is obtained by dividing GDP in IIIQ2013 of $15,790.1 by GDP in IVQ2012 of $15,539.6 and compounding by 4/3: {[($15,790.1/$15,539.6)4/3 -1]100 = 2.2%}. The US economy grew 1.6 percent in IIIQ2013 relative to the same quarter a year earlier in IIIQ2012. 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 2009 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| 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 | 15,679.7 | 4.6 | 0.6 | 1.6 |
| IIIQ2013 | 15,790.1 | 5.3 | 0.7 | 1.6 |
| Cumulative ∆% IQ2012 to IIIQ2013 | 2.9 | 3.6 | ||
| Annual Equivalent ∆% | 1.9 | 2.0 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
ESIII Contracting Real Private Fixed Investment. Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IIQ2013 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, gross private domestic investment in the US was $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 0.8 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,583.1 billion in IIIQ2013. As shown in Table IAI-2, real private fixed investment fell 4.0 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,483.5 billion in IIIQ2013. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.
Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2009 Dollars and ∆%
| Real PFI, Billions Chained 2009 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| 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 | 2458.4 | -4.9 | 1.6 | 4.7 |
| IIIQ2013 | 2,483.5 | -4.0 | 1.0 | 5.1 |
PFI: Private Fixed Investment
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
ESIV Twenty Nine Million Unemployed/Underemployed. 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 11.6 percent and the number of people in job stress could be around 28.9 million, which is 17.7 percent of the effective 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 Oct 2012, Sep 2013 and Oct 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 Oct 2012, Sep 2013 and Oct 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 63.8 percent by Oct 2012 and was 63.2 percent in Sep 2013 and 62.9 percent in Oct 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:
- there are an estimated 8.186 million unemployed in Oct 2013 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM), that is, they dropped out of their job searches
- the total number of unemployed is effectively 18.959 million (Total UEM) and not 10.773 million (UEM) of whom many have been unemployed long term
- the rate of unemployment is 11.6 percent (Total UEM%) and not 7.0 percent, not seasonally adjusted, or 7.3 percent seasonally adjusted
- the number of people in job stress is close to 28.9 million by adding the 8.186 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 28.136 million in Sep 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 17.7 percent of the labor force in Oct 2013. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 59.0 percent in Oct 2012, 58.8 percent in Sep 2013 and 58.5 percent in Oct 2013. The number employed in Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent. There is actually not sufficient job creation in merely absorbing 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 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 14.423 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/2013/10/twenty-eight-million-unemployed-or.html).
Table I-4, US, Population, Labor Force and Unemployment, NSA
| 2006 | Oct 2012 | Sep 2013 | Oct 2013 | |
| POP | 229 | 243,983 | 246,168 | 246,381 |
| LF | 151 | 155,779 | 155,536 | 154,918 |
| PART% | 66.2 | 63.8 | 63.2 | 62.9 |
| EMP | 144 | 144,039 | 144,651 | 144,144 |
| EMP/POP% | 62.9 | 59.0 | 58.8 | 58.5 |
| UEM | 7 | 11,741 | 10,885 | 10,773 |
| UEM/LF Rate% | 4.6 | 7.5 | 7.0 | 7.0 |
| NLF | 77 | 88,204 | 90,632 | 91,463 |
| LF PART 66.2% | 161,517 | 162,963 | 163,104 | |
| ∆NLF UEM | 5,738 | 7,427 | 8,186 | |
| Total UEM | 17,479 | 18,312 | 18,959 | |
| Total UEM% | 10.8 | 11.2 | 11.6 | |
| Part Time Economic Reasons | 7,870 | 7,522 | 7,700 | |
| Marginally Attached to LF | 2,433 | 2,302 | 2,283 | |
| In Job Stress | 27,782 | 28,136 | 28,942 | |
| People in Job Stress as % Labor Force | 17.2 | 17.3 | 17.7 |
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%
Source: US Bureau of Labor Statistics http://www.bls.gov/
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 provide 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 I-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 62.9 percent in Oct 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 I-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 with 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 | Apr | May | Jun | Jul | Aug | Sep | Oct | Dec | Annual |
| 1979 | 62.9 | 62.9 | 64.5 | 64.9 | 64.5 | 63.8 | 64.0 | 63.8 | 63.7 |
| 1980 | 63.2 | 63.5 | 64.6 | 65.1 | 64.5 | 63.6 | 63.9 | 63.4 | 63.8 |
| 1981 | 63.6 | 63.9 | 64.6 | 65.0 | 64.6 | 63.5 | 64.0 | 63.4 | 63.9 |
| 1982 | 63.3 | 63.9 | 64.8 | 65.3 | 64.9 | 64.0 | 64.1 | 63.8 | 64.0 |
| 1983 | 63.2 | 63.4 | 65.1 | 65.4 | 65.1 | 64.3 | 64.1 | 63.8 | 64.0 |
| 1984 | 63.7 | 64.3 | 65.5 | 65.9 | 65.2 | 64.4 | 64.6 | 64.3 | 64.4 |
| 1985 | 64.3 | 64.6 | 65.5 | 65.9 | 65.4 | 64.9 | 65.1 | 64.6 | 64.8 |
| 1986 | 64.6 | 65.0 | 66.3 | 66.6 | 66.1 | 65.3 | 65.5 | 65.0 | 65.3 |
| 1987 | 64.9 | 65.6 | 66.3 | 66.8 | 66.5 | 65.5 | 65.9 | 65.5 | 65.6 |
| 1988 | 65.3 | 65.5 | 66.7 | 67.1 | 66.8 | 65.9 | 66.1 | 65.9 | 65.9 |
| 1989 | 65.9 | 66.2 | 67.4 | 67.7 | 67.2 | 66.3 | 66.6 | 66.3 | 66.5 |
| 1990 | 66.1 | 66.5 | 67.4 | 67.7 | 67.1 | 66.4 | 66.5 | 66.1 | 66.5 |
| 1991 | 66.0 | 66.0 | 67.2 | 67.3 | 66.6 | 66.1 | 66.1 | 65.8 | 66.2 |
| 1992 | 66.0 | 66.4 | 67.6 | 67.9 | 67.2 | 66.3 | 66.2 | 66.1 | 66.4 |
| 1993 | 65.6 | 66.3 | 67.3 | 67.5 | 67.0 | 66.1 | 66.4 | 66.2 | 66.3 |
| 1994 | 66.0 | 66.5 | 67.2 | 67.5 | 67.2 | 66.5 | 66.8 | 66.5 | 66.6 |
| 1995 | 66.4 | 66.4 | 67.2 | 67.7 | 67.1 | 66.5 | 66.7 | 66.2 | 66.6 |
| 1996 | 66.2 | 66.7 | 67.4 | 67.9 | 67.2 | 66.8 | 67.1 | 66.7 | 66.8 |
| 1997 | 66.7 | 67.0 | 67.8 | 68.1 | 67.6 | 67.0 | 67.1 | 67.0 | 67.1 |
| 1998 | 66.6 | 67.0 | 67.7 | 67.9 | 67.3 | 67.0 | 67.1 | 67.0 | 67.1 |
| 1999 | 66.7 | 67.0 | 67.7 | 67.9 | 67.3 | 66.8 | 67.0 | 67.0 | 67.1 |
| 2000 | 67.0 | 67.0 | 67.7 | 67.6 | 67.2 | 66.7 | 66.9 | 67.0 | 67.1 |
| 2001 | 66.7 | 66.6 | 67.2 | 67.4 | 66.8 | 66.6 | 66.7 | 66.6 | 66.8 |
| 2002 | 66.4 | 66.5 | 67.1 | 67.2 | 66.8 | 66.6 | 66.6 | 66.2 | 66.6 |
| 2003 | 66.2 | 66.2 | 67.0 | 66.8 | 66.3 | 65.9 | 66.1 | 65.8 | 66.2 |
| 2004 | 65.7 | 65.8 | 66.5 | 66.8 | 66.2 | 65.7 | 66.0 | 65.8 | 66.0 |
| 2005 | 65.8 | 66.0 | 66.5 | 66.8 | 66.5 | 66.1 | 66.2 | 65.9 | 66.0 |
| 2006 | 65.8 | 66.0 | 66.7 | 66.9 | 66.5 | 66.1 | 66.4 | 66.3 | 66.2 |
| 2007 | 65.7 | 65.8 | 66.6 | 66.8 | 66.1 | 66.0 | 66.0 | 65.9 | 66.0 |
| 2008 | 65.7 | 66.0 | 66.6 | 66.8 | 66.4 | 65.9 | 66.1 | 65.7 | 66.0 |
| 2009 | 65.4 | 65.5 | 66.2 | 66.2 | 65.6 | 65.0 | 64.9 | 64.4 | 65.4 |
| 2010 | 64.9 | 64.8 | 65.1 | 65.3 | 65.0 | 64.6 | 64.4 | 64.1 | 64.7 |
| 2011 | 63.9 | 64.1 | 64.5 | 64.6 | 64.3 | 64.2 | 64.1 | 63.8 | 64.1 |
| 2012 | 63.4 | 63.8 | 64.3 | 64.3 | 63.7 | 63.6 | 63.8 | 63.4 | 63.7 |
| 2013 | 63.1 | 63.5 | 64.0 | 64.0 | 63.4 | 63.2 | 62.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-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 I-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 I-12c, US, Civilian Noninstitutional Population, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
The labor force of the United States in Chart I-12d has increased along a trend similar to that of the civilian noninstitutional population in Chart I-12c. There is an evident stagnation of the civilian labor force in the final segment of Chart I-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 I-12d, US, Labor Force, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
http://www.bea.gov/iTable/index_nipa.cfm
ESV Job Creation. 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 2013. The civilian noninstitutional population grew by 39.6 percent from 174.215 million in 1983 to 243.284 million in 2012 and labor force higher by 38.9 percent, growing from 111.550 million in 1983 to 154.975 million in 2012. Total nonfarm payroll employment seasonally adjusted (SA) increased 204,000 in Oct 2013 and private payroll employment rose 212,000. The average number of nonfarm jobs created in Jan-Oct 2012 was 172,700 while the average number of nonfarm jobs created in Jan-Sep 2013 was 186,300, or increase by 7.9 percent. The average number of private jobs created in the US in Jan-Oct 2012 was 178,900 while the average in Jan-Sep 2013 was 187,500, or increase by 4.8 percent. 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 ten months from Jan to Oct 2013 was 186,300, 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 28.9 million unemployed or underemployed. The difference between the average increase of 186,300 new private nonfarm jobs per month in the US from Jan to Oct 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,133 monthly new jobs net of absorption of new entrants in the labor force. There are 28.9 million in job stress in the US currently. Creation of 73,133 new jobs per month net of absorption of new entrants in the labor force would require 396 months to provide jobs for the unemployed and underemployed (28.942 million divided by 73,133) or 33 years (396 divided by 12). The civilian labor force of the US in Oct 2013 not seasonally adjusted stood at 155.918 million with 10.773 million unemployed or effectively 18.959 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 163.104 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 73.133 by 12, which is 877,596). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.746 million (0.05 times labor force of 154.918 million) for new net job creation of 3.027 million (10.773 million unemployed minus 7.746 million unemployed at rate of 5 percent) that at the current rate would take 3.4 years (3.027 million divided by 0.877596). Under the calculation in this blog, there are 18.959 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.104 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.164 million jobs net of labor force growth that at the current rate would take 12.3 years (18.959 million minus 0.05(163.104 million) = 10.804 million divided by 0.877596, 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 Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent. There is actually not sufficient job creation in merely absorbing 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. There is actually not sufficient job creation in merely absorbing 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. 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
