Recovery without Hiring, World Inflation Waves, Euro Zone Survival Risk and World Economic Slowdown
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
Executive Summary
I Recovery without Hiring
II World Inflation Waves
III World Financial Turbulence
IIIA Financial Risks
IIIB Fiscal Compact
IIIC European Central Bank
IIID Euro Zone Survival Risk
IIIE 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
Appendix I The Great Inflation
V World Economic Slowdown. The JP Morgan Global All-Industry Output Index produced by JPMorgan and Markit in association with ISM and IFPSM registered improvement in Nov, increasing from the low of the recovery in Oct of 51.3 to 52.0 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8909). There was acceleration in both manufacturing and nonmanufacturing in the US with composite activity growing at highest rhythm since Mar. Joseph Lupton, Global Economist at JPMorgan, finds that the combination of low employment and level of new orders could imply continuing global growth below trend in 2012. The JP Morgan Global Manufacturing PMI™ produced by JP Morgan and Markit in association with ISM and IFPSM registered 49.6 in Nov compared with 49.9 in Oct, which means that global manufacturing is contracting at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The JP Morgan Global Manufacturing PMI™ fell for a third consecutive month. The proximity of the index to 50 suggests near stagnation of world manufacturing but it masks that growth in the US with share of 28.2 percent in the index was the sharpest in seven months. World manufacturing excluding the US fell at the fastest rhythm in 36 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The table “World-Wide Factory Activity, by Country,” of Real Time Economics produced by WSJ Research and published in the Wall Street Journal on Dec 1 (http://blogs.wsj.com/economics/2011/12/01/world-wide-factory-activity-by-country-20/tab/interactive/) shows only six countries with manufacturing indexes above 50 in Nov: Canada (53.3), India (51.0), Russia (52.6), South Africa (51.6), Turkey (52.3) and the US (52.7). The HSBC Brazil Services PMITM compiled by Markit, combining manufacturing and services, registered 51.5 in Nov, which is higher than 51.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8889). While the increase is moderate, André Loes, Chief Economist of HSBC in Brazil, finds that the index has been above the neutral point of 50 during 28 consecutive months and the increase in Nov is the fastest in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8889). The HSBC Industrial Production PMI™ for Brazil increased from 46.5 in Oct to 48.7 in Nov, which means contraction at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Andre Loes, Chief Economist of HBSC in Brazil, finds that the index registered the highest level since Jun and the fastest rate of monthly change since Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Inventory adjustment in response to expectations on the economy may have caused the decline of industrial production. Loes finds that if this interpretation is valid industry may improve performance in 2012..
VA United States. The Manufacturing ISM Report on Business® purchasing managers’ index jumped 1.9 percentage points from 50.8 in Oct to 52.7 in Nov, indicating continuing growth for 28 consecutive months but at slower rate of change (http://www.ism.ws/ISMReport/MfgROB.cfm). New orders, which are an indicator of future business, rose 4.3 percentage points, from 52.4 in Oct to 56.7 in Nov, indicating growth at a faster rate. The employment index fell 1.7 percentage points from 53.5 in Oct to 51.8 in Nov, indicating growth at slower rate of change. Prices paid or costs of inputs rose 4.0 percentage points from 41.0 in Oct to 45.0 in Oct, which is the second reading below 50 since May.
The nonmanufacturing index of the Institute for Supply Management™ fell 0.9 percentage points in Nov to 52.0 from 52.9 in Oct. According to the IMS, the reading for Nov is the lowest since 50.7 in Jan 2010 (http://www.ism.ws/ISMReport/NonMfgROB.cfm). There are favorable aspects of the Nonmanufacturing ISM Report on Business®: (1) business activity production increase by 2.4 percentage points from 53.8 in Oct to 56.2 in Nov; (2) new orders, indicating future activity, increase 0.6 percentage points from 52.4 in Oct to 53.0 in Nov; and new export orders increased 1.5 percentage points from 54.0 in Oct to 55.5 in Nov. Perhaps the most unfavorable aspect is the decline of employment by 4.4 percentage points from expansion at 53.3 in Oct to contraction at 48.9 in Nov. The establishment survey of the Bureau of Labor Statistics for Nov shows 92.199 million jobs in private service-providing activities in the US compared with 11.803 million jobs in manufacturing (Table B-1, page 29 http://www.bls.gov/news.release/pdf/empsit.pdf). Contraction of jobs in nonmanufacturing can affect many more workers than in manufacturing. Another unfavorable aspect is the increase in prices of 5.4 percentage points from 57.1 in Oct to 62.5 in Nov. Table USA provides the indicators for the US economy.