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 | 148 | 164 | ||||
| Feb | 107 | 332 | 319 | ||||
| Mar | 93 | 142 | 154 | ||||
| Apr | 188 | 199 | 188 | ||||
| May | 125 | 176 | 187 | ||||
| Jun | -93 | 172 | 194 | ||||
| Jul | 318 | 89 | 100 | ||||
| Aug | 113 | 238 | 207 | ||||
| Sep | 346 | 163 | 150 | ||||
| Oct | 187 | 204 | 212 | ||||
| Nov | 186 | ||||||
| Dec | 204 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
ESVI Stagnating Real Wages. 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 IB-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 2012 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 0.2 percent in the 12 months ending in Jan 2013 and stagnated with gain of 0.1 percent in the 12 months ending in Feb 2013. Average hourly earnings adjusted for inflation increased 0.4 percent in the 12 months ending in Mar 2013 and increased 0.2 percent in the 12 months ending in Apr 2013. Average hourly earnings adjusted for inflation increased 0.6 percent in the 12 months ending in May 2013 and 1.1 percent in the 12 months ending in Jun 2013. Average hourly earnings of all employees adjusted for inflation fell 0.7 percent in the 12 months ending in Jul 2013 and increased 0.7 percent in the 12 months ending in Sep 2013. Average hourly earnings adjusted for inflation increased 0.9 percent in the 12 months ending in Sep 2013. Table IB-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 three 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 1.1 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 0.2 percent in the 12 months ending in Jan 2013, stagnated with gain of 0.1 percent in the 12 months ending in Feb 2013 and gained 0.4 percent in the 12 months ending Mar 2013. Real average hourly earnings increased 0.2 percent in the 12 months ending in Apr 2013 and 0.6 percent in the 12 months ending in May 2013. Average hourly earnings increased 1.1 percent in the 12 months ending in Jun 2013 and fell 0.7 percent in the 12 months ending in Jul 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 (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html).
Table IB-4, US, Average Hourly Earnings of All Employees NSA in Constant Dollars of 1982-1984
| Year | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep |
| 2006 | 10.05 | 10.11 | 9.92 | 9.89 | 9.97 | 9.88 | 10.03 | |
| 2007 | 10.22 | 10.14 | 10.18 | 10.02 | 9.99 | 10.08 | 10.03 | 10.16 |
| 2008 | 10.12 | 10.11 | 10.00 | 9.91 | 9.84 | 9.77 | 9.83 | 9.94 |
| 2009 | 10.50 | 10.47 | 10.40 | 10.32 | 10.20 | 10.23 | 10.29 | 10.30 |
| 2010 | 10.43 | 10.35 | 10.35 | 10.38 | 10.27 | 10.29 | 10.34 | 10.36 |
| 2011 | 10.41 | 10.26 | 10.22 | 10.22 | 10.12 | 10.17 | 10.10 | 10.17 |
| 2012 | 10.30 | 10.21 | 10.28 | 10.16 | 10.15 | 10.27 | 10.11 | 10.24 |
| ∆%12M | -1.1 | -0.5 | 0.6 | -0.6 | 0.3 | 1.0 | 0.1 | 0.7 |
| 2013 | 10.31 | 10.25 | 10.30 | 10.22 | 10.26 | 10.20 | 10.18 | 10.33 |
| ∆%12M | 0.1 | 0.4 | 0.2 | 0.6 | 1.1 | -0.7 | 0.7 | 0.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-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 2009 and $10.36 again in 2010 to $10.25 in 2011 and $10.25 again in 2012 or loss of 1.1 percent (data in http://www.bls.gov/data/). The economic welfare or wellbeing of United States workers deteriorated in a recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html), stagnating/declining real wages and 29 million unemployed or underemployed (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html) because of mediocre economic growth (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html).
Chart IB-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/
Chart IB-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 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 with near stagnation in Feb 2013 followed by mild increase in Mar-Apr 2013. Hourly earnings adjusted for inflation increased in Jun 2013 and fell in Jul 2013, increasing in Aug-Sep 2013.
Chart IB-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/
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 IB-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 2011, increased 0.9 percent in the 12 months ending in Oct 2011. Average weekly earnings fell 1.0 percent in the 12 months ending in Nov 2011 and 0.3 in the 12 months ending in Dec 2011. Average weekly earnings declined 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 1.6 percent in the 12 months ending in Jan 2013 and virtually stagnated with gain of 0.2 percent in the 12 months ending in Feb 2013, increasing 0.4 percent in the 12 months ending in Mar 2013. Real weekly earnings fell 1.0 percent in the 12 months ending in Apr 2013 and increased 0.6 percent in the 12 months ending in May 2013. Average weekly earnings increased 2.5 percent in the 12 months ending in Jun 2013 and fell 1.8 percent in the 12 months ending in Jul 2013. Real weekly earnings increased 1.0 percent in the 12 months ending in Aug 2013 and 0.9 percent in the 12 months ending in Sep 2013. Table I-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/2013/11/global-financial-risk-world-inflation.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/2013/10/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html).
Table IB-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2013
| Year | Apr | May | Jun | Jul | Aug | Sep |
| 2006 | 349.95 | 340.12 | 342.08 | 347.97 | 341.76 | 346.19 |
| 2007 | 353.41 | 344.58 | 346.74 | 351.68 | 347.98 | 355.72 |
| 2008 | 344.13 | 340.93 | 343.40 | 337.06 | 340.18 | 341.83 |
| 2009 | 349.33 | 347.94 | 344.59 | 345.92 | 352.80 | 347.04 |
| 2010 | 351.99 | 356.97 | 350.13 | 352.02 | 358.90 | 353.27 |
| 2011 | 350.62 | 353.56 | 348.08 | 349.75 | 347.42 | 349.93 |
| 2012 | 356.68 | 348.65 | 349.28 | 357.26 | 348.93 | 357.44 |
| ∆%12M | 1.7 | -1.4 | 0.3 | 2.1 | 0.4 | 2.1 |
| 2013 | 353.13 | 350.59 | 357.96 | 350.93 | 352.25 | 360.55 |
| ∆%12M | -1.0 | 0.6 | 2.5 | -1.8 | 1.0 | 0.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-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 IB-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Chart IB-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/2013/10/world-inflation-waves-regional-economic.html).
Chart IB-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/
IA Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II with stressing socioeconomic conditions:
- Mediocre economic growth below potential and long-term trend, resulting in idle productive resources (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Private fixed investment declining 4.0 percent in the entire cycle from IVQ2007 to IIIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Twenty nine million or 17.7 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html)
- Stagnating real disposable income per person or income per person after inflation and taxes (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Depressed hiring that does not afford an opportunity for reducing unemployment/underemployment and moving to better-paid jobs (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html)
- Unsustainable government deficit/debt and balance of payments deficit (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
- Worldwide waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html)
- Deteriorating terms of trade and net revenue margins in squeeze of economic activity by carry trades induced by zero interest rates (http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.html)
- Financial repression of interest rates and credit affecting the most people without means and access to sophisticated financial investments with likely adverse effects on income distribution and wealth disparity (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- 47 million in poverty and 48 million without health insurance with family income adjusted for inflation regressing to 1995 levels (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html
- Net worth of households and nonprofits organizations declining by 0.9 percent after adjusting for inflation in the entire cycle from IVQ2007 to IIQ2013 in contrast with growth at 3.0 percent in real terms from 1945 to 2012 (http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
Valuations of risk financial assets approach historical highs. 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011 to 2.8 percent in 2012. The following calculations show that actual growth is around 2.0 to 2.2 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May).
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/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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 IIIQ2013 was only 2.3 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 IQ1983-IIIQ1986 IQ1983-IQ1986 IQ1983-IQ1987 | 5.7 5.4 5.2 5.0 | |
| First Four Quarters IQ1983 to IVQ1983 | 7.8 | |
| IIIQ2009 to IIIQ2013 | 2.3 | |
| 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://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf
http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 2.0 to 2.2 percent per year. Table Summary GDP provides the data.
3. Average Annual Growth in the Past Six Quarters. GDP growth in the four quarters of 2012 and the first three quarters of 2013 accumulated to 3.6 percent. This growth is equivalent to 2.0 percent per year, obtained by dividing GDP in IIIQ2013 of $15,790.1 by GDP in IVQ2011 of $15,242.1 and compounding by 4/7: {[($15,790.1/$15,242.1)4/6 -1]100 = 2.0.
4. Average Annual Growth in the First Three Quarters of 2013. GDP growth in the first three quarters of 2013 accumulated to 1.6 percent that is equivalent to 2.2 percent in a year. This is obtained by dividing GDP in IIIQ2013 of $15,790.1 by GDP in IVQ2012 of $15,539.6 and compounding by 4/3: {[($15,790.1/$15,539.6)4/3 -1]100 = 2.2%}. The US economy grew 1.6 percent in IIIQ2013 relative to the same quarter a year earlier in IIIQ2012. 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 2009 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| 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 | 15,679.7 | 4.6 | 0.6 | 1.6 |
| IIIQ2013 | 15,790.1 | 5.3 | 0.7 | 1.6 |
| Cumulative ∆% IQ2012 to IIIQ2013 | 2.9 | 3.6 | ||
| Annual Equivalent ∆% | 1.9 | 2.0 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
The objective of this section is analyzing US economic growth in the current cyclical expansion. There is initial discussion of the conventional explanation of the current recovery as being weak because of the depth of the contraction and the financial crisis and brief discussion of the concept of “slow-growth recession.” Analysis that is more complete is in IB Collapse of United States Dynamism of Income Growth and Employment Creation, which is updated with release of more information on the United States economic cycle (IX Conclusion and extended analysis at http://cmpassocregulationblog.blogspot.com/2013/10/collapse-of-united-states-dynamism-of.html). The bulk of the section consists of comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of recent performance.
This blog has analyzed systematically the weakness of the United States recovery in the current business cycle from IIIQ2009 to the present in comparison with the recovery from the two recessions in the 1980s from IQ1983 to IVQ1985. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.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). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
The conventional explanation is that the recession from IVQ2007 (Dec) to IIQ2009 (Jun) was so profound that it caused subsequent weak recovery and that historically growth after recessions with financial crises has been weaker. Michael D. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) provide evidence contradicting the conventional explanation: recovery is much stronger on average after profound contractions and much stronger after recessions with financial crises than after recessions without financial crises. Insistence on the conventional explanation prevents finding policies that can accelerate growth, employment and prosperity.
A monumental effort of data gathering, calculation and analysis by Carmen M. Reinhart and Kenneth Rogoff is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:
“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”
Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.
For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).
An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):
“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”
There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:
“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”
As both sides of the Atlantic economy maneuver around defaults, the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. This time is not different.
Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) incomplete conclusions by lumping together countries with different institutions, economic policies and financial systems; and (2) the erroneous contention that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.
Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money (for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for serial default. William R. Summerhill, Jr. (2007SC, 2007IR) has filled this void in scholarly research on nineteenth-century Brazil. There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 and 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is surprising is that Brazil borrowed by means of long-term bonds and, even more surprising, interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).
The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.
External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1967). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions.
Nicia Villela Luz and Carlos Manuel Peláez (1972, 276) find that:
“The lack of interest on historical moments by economists may explain their emphasis on secular trends in their research on the past instead of changes in the historical process. This may be the origin of why they fill gaps in documentation with their extrapolations.”
Vilela Luz (1961) provides classic analysis of industrialization in Brazil. According to Pelaez 1976, 283) following Cameron (1971, 1967):
“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”
Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:
“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries, supplied the financial services required in the first stage of modernization of the export economy.”
Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).
The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls, “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):
“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”
Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER, finding evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:
“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”
The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). The comparison of recovery from IQ1983 to IVQ1985 is appropriate even when considering financial crises. There was significant financial turmoil during the 1980s. Bordo and Haubrich (2012DR, 11) identify a financial crisis in the United States starting in 1981. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5657.7 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.65 percent of GDP in a year. The US Bureau of Economic Analysis (BEA) estimates GDP in 2012 at $16,244.6 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the bailout would be equivalent to cost to taxpayers of about $430.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986).
Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.
The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of policy and economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html Appendix I; see Taylor 1993, 1997, 1999, 1998LB, 2012Mar27, 2012Mar28, 2012FP, 2012JMCB). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 28.315 million people in job stress, consisting of an effective number of unemployed of 17.577 million, 8.324 million employed part-time because they cannot find full employment and 2.414 million marginally attached to the labor force for 17.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.
In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:
“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”
Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.
Samuelson considers the unexpected incidence of inflation surprises during growth recessions (1974, 76):
“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”
Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.
Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.0, 11.9 and 6.7. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.6, 9.7, 7.7 and 10.1. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IQ1976: 3.1, 6.8, 5.5 and 9.3. The disaster of the Great Inflation and Unemployment of the 1970s, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.
Table I-1, US, Seasonally Adjusted Quarterly Percentage Growth Rates in Annual Equivalent of GDP in Cyclical Recessions and Following Four Quarter Expansions ∆%
| 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 |
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.7 percent is more comparable to the latest revised 4.3 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 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 and revisions in http://bea.gov/iTable/index_nipa.cfm). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on July 31, 2013 (http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.4 percent to -6.5 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.4 percent to -8.3 percent. The striking difference is that in the first sixteen quarters of expansion from IQ1983 to IVQ1986, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.3, 9.4, 8.1, 8.5, 8.2, 7.2, 4.0, 3.2, 4.0, 3.7, 6.4, 3.0, 3.8, 1.9, 4.1 and 2.1. In contrast, the percentage growth rates in the first sixteen quarters of expansion from IIIQ2009 to IIIQ2013 shown in relief in Table I-2 were mediocre: 1.3, 3.9, 1.6, 3.9, 2.8, 2.8, -1.3, 3.2, 1.4, 4.9, 3.7, 1.2, 2.8, 0.1, 1.1, 2.5 and 2.8. Inventory accumulation contributed 2.73 percentage points to the rate of growth of 4.9 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, 0.60 percentage points to the rate of 2.8 percent in IIIQ2012 and 0.83 percentage points to the rate of 2.5 percent in IIIQ2013. Economic growth and employment creation decelerated rapidly during 2012 and in 2013 as would be required in movement to full employment.
Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| 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 | 2.8 | |||||
| IV | 6.8 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real GDP in the US between 1929 and 1999 at the yearly average rate of 3.5 percent. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.
Chart I-1, US, Real GDP 1929-1999
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2012. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession. The average rate of growth from 1947 to 2012 is 3.2 percent. The average growth rate from 2000 to 2012 is only 1.7 percent with 2.8 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.
Chart I-2, US, Real GDP, Quarterly, 1947-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.
Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, growth rates in the comparable first sixteen quarters of expansion from 2009 to 2013 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.
Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 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 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. US GDP fell 4.7 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.3 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 4.6 percent in 1983, 7.3 percent in 1984 and 4.2 percent in 1985 while GDP grew, 2.5 percent in 2010, 1.8 percent in 2011 and 2.8 percent in 2012. Actual annual equivalent GDP growth in the four quarters of 2012 and first two quarters of 2013 is 1.9 percent and 1.8 percent in the first two quarters of 2013. GDP grew at 4.2 percent in 1985 and 3.5 percent in 1986 while the forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.0 to 2.3 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130918.pdf).
Table I-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%
| 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 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was lower by 11 percent in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.
Chart I-5, US, Percentage Change of GDP in the 1930s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.
Chart I-6, US, Percentage Change of GDP in the 1980s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial sixteen quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 17.7 percent of the US labor force (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
Chart I-7, US, Percentage Change of GDP in the 2000s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.3 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 26.4 percent cumulatively and fell 45.3 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 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table I-4, US, Number of Quarters, GDP Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions
| 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 |
Sources: Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html
Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.3 percent of the US economy in the seventeen quarters of the current cyclical expansion from IIIQ2009 to IIQ2013 and the average of 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986, 5.3 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986, 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986 and 5.0 percent in the first seventeen quarters of expansion from IQ1983 to IQ1987. The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of recovery. 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). Table I-5 provides an average of 7.7 percent in the first four quarters of major cyclical expansions while the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 is 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. As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). 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 and 2.8 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) 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. GDP growth in the first three quarters of 2013 accumulated to 1.6 percent that is equivalent to 2.2 percent in a year. This is obtained by dividing GDP in IIIQ2013 of 15,790.1 by GDP in IVQ2012 of $15,539.6 and compounding by 4/3: {[(15,790.1/$15,539.6)4/2 -1]100 = 2.2 %}. The US economy grew 1.6 percent in IIIQ2013 relative to the same quarter a year earlier in IIIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, just at the borderline of contraction.
Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.8 | 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-IQ1986 IQ1983-IIIQ1986 IQ1983-IQ1986 IQ1983-IQ1987 | 13 15 16 17 | 19.9 21.6 22.3 23.1 | 5.7 5.4 5.2 5.0 |
| First Four Quarters IQ1983 to IVQ1983 | 4 | 7.8 | |
| Average First Four Quarters in Four Expansions* | 7.7 | ||
| IIIQ2009 to IIIQ2013 | 17 | 10.0 | 2.3 |
| First Four Quarters IIIQ2009 to IIQ2010 | 2.7 |
*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IIQ1976; 7.8% IQ1983-IVQ1983
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html
Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.
Chart I-8, US, Real GDP, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first sixteen quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.
Chart I-9, US, Real GDP, 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.3 percent but the gain in the cyclical expansion has been only 10.0 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIIQ2013 with the second estimate and revisions is only higher by 5.3 percent than the level of real GDP in IVQ2007. Growth at trend of 3.0 percent in the entire cycle as in past cyclical expansions would result in GDP higher by 19.4 percent in IIIQ2013 relative to IVQ2007. Trend GDP would be $17,905.3 billion, which is higher than actual GDP in IIIQ2013 of $15,790.1 billion, for underperformance of $2,115.2 billion. Table I-6 provides in the second column real GDP in billions of chained 2009 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.2 percent in IVQ2008 relative to the prior quarter and decline of 1.4 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.022) x (1-0.014) -1]100 = -3.6%}, or {[(IQ2009 $14,372.1)/(IIIQ2008 $14,895.1) – 1]100 = -3.5%} except for rounding. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.3 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009, 0.4 percent in IQ2010, 0.9 percent in IIQ2010 and equal growth at 0.7 percent in IIIQ2010 and 0.7 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.004 x 1.009 x 1.007 x 1.007) – 1]100 = 3.8%} or {[(IVQ2010 $14,942.4)/(IIIQ2009 $14,402.5) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.3 percent in IQ2011 and growth of 0.8 percent in IIQ2011 for combined annual equivalent rate of 1.0 percent {(0.997 x 1.008)2}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.1 percent in the first three quarters {[(0.997 x 1.008 x 1.003)4/3 -1]100 = 1.1%}. Growth picked up in IVQ2011 with 1.2 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.7 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.0 percent in IQ2011, 1.9 percent in IIQ2011, 1.5 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.2 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.9 percent relative to IVQ2011 and 3.3 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.8 percent relative to IIQ2011 and 0.7 percent in IIIQ2012 and 3.1 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was 0.0 percent in IVQ2012 with 2.0 percent relative to a year earlier but mostly because of deduction of 2.00 percentage points of inventory divestment and 1.22 percentage points of reduction of one-time national defense expenditures. Growth was 0.3 percent in IQ2013 and 1.3 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.6 percent in IIQ2013 and 1.6 percent relative to a year earlier. In IIIQ2013, GDP grew 0.7 percent relative to the prior quarter and 1.6 percent relative to the same quarter a year earlier. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.
Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%
| Real GDP, Billions Chained 2009 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 14,996.1 | NA | NA | 1.9 |
| IQ2008 | 14,895.4 | -0.7 | -0.7 | 1.1 |
| IIQ2008 | 14,969.2 | -0.2 | 0.5 | 0.9 |
| IIIQ2008 | 14,895.1 | -0.7 | -0.5 | -0.3 |
| IVQ2008 | 14,574.6 | -2.8 | -2.2 | -2.8 |
| IQ2009 | 14,372.1 | -4.2 | -1.4 | -3.5 |
| IIQ2009 | 14,356.9 | -4.3 | -0.1 | -4.1 |
| IIIQ2009 | 14,402.5 | -4.0 | 0.3 | -3.3 |
| IV2009 | 14,540.2 | -3.0 | 1.0 | -0.2 |
| IQ2010 | 14,597.7 | -2.7 | 0.4 | 1.6 |
| IIQ2010 | 14,738.0 | -1.7 | 0.9 | 2.7 |
| IIIQ2010 | 14,839.3 | -1.0 | 0.7 | 3.0 |
| IVQ2010 | 14,942.4 | -0.4 | 0.7 | 2.8 |
| IQ2011 | 14,894.0 | -0.7 | -0.3 | 2.0 |
| IIQ2011 | 15,011.3 | 0.1 | 0.8 | 1.9 |
| IIIQ2011 | 15,062.1 | 0.4 | 0.3 | 1.5 |
| 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 | 15,679.7 | 4.6 | 0.6 | 1.6 |
| IIIQ2013 | 15,790.1 | 5.3 | 0.7 | 1.6 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.
Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and sharp decline from an early peak. The US missed the initial high growth rates in cyclical expansions that eliminate unemployment and underemployment.
Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.
Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2013. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.
Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent and minus 8.3 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent and 5.4 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent and minus 2.0 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent but lowered to 3.9 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent and 1.6 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The final revision increased growth in IIQ2010 to 3.9 percent. Revisions lowered growth of 1.9 percent in IQ2011 to minus 1.3 percent. The revisions lowered growth of 1.8 percent in IQ2013 to 1.1 percent but increased growth of 2.0 percent in IQ2012 to 3.7 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction and continuing underperformance.
Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates
| 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 | |||
| III | 2.8 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IVQ1986 than in IIIQ2009 to IIQ2013, as shown in Table I-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2013. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2013 at seasonally adjusted annual rate of 2.8 percent consisted of positive contribution of 1.04 percentage points of personal consumption expenditures (PCE) plus positive contribution of 1.45 percentage points of gross private domestic investment (GDI) of which 0.83 percentage points of inventory investment (∆PI), contribution of net exports (trade or exports less imports) of 0.31 percentage points and 0.04 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time reduction of national defense expenditures of 0.03 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.
Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 2013 | ||||||
| I | 1.1 | 1.54 | 0.71 | 0.93 | -0.28 | -0.82 |
| II | 2.5 | 1.24 | 1.38 | 0.41 | -0.07 | -0.07 |
| III | 2.8 | 1.04 | 1.45 | 0.83 | 0.31 | 0.04 |
| 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 | ||||||
| I | 4.0 | 4.23 | -2.14 | -2.86 | 0.94 | 1.01 |
| II | 3.7 | 2.35 | 1.34 | 0.35 | -1.90 | 1.93 |
| III | 6.4 | 4.82 | -0.43 | -0.15 | -0.01 | 1.98 |
| IV | 3.0 | 0.62 | 2.80 | 1.40 | -0.66 | 0.27 |
| 1986 | ||||||
| I | 3.8 | 2.10 | 0.04 | -0.17 | 0.92 | 0.70 |
| II | 1.9 | 2.77 | -1.30 | -1.30 | -1.33 | 1.70 |
| III | 4.1 | 4.55 | -1.97 | -1.62 | -0.45 | 1.95 |
| IV | 2.1 | 1.62 | 0.24 | -0.29 | 0.71 | -0.48 |
Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive
GDP: percent change at annual rate; percentage points at annual rates
Source: US Bureau of Economic Analysis
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
The Bureau of Economic Analysis (BEA) (pages 1-2 http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf) explains growth of GDP in IIIQ2013 as follows:
“The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP growth in the third quarter primarily reflected a deceleration in imports and accelerations in private inventory investment and in state and local government spending that were partly offset by decelerations in exports, in nonresidential fixed investment, and in PCE.”
There are positive contributions to growth in IIIQ2013 shown in Table I-9:
- Personal consumption expenditures (PCE) growing at 1.5 percent with consumption of durable goods growing at 7.8 percent
- Residential fixed investment (RFI) growing at 14.6 percent
- Nonresidential fixed investment growing at 1.6 percent
- Private inventory investment contributing 0.83 percentage points
- Growth of exports at 4.5 percent, which is higher than imports at 1.9 percent
There were negative contributions in IIIQ2013:
- Federal government expenditures declining at 1.7 percent partly because of decrease of national defense expenditures at 0.7 percent that deducted 0.03 percentage points from GDP growth
- Growth of imports, which are deduction to growth, at 1.9 percent
The BEA explains acceleration in real GDP growth in IIIQ2013 by:
- Acceleration of inventory investment contributing 0.83 percentage points in IIIQ2013 that is higher than 0.41 percentage points in IIQ2013
- Growth of state and local expenditures at 1.5 percent in IIIQ2013 compared with 0.4 percent in IIQ2013
- Growth of imports at 1.9 percent in IIIQ2013 compared with growth at 6.9 percent in IIQ2013
An important aspect of growth in the US is the decline in growth of real disposable personal income, or what is left after taxes and inflation, which increased at the rate of 1.6 percent in IIIQ2013 compared with a year earlier. The effects of financial repression, or zero interest, are vividly shown in the decline of the savings rate, or personal saving as percent of disposable income from 5.5 percent in IIQ2012 to 4.7 percent in IIIQ2013. Anticipation of income in IVQ2012 to avoid higher taxes in 2013 caused increases in income and savings while higher payroll taxes in 2013 restricted income growth and savings in IQ2013. Zero interest rates induce risky investments with high leverage and can contract balance sheets of families, business and financial institutions when interest rates inevitably increase in the future. There is a tradeoff of weaker economy in the future when interest rates increase by meager growth in the present with forced consumption by zero interest rates.
Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %
| IIIQ 2012 | IVQ 2012 | IQ 2013 | IIQ 2013 | IIIQ 2012 | |
| GDP | 2.8 | 0.1 | 1.1 | 2.5 | 2.8 |
| PCE | 1.7 | 1.7 | 2.3 | 1.8 | 1.5 |
| Durable Goods | 8.3 | 10.5 | 5.8 | 6.2 | 7.8 |
| NRFI | 0.3 | 9.8 | -4.6 | 4.7 | 1.6 |
| RFI | 14.1 | 19.8 | 12.5 | 14.2 | 14.6 |
| Exports | 0.4 | 1.1 | -1.3 | 8.0 | 4.5 |
| Imports | 0.5 | -3.1 | 0.6 | 6.9 | 1.9 |
| GOV | 3.5 | -6.5 | -4.2 | -0.4 | 0.2 |
| Federal GOV | 8.9 | -13.9 | -8.4 | -1.6 | -1.7 |
| National Defense | 12.5 | -21.6 | -11.2 | -0.6 | -0.7 |
| Cont to GDP Growth % Points | 0.60 | -1.22 | -0.57 | -0.03 | -0.03 |
| State/Local GOV | -0.2 | -1.0 | -1.3 | 0.4 | 1.5 |
| ∆ PI (PP) | 0.60 | -2.00 | 0.93 | 0.41 | 0.83 |
| Final Sales of Domestic Product | 2.2 | 2.2 | 0.2 | 2.1 | 2.0 |
| Gross Domestic Purchases | 2.7 | -0.5 | 1.4 | 2.5 | 2.5 |
| Prices Gross | 1.4 | 1.6 | 1.2 | 0.3 | 1.0 |
| Prices of GDP | 2.3 | 1.1 | 1.3 | 0.6 | 1.9 |
| Prices of GDP Excluding Food and Energy | 1.3 | 1.4 | 1.6 | 0.9 | 1.9 |
| Prices of PCE | 1.7 | 1.6 | 1.1 | -0.1 | 1.9 |
| Prices of PCE Excluding Food and Energy | 1.4 | 1.3 | 1.4 | 0.6 | 1.4 |
| Prices of Market Based PCE | 1.6 | 1.4 | 1.3 | -0.3 | 2.0 |
| Prices of Market Based PCE Excluding Food and Energy | 1.3 | 0.9 | 1.6 | 0.5 | 1.4 |
| Real Disposable Personal Income* | 1.3 | 3.6 | 0.4 | 0.8 | 1.6 |
| Personal Savings As % Disposable Income | 4.9 | 6.6 | 4.1 | 4.5 | 4.7 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
*Percent change from quarter one year ago
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Percentage shares of GDP are shown in Table I-10. PCE is equivalent to 68.4 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillion dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.