Table USA, US Economic Indicators
| Consumer Price Index | Nov 12 months NSA ∆%: 3.4; ex food and energy ∆%: 2.2 |
| Producer Price Index | Nov 12 months NSA ∆%: 5.7; ex food and energy ∆% 2.9 |
| PCE Inflation | Oct 12 months NSA ∆%: headline 2.7; ex food and energy ∆% 1.7 |
| Employment Situation | Household Survey: Nov Unemployment Rate SA 8.6% |
| Nonfarm Hiring | Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 IIIQ2011 SAAR ∆%: 2.0 First three quarters AE ∆% 1.4 |
| Personal Income and Consumption | Oct month ∆% SA Real Disposable Personal Income (RDPI) 0.3 |
| Quarterly Services Report | IIIQ11/IIQII SA ∆%: |
| Employment Cost Index | IIIQ2011 SA ∆%: 0.3 |
| Industrial Production | NOV month SA ∆%: 0.2 |
| Productivity and Costs | Nonfarm Business Productivity IIIQ2011∆% SAAE 2.1; IIIQ2011/IIIQ2010 ∆% 0.9; Unit Labor Costs IIIQ2011 ∆% -2.5; IIIQ2011/IIIQ2010 ∆%: 0.4 Blog 12/04/11 |
| New York Fed Manufacturing Index | General Business Conditions From 0.61 Nov to Dec 9.53 |
| Philadelphia Fed Business Outlook Index | General Index from 3.6 Nov to 10.3 Dec |
| Manufacturing Shipments and Orders | Oct/Sep New Orders SA ∆%: minus 0.4; ex transport ∆%: 0.2 |
| Durable Goods | Oct New Orders SA ∆%: -0.7; ex transport ∆%: 0.7 |
| Sales of New Motor Vehicles | Jan-Nov 2011 11.532 million; Jan-Oct 2011 10.444 million; Jan-Nov 2010 12.28 million. Nov SAAR 13.62 million, Oct SAAR 13.25, Nov 2010 SAAR 12.28 million Blog 12/04/11 |
| Sales of Merchant Wholesalers | Jan-Oct 2011/2010 ∆%: Total 14.8; Durable Goods: 12.4; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Oct 11/Oct 10 NSA ∆%: Total Business 10.4; Manufacturers 11.0 |
| Sales for Retail and Food Services | Jan-Nov 2011/Jan-Nov 2010 ∆%: Retail and Food Services: 7.8; Retail ∆% 8.1 |
| Value of Construction Put in Place | Oct SAAR month SA ∆%: 0.8 Oct 12 months NSA: 0.3 |
| Case-Shiller Home Prices | Sep 2011/Sep 2010 ∆% NSA: 10 Cities minus 3.3; 20 Cities: minus 3.6 |
| FHFA House Price Index Purchases Only | Sep SA ∆% 0.9; |
| New House Sales | Oct month SAAR ∆%: |
| Housing Starts and Permits | Sep Starts month SA ∆%: -0.3; Permits ∆%: 10.9 |
| Trade Balance | Balance Oct SA -$43,466 million versus Sep -$44,170 million |
| Export and Import Prices | Nov 12 months NSA ∆%: Imports 9.9; Exports 4.7 |
| Consumer Credit | Oct ∆% annual rate: 3.7 |
| Net Foreign Purchases of Long-term Treasury Securities | Oct Net Foreign Purchases of Long-term Treasury Securities: $4.8 billion Oct versus Sep $68.3 billion |
| Treasury Budget | Fiscal Year 2012/2011 ∆%: Receipts 7.0; Outlays -5.9; Individual Income Taxes 16.0 Deficit Fiscal Year 2012 Oct-Nov $315,474 million |
| Flow of Funds | IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11 |
| Current Account Balance of Payments | IIIQ2011 -131B %GDP 2.9 Blog 12/18/11 |
Links to blog comments in Table USA: 12/11/2011 II http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
12/4/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html
11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html
11/6/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html
10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html
09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html
Industrial production rose 0.2 percent in Nov and 3.7 percent in the 12 months ending in Nov, as shown in Table VA-1. In the six months ending in Nov, industrial production grew at the annual equivalent rate of 4.3 percent. Business equipment fell 1.0 percent in Nov but grew 10.0 percent in the 12 months ending in Nov and at the annual equivalent rate of 10.0 percent in the four months Jun-Nov. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “Capacity utilization for total industry decreased to 77.8 percent, a rate 2.0 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average.” Manufacturing contributed $1,229 billion to US national income of $12,643 billion without capital consumption adjustment in 2010, or 9 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm).
Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, %
| 2011 | Nov | Oct | Sep | Aug | Jul | Jun | Nov 11/ Nov 10 |
| Total | 0.2 | 0.7 | 0.0 | 0.0 | 1.2 | 0.0 | 3.7 |
| Market | |||||||
| Final Products | -0.3 | 0.7 | 0.1 | 0.6 | 0.9 | 0.0 | 4.2 |
| Consumer Goods | -0.5 | 0.4 | -0.1 | 0.3 | 0.7 | -0.1 | 2.0 |
| Business Equipment | -0.1 | 1.4 | 0.8 | 1.2 | 1.2 | 0.3 | 10.0 |
| Non | -0.6 | 0.0 | 0.0 | -0.3 | 0.9 | -0.3 | 1.6 |
| Construction | 0.4 | 0.3 | 0.4 | -0.5 | 1.2 | 0.0 | 3.7 |
| Materials | 0.0 | 0.8 | -0.1 | 0.0 | 1.4 | 0.4 | 4.0 |
| Industry Groups | |||||||
| Manufacturing | -0.4 | 0.5 | 0.4 | 0.3 | 0.8 | 0.1 | 3.8 |
| Mining | 0.1 | 2.1 | 0.1 | 1.1 | 1.5 | 0.3 | 6.7 |
| Utilities | 0.2 | -0.3 | -3.0 | -1.1 | 3.2 | 0.4 | -0.7 |
| Capacity | 77.8 | 78.0 | 77.6 | 77.7 | 77.5 | 76.7 | 1.1 |
Sources: http://www.federalreserve.gov/releases/g17/Current/
A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.
Table VA-2, US, Monthly and 12 Months Rates of Growth of Manufacturing ∆%
| Month SA ∆% | 12 Months NSA ∆% | |
| Nov 2011 | -0.4 | 4.0 |
| Oct | 0.5 | 4.4 |
| Sep | 0.4 | 4.2 |
| Aug | 0.3 | 3.7 |
| Jul | 0.8 | 3.8 |
| Jun | 0.1 | 3.6 |
| May | 0.2 | 3.6 |
| Apr | -0.6 | 4.5 |
| Mar | 0.7 | 6.0 |
| Feb | 0.1 | 6.2 |
| Jan | 0.7 | 6.2 |
| Dec 2010 | 1.0 | 6.2 |
| Nov | 0.2 | 5.3 |
| Oct | 0.2 | 6.2 |
| Sep | 0.2 | 5.9 |
| Aug | 0.1 | 6.6 |
| Jul | 0.8 | 7.6 |
| Jun | -0.1 | 8.1 |
| May | 1.1 | 7.8 |
| Apr | 0.7 | 6.1 |
| Mar | 0.9 | 5.9 |
| Feb | 0.1 | 0.6 |
| Jan | 1.0 | 6.2 |
| Dec 2009 | 0.2 | -3.2 |
| Nov | 0.8 | -5.9 |
| Oct | -0.04 | -8.9 |
| Sep | 0.8 | -10.3 |
| Aug | 1.0 | -13.3 |
| Jul | 1.3 | -14.9 |
| Jun | -0.3 | -17.4 |
| May | -1.2 | -17.4 |
| Apr | -0.8 | -18.1 |
| Mar | -2.0 | -17.1 |
| Feb | 0.1 | -16.0 |
| Jan | -2.7 | -16.5 |
| Dec 2008 | -3.1 | -14.1 |
| Nov | -2.4 | -11.5 |
| Oct | -0.6 | -9.2 |
| Sep | -3.4 | -9.0 |
| Aug | -1.4 | -5.5 |
| Jul | -1.1 | -4.1 |
| Jun | -0.6 | -3.5 |
| May | -0.6 | -2.8 |
| Apr | -1.2 | -1.5 |
| Mar | -0.4 | -0.9 |
| Feb | -0.5 | 0.6 |
| Jan | -0.3 | 1.9 |
| Dec 2007 | 0.3 | 1.8 |
| Nov | 0.3 | 3.2 |
| Oct | -0.5 | 2.8 |
| Sep | 0.5 | 3.2 |
| Aug | -0.5 | 2.9 |
| Jul | 0.3 | 3.8 |
| Jun | 0.3 | 3.3 |
| May | -0.2 | 3.5 |
| Apr | 0.7 | 4.0 |
| Mar | 0.7 | 2.8 |
| Feb | 0.5 | 2.0 |
| Jan | -0.3 | 1.8 |
| Dec 2006 | 3.2 | |
| Dec 2005 | 1.4 | |
| Dec 2004 | 2.8 | |
| Dec 2003 | 1.7 |
Source:
http://www.federalreserve.gov/releases/g17/current/table1.htm
Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.
Chart VA-1, US, Industrial Production, Capacity and Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg1.gif
The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression. The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of computers and semiconductors has already surpassed the level before the global recession.
Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg3.gif
Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 10 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.