Table I-10, US, Percentage Shares of GDP, %
| IIIQ2013 | |
| GDP | 100.0 |
| PCE | 68.4 |
| Goods | 23.2 |
| Durable | 7.6 |
| Nondurable | 15.6 |
| Services | 45.2 |
| Gross Private Domestic Investment | 16.0 |
| Fixed Investment | 15.3 |
| NRFI | 12.1 |
| Structures | 2.8 |
| Equipment & Software | 5.5 |
| Intellectual Property | 3.8 |
| RFI | 3.2 |
| Change in Private | 0.7 |
| Net Exports of Goods and Services | -2.9 |
| Exports | 13.5 |
| Goods | 9.3 |
| Services | 4.1 |
| Imports | 16.4 |
| Goods | 13.6 |
| Services | 2.7 |
| Government | 18.6 |
| Federal | 7.4 |
| National Defense | 4.6 |
| Nondefense | 2.8 |
| State and Local | 11.2 |
PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011 and 2012. The data incorporate the new revisions released by the BEA on Jul 31, 2013. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 6.9 percent in 1959, 5.4 percent in 1976, and 4.6 percent in 1983 followed by 7.3 percent in 1984 and 4.2 percent in 1985. In contrast, GDP grew 2.5 percent in 2010 after six consecutive quarters of growth, 1.8 percent in 2011 after ten consecutive quarters of expansion and 2.8 percent in 2012 after 14 quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011 and 2012.
Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP
| 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 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2012 using annual-level data. PCEs contributed 1.34 PPs to GDP growth in 2010 of which 0.77 percentage points (PP) in goods and 0.57 PP in services. Gross private domestic investment (GPDI) deducted 3.52 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.76 PPs of inventory change (∆PI) and added 1.66 PPs of GPDI in 2010 of which minus 0.21 PPs of fixed investment and 1.45 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.10 PPs and imports added 2.24 PPs. In 2010, trade deducted 0.51 PPs with exports contributing 1.28 PPs and imports deducting 1.79 PPs likely benefitting from dollar revaluation. In 2009, government added 0.64 PP of which 0.44 PPs by the federal government and 0.20 PPs by state and local government; in 2010, government added 0.02 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.35 PPs. The final two columns of Table I-12 provide the estimates for 2011 and 2012. PCE contributed 1.74 PPs in 2011 after 1.34 PPs in 2010. The contribution of PCE fell to 1.52 points in 2012. The breakdown into goods and services is similar but with contributions in 2012 of 0.77 PPs of goods and 0.74 PPs of services. Gross private domestic investment contributed 1.66 PPs in 2010 with 1.45 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.69 PPs in 2011. The contribution of GPDI in 2012 increased to 1.36 PPs with fixed investment increasing its contribution to 1.17 PPs and residential investment contributing 0.32 PPs for the first time since 2009. Net exports of goods and services contributed marginally in 2011 with 0.10 PPs and 0.10 PPs in 2012. The contribution of exports fell from 1.28 PPs in 2010 and 0.89 PPs in 2011 to only 0.48 PPs in 2012. Government deducted 0.68 PPs in 2011 and 0.20 PPs in 2012. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011, the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future while creating multiple distortions of resource allocation and growth restraint.
Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points
| 2009 | 2010 | 2011 | 2012 | |
| GDP Growth ∆% | -2.8 | 2.5 | 1.8 | 2.8 |
| Personal Consumption Expenditures (PCE) | -1.06 | 1.34 | 1.74 | 1.52 |
| Goods | -0.68 | 0.77 | 0.76 | 0.77 |
| Durable | -0.41 | 0.43 | 0.46 | 0.56 |
| Nondurable | -0.27 | 0.34 | 0.30 | 0.22 |
| Services | -0.38 | 0.57 | 0.98 | 0.74 |
| Gross Private Domestic Investment (GPDI) | -3.52 | 1.66 | 0.69 | 1.36 |
| Fixed Investment | -2.77 | 0.21 | 0.85 | 1.17 |
| Nonresidential | -2.04 | 0.28 | 0.84 | 0.85 |
| Structures | -0.70 | -0.49 | 0.05 | 0.31 |
| Equipment, software | -1.29 | 0.70 | 0.62 | 0.41 |
| Intellectual Property | -0.05 | 0.07 | 0.17 | 0.13 |
| Residential | -0.73 | -0.07 | 0.01 | 0.32 |
| Change Private Inventories | -0.76 | 1.45 | -0.16 | 0.20 |
| Net Exports of Goods and Services | 1.14 | -0.51 | 0.10 | 0.10 |
| Exports | -1.10 | 1.28 | 0.89 | 0.48 |
| Goods | -1.02 | 1.08 | 0.63 | 0.36 |
| Services | -0.08 | 0.20 | 0.27 | 0.12 |
| Imports | 2.24 | -1.79 | -0.79 | -0.38 |
| Goods | 2.15 | -1.72 | -0.70 | -0.30 |
| Services | 0.08 | -0.07 | -0.09 | -0.07 |
| Government Consumption Expenditures and Gross Investment | 0.64 | 0.02 | -0.68 | -0.20 |
| Federal | 0.44 | 0.37 | -0.23 | -0.12 |
| National Defense | 0.27 | 0.18 | -0.13 | -0.17 |
| Nondefense | 0.17 | 0.19 | -0.10 | 0.05 |
| State and Local | 0.20 | -0.35 | -0.46 | -0.08 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Manufacturing jobs increased 19,000 in Oct 2013 relative to Sep 2013, seasonally adjusted (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). Manufacturing jobs not seasonally adjusted increased 49,000 from Oct 2012 to Oct 2013 or at the average monthly rate of 4,083. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production increased 0.6 percent in Sep 2013 after increasing 0.4 percent in Aug 2013 and decreasing 0.1 percent in Jul 2013, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):
“Industrial production increased 0.6 percent in September following a gain of 0.4 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 2.3 percent. Manufacturing output edged up 0.1 percent in September following a gain of 0.5 percent in August, and increased at an annual rate of 1.2 percent for the third quarter. Production at mines moved up 0.2 percent in September and advanced at an annual rate of 12.9 percent for the third quarter. The output of utilities rose 4.4 percent in September following declines in each of the previous five months. The level of the index for total industrial production in September was equal to its 2007 average and was 3.2 percent above its year-earlier level.“
In the six months ending in Sep 2013, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is much lower than growth of 3.2 percent in the 12 months ending in Sep 2013. Excluding growth of 0.6 percent in Sep 2013, growth in the remaining five months from Apr 2012 to Aug 2013 accumulated to 0.3 percent or 0.6 percent annual equivalent. Industrial production stagnated in one of the past six months and fell in two. Business equipment accumulated growth of 1.3 percent in the six months from Apr to Sep 2013 at the annual equivalent rate of 2.6 percent, which is much lower than growth of 3.7 percent in the 12 months ending in Aug 2013. Growth of business equipment accumulated 0.1 percent from Apr to Aug 2013 at the annual equivalent rate of minus 0.2 percent. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for total industry moved up 0.4 percentage point to 78.3 percent, a rate 1.9 percentage points below its long-run (1972-2012) average.” United States industry is apparently decelerating.
Manufacturing increased 0.1 percent in Sep 2013 after increasing 0.5 percent in Aug 2013 and decreasing 0.4 percent in Jul 2013 seasonally adjusted, increasing 2.4 percent not seasonally adjusted in 12 months ending in Sep 2013, as shown in Table I-11. Manufacturing grew cumulatively 0.6 percent in the six months ending in Sep 2013 or at the annual equivalent rate of 0.4 percent. Excluding the increase of 0.5 percent in Aug 2013, manufacturing accumulated growth of 0.1 percent from Apr 2013 to Aug 2013 or at the annual equivalent rate of 0.2 percent. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 into more recent months as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.2 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steadily in the past six months with some weakness at the margin. Manufacturing fell 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 16.8 percent from the trough in Apr 2009 to Dec 2012. Manufacturing grew 21.5 percent from the trough in Apr 2009 to Sep 2013. Manufacturing output in Sep 2013 is 5.1 percent below the peak in Jun 2007. Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.7 percent in IIQ2013. Most of US national income is in the form of services. In Oct 2013, there were 137.540 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 115.308 million NSA in Oct 2013 accounted for 83.8 percent of total nonfarm jobs of 137.540 million, of which 12.033 million, or 10.4 percent of total private jobs and 8.7 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 96.328 million NSA in Oct 2013, or 70.0 percent of total nonfarm jobs and 83.5 percent of total private-sector jobs. Manufacturing has share of 10.8 percent in US national income in IIQ2013, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR IQ2013 | % Total | SAAR | % Total | |
| National Income WCCA | 14,354.5 | 100.0 | 14,471.3 | 100.0 |
| Domestic Industries | 14,117.1 | 98.3 | 14,224.4 | 98.3 |
| Private Industries | 12,432.9 | 86.6 | 12,544.3 | 86.7 |
| Agriculture | 226.4 | 1.6 | 220.3 | 1.5 |
| Mining | 247.6 | 1.7 | 252.6 | 1.7 |
| Utilities | 209.1 | 1.5 | 216.5 | 1.5 |
| Construction | 618.2 | 4.3 | 626.4 | 4.3 |
| Manufacturing | 1568.1 | 10.9 | 1561.1 | 10.8 |
| Durable Goods | 878.8 | 6.1 | 890.3 | 6.2 |
| Nondurable Goods | 689.2 | 4.8 | 670.1 | 4.6 |
| Wholesale Trade | 870.0 | 6.1 | 875.3 | 6.0 |
| Retail Trade | 971.4 | 6.8 | 994.5 | 6.9 |
| Transportation & WH | 434.0 | 3.0 | 437.7 | 3.0 |
| Information | 496.0 | 3.5 | 504.8 | 3.5 |
| Finance, Insurance, RE | 2418.9 | 16.8 | 2437.1 | 16.8 |
| Professional, BS | 1973.6 | 13.7 | 1998.1 | 13.8 |
| Education, Health Care | 1423.7 | 9.9 | 1439.4 | 9.9 |
| Arts, Entertainment | 569.7 | 4.0 | 575.0 | 4.0 |
| Other Services | 406.1 | 2.8 | 408.3 | 2.8 |
| Government | 1684.3 | 11.7 | 1680.1 | 11.6 |
| Rest of the World | 237.4 | 1.7 | 246.8 | 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://bea.gov/iTable/index_nipa.cfm
IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.
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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.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 seventeen quarters of cyclical expansion from IIIQ2009 to IIIQ2013. 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 6.5 percent in IIQ2013 and fell to 4.1 percent in IIIQ2013. 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 6.5 percent in IIQ2013 and falling to 4.1 percent in IIIQ2013.