Chart VA-3, US, Industrial Production and Capacity Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg2.gif
The general business conditions index of the Federal Reserve Bank of New York Empire State Manufacturing Survey shows significant improvement from minus 8.48 in Sep to 0.61 in Nov and a jump to solid positive growth territory of 9.53 in Dec, as shown in Table VA-3. The index had been registering negative changes in the five months from Jun to Oct. The new orders segment fell from 0.16 in Oct to minus 2.07 in Nov but rebounded to 5.10 in Dec back to expansion territory. There is positive reading in shipments from minus 12.88 in Sep to positive 5.33 in Oct and even higher at 9.43 in Nov with a jump to 20.86 in Dec. The segment of number of employees fell back into contraction territory from 3.37 in Oct to minus 3.66 in Nov but returned to expansion at 2.33 in Dec. Expectations for the next six months of the general business conditions index fell from 13.04 in Sep to 6.74 in Oct at levels well below the higher expectations of 22.45 in Jun of 22.45 and 32.22 in Jul but surged to 39.02 in Nov and 52.33 in Dec. Expectations of new orders fell from 13.04 in Sep to 12.36 in Oct but jumped to 35.37 in Nov and jumped to 54.65 in Dec. Expectations of new employees surged from 0.00 in Sep to 6.74 in Oct and jumped to 14.63 in Nov and 24.43 in Dec. The average employee workweek rose from the contraction zone at minus 2.25 in Oct to the expansion zone at 8.54 and solid expansion at 22.09 in Dec.
Table VA-3, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index
| Jul | Aug | Sep | Oct | Nov | Dec | |
| Current Conditions | ||||||
| General Business | -3.76 | -7.72 | -8.82 | -8.48 | 0.61 | 9.53 |
| New Orders | -5.45 | -7.82 | -8.0 | 0.16 | -2.07 | 5.10 |
| Shipments | 2.22 | 3.01 | -12.88 | 5.33 | 9.43 | 20.87 |
| Unfilled Orders | -12.22 | -15.22 | -7.61 | -4.49 | -7.32 | -15.12 |
| Inventories | -5.56 | -7.61 | -11.96 | -8.99 | -12.2 | -3.49 |
| # Employees | 1.11 | 3.26 | -5.43 | 3.37 | -3.66 | 2.33 |
| Average Employee Workweek | -15.56 | -2.17 | -2.17 | -4.49 | 2.44 | -2.33 |
| Expectations Six | ||||||
| General Business Conditions | 32.22 | 8.70 | 13.04 | 6.74 | 39.02 | 52.33 |
| New Orders | 25.56 | 6.52 | 13.04 | 12.36 | 35.37 | 54.65 |
| Shipments | 30.00 | 7.61 | 13.04 | 17.98 | 36.59 | 51.16 |
| Unfilled Orders | 5.56 | -6.52 | -6.52 | 1.12 | 6.10 | 8.14 |
| Inventories | 1.1 | 7.61 | -2.17 | -15.73 | 2.44 | 9.30 |
| # Employees | 17.78 | 6.52 | 0.00 | 6.74 | 14.63 | 24.42 |
| Average Employee Workweek | 2.22 | -4.35 | -6.52 | -2.25 | 8.54 | 22.09 |
Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct with the movement to 8.7 away from the contraction zone of minus 17.5 in Sep but fell to 3.6 in Nov and then rose t0 10.3 in Dec. New orders were signaling increasing future activity, rising from minus 11.3 in Sep to 7.8 in Oct but declined to 1.3 in Nov to rise to 9.7 in Dec. Employment is stronger with number of employees increasing from 1.4 in Oct to 12.0 in Nov, remaining at 10.7 in Dec. The average employee workweek increased from minus 13.7 in Sep to 3.1 in Oct and jumped to 11.0 in Nov but fell to 3.9 in Dec. Most indexes of expectations for the next six months are showing sharp increases. The general index of expectations for the next six months rose from 27.2 in Oct to 41.9 in Nov and 44.1 in Dec. Expectations of new orders rose from 26.7 in Oct to 39.8 in Nov and 47.6 in Dec.
Table VA-4, FRB of Philadelphia Business Outlook Survey Diffusion Index SA
| Jul | Aug | Sep | Oct | Nov | Dec | |
| Current Conditions | ||||||
| General Index | 3.2 | -30.7 | -17.5 | 8.7 | 3.6 | 10.3 |
| New Orders | 0.1 | -26.8 | -11.3 | 7.8 | 1.3 | 9.7 |
| Shipments | 4.3 | -13.9 | -22.8 | 13.6 | 7.3 | 6.7 |
| Unfilled Orders | -16.3 | -20.9 | -10.4 | 3.4 | -1.5 | 7.2 |
| Number Employees | 8.9 | -5.2 | 5.8 | 1.4 | 12.0 | 10.7 |
| Average Employee Workweek | -5.4 | -14.4 | -13.7 | 3.1 | 11.0 | 3.9 |
| Expectation Six Months | ||||||
| General Index | 23.7 | 1.4 | 21.4 | 27.2 | 41.9 | 44.1 |
| New Orders | 27.8 | 16.3 | 21.6 | 26.7 | 39.8 | 47.6 |
| Shipments | 23.0 | 12.6 | 25.2 | 27.1 | 37.3 | 37.4 |
| Unfilled Orders | 2.9 | -3.5 | 4.7 | 7.7 | 9.0 | 4.4 |
| Number Employees | 10.1 | 7.8 | 11.2 | 14.5 | 25.4 | 12.9 |
| Average Employee Workweek | 4.1 | -5.3 | 7.4 | 9.7 | 3.9 | 6.5 |
http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos1111.pdf
http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdf
Chart VA-4 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Nov 2011. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now what hopefully could be renewed strength.
Chart VA-4, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Growth rates and levels of sales in billions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-5. Total business sales rose 0.7 percent in Oct after 0.6 percent in Aug and were up by 10.4 percent in Oct 2011 relative to Oct 2010. Sales of manufacturers rose 0.6 percent in Oct after increasing 0.3 percent in Sep and rose 11.0 percent in the 12 months to Oct. Retailers experienced strong growth of 1.3 percent in sales in Oct and 7.1 percent in 12 months. Sales of merchant wholesalers rose 0.9 percent in Oct after 0.3 percent in Sep and grew 12.8 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.
Table VA-5, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers
| Oct 2011 | Oct 11/ Sep 11 | Sep 11/ Aug 11 | Oct 11/ Oct 10 | |
| Total Business | 1,214.6 | 0.7 | 0.6 | 10.4 |
| Manufacturers | 460.5 | 0.6 | 0.3 | 11.0 |
| Retailers | 344.7 | 0.6 | 1.3 | 7.1 |
| Merchant Wholesalers | 409.4 | 0.9 | 0.3 | 12.8 |
Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf
Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 0.8 percent to inventories in Sep with growth of 4.1 percent in 12 months, as shown in Table VA-6. Total business increased inventories by 0.8 percent in Oct and 8.7 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.27 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.
Table VA-6, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios
| Inventory Change | Oct 11 | Oct 11/ Sep 11 | Sep11/ Aug 11 | Oct 11/ Oct 10 |
| Total Business | 1,575.6 | 0.8 | 0.0 | 8.7 |
| Manufacturers | 609.8 | 0.9 | 0.1 | 11.5 |
| Retailers | 493.7 | 0.0 | -0.1 | 3.4 |
| Merchant | 472.1 | 1.6 | 0.0 | 10.9 |
| Inventory/ | Oct 11 | Oct 2011 SA | Sep 2011 SA | Oct 2010 SA |
| Total Business | 1,575.6 | 1.27 | 1.27 | 1.29 |
| Manufacturers | 609.8 | 1.33 | 1.33 | 1.33 |
| Retailers | 493.7 | 1.32 | 1.32 | 1.37 |
| Merchant Wholesalers | 472.1 | 1.16 | 1.15 | 1.18 |
Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf
Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:
“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:
(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.
This is the pure inventory cycle.
(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.
(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference' in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.
(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.
(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”
Chart VA-5 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels.
Chart VA-5, Total Business Inventories/Sales Ratios 2002 to 2011
Source: US Census Bureau
http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif
Market participants were concerned after the announcement of growth of sales of retail and food services by 0.2 percent in Nov after increasing 0.6 percent in Oct and 7.8 percent in Jan-Nov 2011 relative to Jan-Nov 2010, as shown in Table VA-7. Sales of motor vehicles and parts rose 0.5 percent in Nov after 0.8 percent in Oct and 9.9 percent in Jan-Nov 2011 relative to Jan-Nov 2010. Sales ex motor vehicles and parts rose 0.2 per cent in Nov and 7.4 percent in Jan-Nov 2011 relative to Jan-Nov 2010. Gasoline station sales fell 0.1 percent in fluctuating prices of gasoline and rose 18.4 cumulatively in 2011 relative to 2010.