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 | 6.5 | |||||
| III | 7.1 | 4.1 | |||||
| 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
http://www.bea.gov/iTable/index_nipa.cfm
Weak behavior of real private fixed investment from 2007 to 2013 is shown in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of expansion in the current economic cycle and have entered sharp trend of decline.
Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IIQ2013 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, gross private domestic investment in the US was $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 0.8 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,583.1 billion in IIIQ2013. As shown in Table IAI-2, real private fixed investment fell 4.0 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,483.5 billion in IIIQ2013. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.
Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2009 Dollars and ∆%
| Real PFI, Billions Chained 2009 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| 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 | 2458.4 | -4.9 | 1.6 | 4.7 |
| IIIQ2013 | 2,483.5 | -4.0 | 1.0 | 5.1 |
PFI: Private Fixed Investment
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart IA1-3 provides real private fixed investment in billions of chained 2009 dollars from IQ2007 to IIIQ2013. Real private fixed investment has not recovered, stabilizing at a level in IIIQ2013 that is 4.0 percent below the level in IVQ2007.
Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars, IQ2007 to IIQ2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-4 provides real gross private domestic investment in chained dollars of 2009 from 1980 to 1986. Real gross private domestic investment climbed 20.1 percent to $1143.0 billion of 2009 dollars in IVQ1986 above the level of $951.6 billion in IQ1980.
Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-5 provides real gross private domestic investment in the United States in billions of dollars of 2009 from 2006 to 2013. Gross private domestic investment reached a level of $2583.1 in IIIQ2013 of that was 0.8 percent lower than the level of $2605.2 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).
Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 2007-2013
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-3 provides percentage shares in GDP of gross private domestic investment and its components in IIIQ2013, IIIQ2006 and IIIQ2000. The share of gross private domestic investment in GDP has fallen from 19.8 percent in IIIQ2000 and 19.3 percent in IIIQ2006 to 16.0 percent in IIIQ2013. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.7 percent in IIIQ2000 and 5.8 percent in IIIQ2006 to 3.2 percent in IIIQ2013. The share of fixed investment in GDP fell from 19.3 percent in IIIQ2000 and 18.7 percent in IIIQ2006 to 15.3 percent in IIIQ2013.
Table IA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IQ2013
| IIIQ2013 | IIIQ2006 | IIIQ2000 | |
| Gross Private Domestic Investment | 16.0 | 19.3 | 20.1 |
| Fixed Investment | 15.3 | 18.7 | 19.3 |
| Nonresidential | 12.1 | 12.9 | 14.5 |
| Structures | 2.8 | 3.1 | 3.0 |
| Equipment and Software | 5.5 | 6.2 | 7.5 |
| Intellectual | 3.8 | 3.7 | 4.0 |
| Residential | 3.2 | 5.8 | 4.7 |
| Change in Private Inventories | 0.7 | 0.6 | 0.9 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2012. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.
Chart IA1-6, US, Percentage Share of Gross Private Domestic Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2012. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.
Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2012. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.
Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2012. There is again inadequate recovery in the current economic cycle.
Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2012. The salient characteristic of Chart IA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.
Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2013 in Chart IA1-11. There was protracted growth of that share, accelerating sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:
“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”
Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:
“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”
There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ingersoll 1987, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.
The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.
Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).
Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-12 provides the share of intellectual property products investment in GDP with annual data from 1929 to 2012. This is an important addition in the revision and enhancement of GDP provided by the Bureau of Economic Analysis. The share rose sharply over time but in the past decade and stabilized at a lower level.
Chart IA1-12, US, Percentage Share of Intellectual Property Products Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IA1-13 provides the percentage share of intellectual property investment in GDP on a quarterly basis from 1979 to 2013. The share stabilized in the 2000s.
Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IA1-4 provides the seasonally adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES), intellectual property products (IPP) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IIIQ2013. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion since IIIQ2009 with contributions largely only from IQ2010 to IVQ2011. Gross domestic investment added 1.45 percentage points to GDP growth of 2.8 percent in IIIQ2013 partly because of change of inventories of 0.83 percentage points with PFI adding 0.63 percentage points. Nonresidential investment added 0.20 percentage points and residential investment added 0.43 percentage points to GDP growth of 2.8 percent in IIIQ2013. GDI added 1.38 percentage points to GDP growth of 2.5 percent in IIQ2013 with 0.41 percentage points from inventory change while nonresidential investment added 0.56 percentage points and residential investment 0.40 percentage points. GDI added 0.71 percentage points in IQ2013 mostly because of 0.93 percentage points of inventory investment while private fixed investment deducted 0.23 percentage points. Nonresidential investment deducted 0.57 percentage points. Business equipment and software added 0.09 percentage points and residential investment 0.34 percentage points. Intellectual property products (IPP) added 0.14 percentage points in IQ2013, deducted 0.06 percentage points in IIQ2013 and added 0.09 percentage points in IIIQ2013. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to negative 0.22 percentage points in IIIQ2012 as business scales down investment but rebounded with 0.47 percentage points in IVQ2012, 0.09 percentage points in IQ2013 and 0.18 percentage points in IIQ2013. Business equipment and software deducted 0.21 percentage points in IIIQ2013. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters. Residential investment only contributed significantly to growth of GDP in the four quarters of 2012, IQ2013, IIQ2013 and IIIQ2013.
Table IA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points
| 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 | 1.38 | 0.96 | 0.56 | 0.18 | -0.06 | 0.40 | 0.41 |
| III | 2.8 | 1.45 | 0.63 | 0.20 | -0.21 | 0.09 | 0.43 | 0.83 |
| 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 |
GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; IPP: Intellectual Property Products; RES: Residential; ∆INV: Change in Private Inventories.
GDI = PFI + ∆INV, may not add exactly because of errors of rounding.
GDP: Seasonally adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
IB Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides important revisions and enhancements of data on personal income and outlays since 1929 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). There are waves of changes in personal income and expenditures in Table IB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. The Bureau of Economic Analysis (BEA) explains as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):
“The February and January [2013] changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December [2012] in anticipation of changes in individual tax rates.”
In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.1 percent, nominal disposable personal income (NDPI) at 5.2 percent and nominal personal consumption expenditures (NPCE) at 5.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.8 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.1 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 4.3 percent, NPDI at 4.3 percent and NPCE at 4.0 percent. RDPI increased at 1.8 percent annual equivalent and RPCE at 1.5 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 1.5 percent and NPCE at 3.3 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 2.1 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.3 percent annual equivalent and NDPI at 7.0 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 3.7 percent annual equivalent and RPCE at 3.7 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 3.7 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.2 percent, NDPI at 1.2 percent and RDPI at 0.6 percent. Financial repression failed to stimulate consumption with NPCE growing at 2.1 percent annual equivalent and RPCE at 2.1 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI increased at 4.5 percent annual equivalent and NDPI increased at 3.7 percent while real disposable income (RDPI) increased at 0.4 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 29.0 percent in Nov-Dec 2012, nominal disposable income at 29.0 percent and real disposable personal income at 29.8 percent with likely effects on nominal personal consumption that increased at 1.8 percent and real personal consumption at 2.4 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 4.4 percent in Jan 2013 or at the annual equivalent rate of decline of 41.7 percent; nominal disposable personal income fell 5.1 percent or at the annual equivalent rate of decline of 46.6 percent; real disposable income fell 5.1 percent or at the annual rate of decline of 46.6 percent; nominal personal consumption expenditures increased 0.2 percent or at the annual equivalent rate of 2.4 percent; and real personal consumption expenditures increased 0.1 percent or at the annual equivalent rate of 1.2 percent. The savings rate fell significantly from 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):
“Contributions for government social insurance -- a subtraction in calculating personal income -- increased $126.7 billion in January, compared with an increase of $6.3 billion in December. The
January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.8 billion to January. As noted above, employer contributions were boosted $5.9 billion in January, so the total contribution of special factors to the January change in contributions for government social insurance was $132.8 billion”
Further explanation is provided by the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3):
“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The
January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9 billion. The January change in disposable personal income (DPI) mainly reflected the effect of special factors, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to December in anticipation of changes in individual tax rates. Excluding these special factors and others, which are discussed more fully below, DPI increased $46.8 billion in February, or 0.4 percent, after increasing $15.8 billion, or 0.1 percent, in January.”
The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf). In the ninth wave in Feb-Mar 2013, nominal personal income increased at 10.0 percent and nominal disposable income at 10.0 percent annual equivalent, while real disposable income increased at 8.1 percent annual equivalent. Nominal personal consumption expenditures grew at 5.5 annual equivalent and real personal consumption expenditures at 3.7 percent annual equivalent. The savings rate collapsed from 5.0 percent in Oct 2012, 5.9 percent in Nov 2012 and 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013, 4.2 percent in Feb 2013 and 4.3 percent in Mar 2013. In the tenth wave from Apr to Sep 2013, personal income grew at 3.7 percent annual equivalent, nominal disposable income increased at annual equivalent 3.7 percent and nominal personal consumption expenditures at 2.4 percent. Real disposable income grew at 2.6 percent annual equivalent and real personal consumption expenditures at 1.2 percent.
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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf). 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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
RDPI stagnated in Jan-Dec 2011 at 1.2 percent with the latest revised data compared with growth of 2.8 percent in Jan-Dec 2010 but grew at annual equivalent 3.7 percent in Jan-Mar 2012 and 0.6 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE (nominal personal consumption expenditures) to 2.1 percent annual equivalent in Apr-Jul 2012 and of RPCE (real personal consumption expenditures) to 2.1 percent. A bump occurred in Aug 2012 with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.2 percent in Aug 2012 or at annual equivalent 2.4 percent but declined 0.1 percent in real terms. Nominal personal income increased 0.1 percent in Aug 2012 or 1.2 percent annual equivalent while nominal disposable income was flat at 0.0 percent. Real disposable income (RDPI) increased 0.2 percent in Oct 2012 while real personal consumption expenditures (RPCE) decreased 0.1 percent. RDPI increased 1.3 percent in Nov 2012 and 3.1 percent in Dec 2012 because of realization of incomes in anticipation of tax increases in Jan 2013 while RPCE increased 0.3 percent in Nov 2012 and 0.1 percent in Dec 2012. In Jan-Dec 2012, RDPI increased 5.9 percent and RPCE 2.2 percent. NPI contracted 4.4 percent in Jan 2013, NDPI 5.1 percent and RDPI 5.1 percent but NPCE increased 0.2 percent and RPCE 0.1 percent, probably by drawing on savings. There is strong recovery in Feb-Mar 2013 and renewed weakness in Apr 2013. While NPI increased at 3.7 percent and NDPI at 3.7 in annual equivalent in Apr-Sep 2013 and RDPI at 2.6 percent, NPCE stagnated in Apr-May 2013 and RPCE increased at 1.2 percent annual equivalent in Apr-Sep 2013.