Table VA-7, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%
| Nov/Oct ∆% SA | Oct/Sep ∆% SA | Jan-Nov 2011 Billion Dollars | 12 Months Jan to Nov 2011 from Jan to Nov 2010 ∆% NSA | |
| Retail and Food Services | 0.2 | 0.6 | 4,228.8 | 7.8 |
| Excluding Motor Vehicles and Parts | 0.2 | 0.6 | 3,481.6 | 7.4 |
| Motor Vehicles & Parts | 0.5 | 0.8 | 747.2 | 9.9 |
| Retail | 0.3 | 0.6 | 3,778.8 | 8.1 |
| Building Materials | -0.3 | 1.4 | 277.1 | 5.9 |
| Food and Beverage | -0.2 | 0.7 | 558.3 | 5.5 |
| Grocery | -0.3 | 0.6 | 501.9 | 5.7 |
| Health & Personal Care Stores | -0.1 | 0.4 | 249.2 | 4.8 |
| Clothing & Clothing Accessories Stores | 0.5 | -0.8 | 195.7 | 5.6 |
| Gasoline Stations | -0.1 | -0.4 | 489.8 | 18.4 |
| General Merchandise Stores | 0.3 | -0.1 | 556.7 | 3.6 |
| Food Services & Drinking Places | -0.3 | 0.6 | 450.1 | 5.5 |
Source: http://www.census.gov/retail/marts/www/marts_current.pdf
Chart VA-6 of the US Bureau of the Census shows percentage change of retails and food services sales. Sep was strong in multiple categories but the strength did not continue in Oct and Nov.
Chart VA-6, US, Percentage Change of Retail and Food Services Sales
Source: US Census Bureau
http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif
Twelve months rates of growth of US sales of retail and food services in Oct from 2000 to 2011 are shown in Table VA-8. Nominal sales have been dynamic in 2011 and 2010 after decline of 19.9 percent in 2008 and increase of only 1.4 percent in 2008.
Table VA-8, US, Percentage Change in 12 Months Sales for Retail and Food Services, ∆% NSA
| Nov | 12 Months ∆% |
| 2011 | 6.8 |
| 2010 | 8.9 |
| 2009 | 1.4 |
| 2008 | -10.9 |
| 2007 | 5.9 |
| 2006 | 3.9 |
| 2005 | 6.0 |
| 2004 | 7.6 |
| 2003 | 3.7 |
| 2002 | -2.9 |
| 2001 | 4.1 |
| 2000 | 4.6 |
Source: http://www.census.gov/retail/
Chart VA-7 provides US prices of total US imports 2001-2011. Prices fell during the contraction of 2001. Import price inflation accelerated after unconventional monetary policy of near zero interest rates in 2003-2004 and quantitative easing by withdrawing supply with the suspension of 30-Treasury auctions. Slow pace of adjusting fed funds rates from 1 percent by 25 basis points increments in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006 continued to give impetus to carry trades. The reduction of fed funds rates toward zero in 2008 fueled a spectacular hunt for yields that caused commodity price inflation in the middle of a global recession. After risk aversion in 2009 because of the announcement of TARP (Troubled Asset Relief Program) creating anxiety on “toxic assets” in bank balance sheets (see Cochrane and Zingales 2009), prices collapsed after unwinding carry trades. Renewed price increases returned with zero interest rates and quantitative easing. Monetary policy impulses in massive doses have driven inflation and valuation of risk financial assets in wide fluctuations over a decade.
Source: http://www.bls.gov/mxp/data.htm
Chart VA-8 provides prices of US imports from 1982 to 2011. There is no similar episode to that of the increase of commodity prices in 2008 during a protracted and deep global recession with subsequent collapse during a flight into government obligations. Trade prices have been driven by carry trades created by unconventional monetary policy in the past decade.
Chart VA-8, US, Prices of Total US Imports, 2001=100, 1982-2011
Source: http://www.bls.gov/mxp/data.htm
Chart VA-9 provides 12 months percentage changes of US total imports from 1982 to 2011. There have not been wide consecutive oscillations as the ones during the global recession of IVQ2007 to IIQ2009.
Chart VA-9, US, Prices of Total US Imports, 12 Month Percentage Changes, 1982-2011
Source: http://www.bls.gov/mxp/data.htm
Chart VA-10 provides the index of US export prices from 2001 to 2011. Import and export prices have been driven by impulses of unconventional monetary policy in massive doses.
Source: http://www.bls.gov/mxp/data.htm
Chart VA-11 provides prices of US total exports from 1982 to 2011. The rise before the global recession is also unique in the series.
Chart VA-11, US, Prices of Total US Exports, 2001=100, 1982-2011
Source: http://www.bls.gov/mxp/data.htm
Chart VA-12 provides 12 months percentage changes of total US exports from 1982 to 2011. The uniqueness of the oscillations around the global recession of IVQ2007 to IIQ2009 is clearly revealed.
Chart VA-12, US, Prices of Total US Exports, 12 Month Percentage Changes, 1982-2011
Source: http://www.bls.gov/mxp/data.htm
Twelve months percentage rates of change of US prices of exports and imports are provided in Table VA-9. Import prices have been driven since 2003 by unconventional monetary policy of near zero interest rates influencing commodity prices according to moods of risk aversion. In a global recession without risk aversion until the panic of Sep 2008 with flight to government obligations, import prices rose 12.0 percent in the twelve months ending in Nov 2007 and fell 5.9 percent when risk aversion developed until mid 2009. Import prices rose again sharply in 2011 until May in the presence of zero interest rates with relaxed mood of risk aversion. There is similar behavior of prices of imports ex fuels, exports and exports ex agricultural goods.
Table VA-9, US, Twelve Months Percentage Rates of Change of Prices of Exports and Imports
| Imports | Imports Ex Fuels | Exports | Exports Non-Ag | |
| Nov 2011 | 9.9 | 3.8 | 4.7 | 4.8 |
| Nov 2010 | 4.1 | 3.0 | 6.5 | 5.1 |
| Nov 2009 | 3.4 | -1.1 | 0.4 | 0.3 |
| Nov 2008 | -5.9 | 2.6 | -0.3 | 0.0 |
| Nov 2007 | 12.0 | 3.0 | 6.2 | 4.7 |
| Nov 2006 | 1.3 | 2.8 | 3.9 | 3.4 |
| Nov 2005 | 6.4 | 1.4 | 2.8 | 2.6 |
| Nov 2004 | 9.0 | 2.6 | 4.2 | 5.2 |
| Nov 2003 | 2.3 | 1.0 | 1.7 | 0.8 |
| Nov 2002 | 2.5 | NA | 1.0 | 0.3 |
| Nov 2001 | -8.8 | NA | -2.5 | -2.5 |
Source: http://www.bls.gov/mxp/data.htm#
Chart VA-13 shows the US monthly import price index of all commodities excluding fuels from 2001 to 2011. All curves of nominal values follow the same behavior under the influence of unconventional monetary policy. Zero interest rates without risk aversion result in jumps of nominal values and zero interest rates while there is strong risk aversion results in declines of nominal values.
Chart VA-13, US, Import Price Index All Commodities Excluding Fuels, 2001=100, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-14 provides 12 month percentage changes of the US import price index excluding fuels between 2001 and 2011. There is the same behavior of carry trades driving up without risk aversion and down with risk aversion prices of raw materials, commodities and food in international trade during the global recession of IVQ2007 to IIQ2009 and in previous and subsequent periods.
Chart VA-14, US, Import Price Index All Commodities Excluding Fuels, 12 Month Percentage Changes, 2002-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-15 provides the monthly US import price index ex petroleum from 2001 to 2011. Prices including or excluding commodities follow the same fluctuations and trends originating in impulses of unconventional monetary policy of zero interest rates.
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-16 provides the US import price index ex petroleum from 1982 to 2011. There is the same hump in 2008 caused by carry trades from zero interest rates to prices of commodities and raw materials.
Chart VA-16, US, Import Price Index ex Petroleum, 2001=100, 1982-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-17 provides 12 months percentage changes of the import price index ex petroleum from 1986 to 2011. The oscillations caused by the carry trade in increasing prices of commodities and raw materials without risk aversion and subsequently decreasing them during risk aversion are quite unique.
Chart VA-17, US, Import Price Index ex Petroleum, 12 Month Percentage Changes, 1986-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-18 of the US Energy Information Administration provides the price of the crude oil futures contract from 1985 to 2011. There is the same hump in 2008 as in all charts caused by the common factor of carry trades from zero interest rates to commodity futures positions with risk appetite and subsequent decline when carry trades were unwound during shocks of risk aversion.
Chart VA-18, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
The price index of US imports of petroleum and petroleum products in shown in Chart VA-19. There is similar behavior of the curves all driven by the same impulses of monetary policy.
Chart VA-19, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-20 provides the price index of petroleum and petroleum products from 1982 to 2011. The rise in prices during the global recession in 2008 and the decline after the flight to government obligations is unique in the history of the series. Increases in prices of trade in petroleum and petroleum products were induces by carry trades and declines by unwinding carry trades in flight to government obligations.
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-21 provides 12 months percentage changes of the price index of US imports of petroleum and petroleum products from 1982 to 2011. There were wider oscillations in this index from 1999 to 2001 (see Barsky and Killian 2004 for an explanation).
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
The price index of US exports of agricultural commodities is in Chart VA-22 from 2001 to 2011. There are similar fluctuations and trends as in all other price index originating in unconventional monetary policy repeated over a decade.
Chart VA-22, US, Exports Price Index of Agricultural Commodities, 2001=100, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-23 provides the price index of US exports of agricultural commodities from 1982 to 2011. The increase in 2008 in the middle of deep, protracted contraction was induced by unconventional monetary policy. The decline from 2008 into 2009 was caused by unwinding carry trades in a flight to government obligations. The increase into 2011 and current pause were also induced by unconventional monetary policy.