Table IB-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2013 | |||||
| Sep | 0.5 | 0.5 | 0.4 | 0.2 | 0.1 |
| Aug | 0.5 | 0.5 | 0.4 | 0.3 | 0.2 |
| Jul | 0.2 | 0.3 | 0.2 | 0.1 | 0.0 |
| Jun | 0.3 | 0.3 | -0.1 | 0.6 | 0.2 |
| May | 0.3 | 0.3 | 0.2 | 0.2 | 0.1 |
| Apr | 0.0 | -0.1 | 0.2 | -0.2 | 0.0 |
| AE ∆% Apr-Sep | 3.7 | 3.7 | 2.6 | 2.4 | 1.2 |
| Mar | 0.3 | 0.3 | 0.4 | 0.2 | 0.3 |
| Feb | 1.3 | 1.3 | 0.9 | 0.7 | 0.3 |
| AE ∆% Feb-Mar | 10.0 | 10.0 | 8.1 | 5.5 | 3.7 |
| Jan | -4.4 | -5.1 (0.1)a | -5.1 | 0.2 | 0.1 |
| AE ∆% Jan | -41.7 | -46.6 (3.7)a | -46.6 | 2.4 | 1.2 |
| 2012 | |||||
| ∆% Jan-Dec 2012*** | 7.9 | 7.5 | 5.9 | 3.8 | 2.2 |
| Dec | 3.1 | 3.1 (0.3)* | 3.1 (0.5)* | 0.1 | 0.1 |
| Nov | 1.2 | 1.2 (0.6)* | 1.3 (0.9)* | 0.2 | 0.3 |
| AE ∆% Nov-Dec | 29.0 | 29.0 (5.5)* | 29.8 (8.7)* | 1.8 | 2.4 |
| Oct | 0.4 | 0.4 | 0.2 | 0.1 | -0.1 |
| Sep | 0.6 | 0.5 | 0.2 | 0.7 | 0.4 |
| Aug | 0.1 | 0.0 | -0.3 | 0.2 | -0.1 |
| AE ∆% Aug-Oct | 4.5 | 3.7 | 0.4 | 4.1 | 0.8 |
| Jul | -0.1 | -0.1 | -0.1 | 0.4 | 0.4 |
| Jun | 0.3 | 0.3 | 0.1 | 0.1 | 0.0 |
| May | 0.0 | 0.0 | 0.0 | -0.1 | 0.0 |
| Apr | 0.2 | 0.2 | 0.2 | 0.3 | 0.3 |
| AE ∆% Apr-Jul | 1.2 | 1.2 | 0.6 | 2.1 | 2.1 |
| Mar | 0.4 | 0.3 | 0.1 | 0.2 | 0.0 |
| Feb | 0.7 | 0.6 | 0.3 | 0.8 | 0.5 |
| Jan | 0.9 | 0.8 | 0.5 | 0.6 | 0.4 |
| AE ∆% Jan-Mar | 8.3 | 7.0 | 3.7 | 6.6 | 3.7 |
| 2011 | |||||
| ∆% Jan-Dec 2011* | 4.6 | 3.6 | 1.2 | 4.3 | 1.8 |
| Dec | 0.7 | 0.6 | 0.6 | 0.0 | 0.0 |
| Nov | -0.1 | -0.1 | -0.2 | 0.2 | 0.0 |
| Oct | 0.0 | 0.1 | 0.0 | 0.4 | 0.4 |
| Sep | -0.1 | -0.1 | -0.3 | 0.5 | 0.3 |
| AE ∆% Sep-Dec | 1.5 | 1.5 | 0.3 | 3.3 | 2.1 |
| Aug | 0.1 | 0.1 | -0.1 | 0.2 | 0.0 |
| Jul | 0.6 | 0.6 | 0.4 | 0.5 | 0.3 |
| Jun | 0.4 | 0.4 | 0.3 | 0.3 | 0.2 |
| May | 0.3 | 0.3 | 0.0 | 0.3 | 0.0 |
| AE ∆% May-Aug | 4.3 | 4.3 | 1.8 | 4.0 | 1.5 |
| Apr | 0.2 | 0.2 | -0.1 | 0.4 | 0.0 |
| Mar | 0.2 | 0.2 | -0.2 | 0.7 | 0.4 |
| Feb | 0.6 | 0.5 | 0.3 | 0.4 | 0.2 |
| Jan | 1.6 | 0.8 | 0.6 | 0.3 | 0.1 |
| AE ∆% Jan-Apr | 8.1 | 5.2 | 1.8 | 5.5 | 2.1 |
| 2010 | |||||
| ∆% Jan-Dec 2010** | 4.8 | 4.2 | 2.8 | 4.4 | 2.9 |
| Dec | 0.9 | 0.9 | 0.7 | 0.3 | 0.1 |
| Nov | 0.5 | 0.4 | 0.3 | 0.6 | 0.4 |
| Oct | 0.5 | 0.5 | 0.2 | 0.8 | 0.5 |
| IVQ2010∆% | 1.9 | 1.8 | 1.2 | 1.7 | 1.0 |
| IVQ2010 AE ∆% | 7.9 | 7.4 | 4.9 | 7.0 | 4.1 |
Notes: *Excluding exceptional income gains in Nov and Dec 2012 because of anticipated tax increases in Jan 2013 ((page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). a Excluding employee contributions for government social insurance (pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf )Excluding NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent
Percentage change month to month seasonally adjusted
*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011
Source: US Bureau of Economic http://bea.gov/iTable/index_nipa.cfm
Table IB-2 provides further information on income and consumption. The 12-month rate of increase of RDPI of 2.8 percent in Dec 2010 fell to 1.2 percent in Dec 2011 while that of RPCE fell from 2.9 percent to 1.8 percent. Revisions shows increase of RDPI of 1.1 percent in the 12 months ending in Jan 2012 and marginal increase to 1.2 percent in the 12 months ending in Feb 2012. The significant difference is continuing growth of 12-month percentage changes of RDPI with 1.7 percent in Jun 2012, 1.6 percent in Sep 2013 and 1.7 percent in Oct 2012 followed by 3.2 percent in Nov 2012 and 5.9 percent in Dec 2012. The BEA explains increases of RDPI in Nov-Dec 2012: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The 12-month rate of growth of real disposable personal income fell from 5.9 percent in Dec 2012 to minus 0.1 percent in Jan 2013, increasing to 0.5 percent in Feb 2013, 0.8 percent in Mar 2013 and 0.9 percent in May 2013, 1.0 percent in Jul 2013 and 1.7 percent in Aug 2013. RDPI increased 2.0 percent in the 12 months ending in Sep 2013. Real disposable income fell 5.1 percent in Jan 2013, which is explained by the Bureau of Economic Analysis as follows (page 2 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):
“The January change in disposable personal income (DPI) mainly reflected the effect of special factors, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to December in anticipation of changes in individual tax rates. Excluding these special factors and others, which are discussed more fully below, DPI increased $46.8 billion in February, or 0.4 percent, after increasing $15.8 billion, or 0.1 percent, in January.”
The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf)
RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.1 percent in Mar 2012, 1.8 percent in Oct 2012, 2.1 percent in Nov 2012, 2.2 percent in Dec 2012 perhaps also with some effects of anticipations of tax increases in Jan 2013, 2.0 percent in Jan 2013 by burning savings, 1.7 percent in Feb 2013 and 2.0 percent in Mar 2013. RPCE increased 1.7 percent in the 12 months ending in Apr 2013, 1.8 percent in the 12 months ending in May 2013 and 2.0 percent in the 12 months ending in Jun 2013. RPCE increased 2.0 percent in the 12 months ending in Aug 2013 and 1.7 percent in the 12 months ending in Sep 2013. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). Growth of consumption of goods and, in particular, of consumer durable goods drives the faster expansion of the economy while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 5.9 to 9.1 percent from Jan 2012 to Sep 2013. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.3 to 4.2 percent from Jan 2012 to Sep 2013. Growth rates in 12 months of goods and durable goods increased again toward the end of 2012 with strength continuing into 2013. In Sep 2013, RPCEG increased 3.3 percent in 12 months and RPCEGD 5.9 percent while RPCES increased only 1.0 percent. There are limits to sustained growth based on financial repression in an environment of weak labor markets and real labor remuneration.
Table IB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures
Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2013 | |||||
| Sep | 2.0 | 1.7 | 3.3 | 5.9 | 1.0 |
| Aug | 1.7 | 2.0 | 4.0 | 8.9 | 1.0 |
| Jul | 1.0 | 1.7 | 3.9 | 8.0 | 0.6 |
| Jun | 0.7 | 2.0 | 4.1 | 8.3 | 1.0 |
| May | 0.9 | 1.8 | 3.6 | 7.7 | 0.9 |
| Apr | 0.8 | 1.7 | 3.0 | 7.1 | 1.1 |
| Mar | 0.8 | 2.0 | 3.1 | 6.3 | 1.4 |
| Feb | 0.5 | 1.7 | 3.2 | 6.6 | 0.9 |
| Jan | -0.1 | 2.0 | 3.7 | 7.7 | 1.1 |
| 2012 | |||||
| Dec | 5.9 | 2.2 | 4.2 | 9.0 | 1.2 |
| Nov | 3.2 | 2.1 | 3.6 | 8.4 | 1.4 |
| Oct | 1.7 | 1.8 | 2.8 | 6.1 | 1.3 |
| Sep | 1.6 | 2.3 | 4.1 | 8.8 | 1.4 |
| Aug | 1.1 | 2.1 | 4.0 | 9.1 | 1.2 |
| Jul | 1.2 | 2.2 | 3.4 | 7.9 | 1.6 |
| Jun | 1.7 | 2.2 | 3.2 | 8.9 | 1.7 |
| May | 1.9 | 2.4 | 3.5 | 7.7 | 1.8 |
| Apr | 1.8 | 2.4 | 3.0 | 6.7 | 2.1 |
| Mar | 1.5 | 2.1 | 2.9 | 6.5 | 1.7 |
| Feb | 1.2 | 2.5 | 3.0 | 7.5 | 2.2 |
| Jan | 1.1 | 2.1 | 2.3 | 6.4 | 1.9 |
| Dec 2011 | 1.2 | 1.8 | 1.9 | 5.8 | 1.7 |
| Dec 2010 | 2.8 | 2.9 | 4.7 | 8.4 | 2.1 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart IB-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2013. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.
Chart IB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1999-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Percent changes from the prior period in seasonally adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IB-2 from 1995 to 2013. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart II-2 that the average rate of growth of RPCE was higher before the recession than during the past sixteen quarters of expansion that began in IIIQ2009.
Chart IB-2, Percent Change from Prior Period in Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Personal income and its disposition are shown in Table IB-3. The latest estimates and revisions have changed movements in four forms. (1) Increase in Sep 2013 of personal income by $67.4 billion or 0.5 percent and disposable income of $64.8 billion or 0.5 percent with increase of wages and salaries of 0.4 percent. (2) Decrease of personal income of $155.7 billion from Dec 2012 to Sep 2013 or by 1.1 percent and decrease of disposable income of $225.7 billion or by 1.8 percent. Wages and salaries decreased $34.6 billion from Dec 2012 to Sep 2013 or by 0.5 percent. In 2012, personal income increased $1060.8 billion or 7.9 percent while salaries increased 7.6 percent and disposable income 7.5 percent. Significant part of these gains occurred in Dec 2012 in anticipation of incomes because of tax increases beginning in Jan 2013. (3) Increase of $591.6 billion of personal income in 2011 or by 4.6 percent with increase of salaries of 2.8 percent and disposable income of 3.6 percent. (4) Decline of the rate of savings as percent of disposable income from 5.8 percent in Dec 2010 to 5.4 percent in Dec 2011 and 4.9 percent in Sep 2013.
Table IB-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates USD Billions
| Personal | Wages & | Personal | DPI | Savings | |
| Sep 2013 | 14,264.5 | 7,166.2 | 1,661.0 | 12,603.5 | 4.9 |
| Aug 2013 | 14,197.1 | 7,138.7 | 1,668.4 | 12,538.7 | 4.7 |
| Change Sep 2013/ Aug 2013 | 67.4 ∆% 0.5 | 27.5 ∆% 0.4 | -7.4 ∆% -0.4 | 64.8 ∆% 0.5 | |
| Jan 2013 | 13,791.7 | 7,001.5 | 1,612.9 | 12,178.7 | 3.6 |
| Dec 2012 | 14,420.2 | 7,200.8 | 1,591.0 | 12,829.2 | 8.7 |
| Change Sep 2013/ Dec 2012 | -155.7 ∆% -1.1 | -34.6 ∆% -0.5 | 70.0 ∆% 4.4 | -225.7 ∆% -1.8 | |
| Change Dec 2012/ Dec 2011 | 1060.8 ∆% 7.9 | 510.7 ∆% 7.6 | 163.3 ∆% 11.4 | 897.6 ∆% 7.5 | |
| Dec 2011 | 13,359.4 | 6,690.1 | 1,427.7 | 11,931.6 | 5.4 |
| Dec 2010 | 12,767.8 | 6,506.0 | 1,254.2 | 11,513.7 | 5.8 |
| Change Dec 2011/ Dec 2010 | 591.6 ∆% 4.6 | 184.1 ∆% 2.8 | 173.5 ∆% 13.8 | 417.9 ∆% 3.6 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The Bureau of Economic Analysis (BEA) provides a wealth of revisions and enhancements of US personal income and outlays since 1929 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of real disposable income of 3.2 percent per year on average from 1929 to 2012 and 2.0 percent in real disposable income per capita. Real disposable income increased at the average yearly rate of 3.7 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.4 percent for real disposable income on average from 1999 to 2012 and 1.5 percent in real disposable per capita income. Real disposable income grew at 3.5 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 1.4 percent on average from 2006 to 2012 and real disposable income at 0.6 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge.
Table IB-4, Average Annual Growth Rates of Real Disposable Income (RDPI) and Real Disposable Income per Capita (RDPIPC), Percent per Year
| 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 |
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm
Chart IB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982.
Chart IB-3, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf Table 6), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”
The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).
In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):
“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”
In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.9 percent and real disposable income at 3.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). In IIIQ2013, personal income grew at 3.8 percent, real personal income excluding current transfers at 1.7 percent and real disposable income at 2.5 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf).
Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Real or inflation-adjusted disposable personal income is provided in Chart IB-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.
Chart IB-5, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):
“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”
This is the explanation for the decline in IQ2013 in Chart IB-6. In IIQ2013, personal income increased at 4.1 percent, real disposable income excluding current transfer receipts at 4.9 percent and real disposable income at 3.5 percent. In IIIQ2013, personal income increased at 3.8 percent, real personal income excluding current transfer receipts at 1.7 percent and real disposable income at 2.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf).
Chart IB-6, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 1980 to 1989. Rates of changes were high during the decade with few negative changes.
Chart IB-7, US, Real Disposable Income Percentage Change from Preceding Period at Quarterly Seasonally-Adjusted Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 2007 to 2013. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 a thttp://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):
“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”
In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.9 percent and real disposable personal income at 3.5 percent. In IIIQ2013, personal income grew at 3.8 percent, real personal income excluding current transfers at 1.7 percent and real disposable personal income at 2.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf).
Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Sep 2013 at the seasonally adjusted annual rate of $14,264.5 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0913.pdf). The major portion of personal income is compensation of employees of $8,893.7 billion, or 62.3 percent of the total. Wages and salaries are $7,166.2 billion, of which $5,969.2 billion by private industries and supplements to wages and salaries of $1,727.5 billion (employer contributions to pension and insurance funds are $1,195.2 billion and contributions to social insurance are $532.3 billion). In Sep 1985, US personal income was $3,551.8 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,425.8 billion, or 68.3 percent of the total. Wages and salaries were $2,011.7 billion of which $1632.3 billion by private industries. Supplements to wages and salaries were $414.0 billion with employer contributions to pension and insurance funds of $264.5 billion and $149.6 billion to government social insurance. Chart IB-9 provides US wages and salaries by private industries in the 1980s. Growth was robust after the interruption of the recessions.
Chart IB-9, US, Wages and Salaries, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-10 shows US wages and salaries of private industries from 2007 to 2012. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011, 2012 and 2013.
Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-11 provides finer detail with monthly wages and salaries of private industries from 2007 to 2013. Total wages and salaries decreased 0.5 percent from Dec 2012 to Sep 2013, as shown in Table IB-3.
Chart IB-11, US, Wages and Salaries, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of wellbeing in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capita grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.
Chart IB-12, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Chained 2009 Dollars 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-13 provides monthly real disposable personal per capita from 2007 to 2013. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.2 percent from $36,580 in chained dollars of 2009 in Oct 2012 to $37,030 in Nov 2012 and 3.1 percent to $38,170 in Dec 2012 for cumulative increase of 4.3 percent from Oct 2012 to Dec 2012. Real per capita disposable income fell 5.2 percent from $38,170 in Dec 2012 to $36,190 in Jan 2013, increasing marginally 0.8 percent to $36,497 in Feb 2013 for cumulative change of minus 0.2 percent from Oct 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart II-13 with Nov-Dec 2012, decline in Jan 2013 and recovery in Feb 2013. Real per capita disposable income increased 0.4 percent from $36,497 in Feb 2013 in chained dollars of 2009 to $36,626 in Mar 2013 for cumulative increase of 0.1 percent relative to Oct 2012. Real per capita disposable income increased to $36,734 in May 2013 for gain of 0.2 percent relative to $36,676 in Apr 2013 and 0.4 percent from Oct 2012. Real disposable per capita income eased to $36,668 in Jun 2013 for decrease of 0.2 percent relative to May 2013 and increase of 0.2 percent relative to Oct 2012. Real disposable income per capita increased 0.2 percent from $36,668 in Jun 2013 to $36,725 in Jul 2013 and 0.4 percent relative to $36,580 in Oct 2013. Real per capita disposable income increased to $36,850 in Aug 2013 or 0.3 percent higher than in Jul 2013 and 0.7 percent above Oct 2012. Real per capita disposable income increased 0.4 percent from $36,850 in Aug 2013 to $36,984 in Sep 2013 and increased 1.1 percent relative to $36,580 in Oct 2012. BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”
The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).
The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):
“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”
Chart IB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Chained 2009 Dollars 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IB2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.
Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 2.0 percent in the 12 months ending in Feb 2013 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:
“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”
Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:
“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”
Friedman (1970, 26-7) predicted the future:
“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”
In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:
“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”
Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2013. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.0 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.5 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.7 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.6 percent in Jul 2013 with increase of real disposable income by 0.2 percent. In Aug 2013, real disposable income increased 0.4 percent and the savings rate increased to 4.7 percent. In Sep 2013, the savings rate increased to 4.9 percent with increase of real disposable income of 0.4 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html).
Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Sep 2013. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.0 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second peak occurred at 8.1 percent in May 2009. There was another rising trend until 5.9 percent in Jun 2010 and then steady downward trend until 4.8 percent in Nov 2011. This was followed by an upward trend with 5.6 percent in Jun 2012 but decline to 4.9 percent in Aug 2012 followed by jump to 8.7 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 3.6 percent. Real disposable personal income fell 5.1 percent and real disposable per capita income fell from $38,170 in Dec 2012 to $36,190 in Jan 2013 or by 5.2 percent, which is explained by the Bureau of Economic Analysis as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):
“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The
January estimate reflected increases in both employer and employee contributions forgovernment social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9billion.”
The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.5 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.7 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.6 percent in Jul 2013 with increase of real disposable income by 0.2 percent. In Aug 2013, real disposable income increased 0.4 percent and the savings rate increased to 4.7 percent. In Sep 2013, the savings rate increased to 4.9 percent with increase of real disposable income of 0.4 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.
Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2013
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
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