Chart VA-23, US, Exports Price Index of Agricultural Commodities, 2001=100, 1982-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-24 provides 12 month percentage changes of the index of US exports of agricultural commodities from 1986 to 2011. The wide swings in 2008, 2009 and 2011 are only explained by unconventional monetary policy inducing carry trades from zero interest rates to commodity futures.
Chart VA-24, US, Exports Price Index of Agricultural Commodities, 12 Months Percentage Changes, 1986-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-25 shows the export price index of nonagricultural commodities from 2001 to 2011. Unconventional monetary policy of zero interest rates drove price behavior during the past decade. Policy has been based on the myth of stimulating the economy by climbing the negative slope of an imaginary short-term Phillips curve.
Chart VA-25, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart VA-26 provides a longer perspective of the price index of US nonagricultural commodities from 1982 to 2011. Increases and decreases around the global contraction after 2007 were caused by carry trade induced by unconventional monetary policy.
Chart VA-26, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 1982-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Finally, Chart VA-27 provides 12 month percentage changes of the price index of US exports of nonagricultural commodities from 1986 to 2011. The wide swings before, during and after the global recession beginning in 2007 were caused by carry trades induced by unconventional monetary policy.
Chart VA-27, US, Exports Price Index of Nonagricultural Commodities, 12 Months Percentage Changes, 1986-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
The US Treasury budget for fiscal year 2012 in the first two months of Nov and Oct 2011 is shown in Table VA-10. Receipts increased 7.0 percent in the first two months of fiscal year 2012 relative to the same two months in fiscal year 2011 or Oct-Nov 2010. Individual income taxes have grown 16.0 percent in 12 months. Outlays were lower by 5.9 percent relative to a year earlier. The final two rows of Table 1 provide the deficit for fiscal year 2011 at $1.3 trillion.
Table VA-10, US, Treasury Budget in Fiscal Year to Date Million Dollars
| Fiscal Year 2012 | Oct-Nov 2011 | Oct-Nov 2010 | ∆% |
| Receipts | 315,474 | 294,921 | 7.0 |
| Outlays | 551,243 | 585,748 | -5.9 |
| Deficit | -235,769 | 290,826 | NA |
| Individual Income Taxes | 157,418 | 135,706 | 16.0 |
| Receipts | Outlays | Deficit (-), Surplus (+) | |
| Fiscal Year 2011 | 2,302,495 | 3,599,300 | -1,296,806 |
| Fiscal Year 2010 ($ Billions) | 2,163 | 3,456 | -1,294 |
Source: http://www.fms.treas.gov/mts/mts1111.pdf
Risk aversion channeled funds toward US long-term and short-term securities as shown in Table VA-11. Net foreign purchases of US long-term securities (row C in Table VA-11) in Sep were a high for a month in 2011 of revised $68.3 billion, incomparably larger than $9.1 billion in Jul and $4.1 billion in May and higher by $14.3 billion than $54.0 billion revised in Aug. In Oct, net foreign purchases of US long-term securities were $4.8 billion, normally declining after high values in Sep and Aug. Foreign (residents) purchases less sales of US long-term securities (row A in Table VA-11) in Oct were $2.6 billion, much lower than $65.6 billion in Sep. Net US (residents) purchases of long-term foreign securities (row B in Table VA-11) in Oct were $2.2 billion. In Oct,
C = A + B = $2.6 billion + $2.2 billion = $4.8 billion
The significant change in Table IV-11 in Oct is in A1 private purchases by residents overseas of US long-term securities of $10.1 billion of which A11 Treasury securities $16.9 billion and A12 $3.0 billion agency securities but reduction of corporate bonds by $11.8 with only $2.0 billion in equities. The sovereign risk crisis in Europe diverted foreign private investment away from risk toward the safe haven of US Treasury securities. Oct inflows into US long-term securities were much lower than in Sep and Aug as investors had already exited risk positions in other currencies. In Oct A1 private purchases by residents overseas of US long-term securities fell to $10.1 billion with declines in all items. A2 official purchases by foreign residents of US long-term securities rose from minus $8.7 billion in Aug to $37.3 billion in Sep mainly because of $38.8 billion in A21 Treasury securities but A2 official was negative $7.5 billion in Oct with negative $9.4 billion in Treasury securities. Row D shows sharp decrease in Oct in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills fell to only $1.1 billion (row D11) but foreign official holdings fell $12.7 billion. Risk aversion of principal losses in foreign securities dominated decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.
Table VA-11, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA
| 2011 | Jul | Aug | Sep | Oct |
| A Foreign Purchases less Sales of | 24.1 | 62.3 | 65.6 | 2.6 |
| A1 Private | 9.8 | 70.9 | 28.3 | 10.1 |
| A11 Treasury | 1.7 | 69.7 | 45.6 | 16.9 |
| A12 Agency | 6.9 | 9.8 | 8.9 | 3.0 |
| A13 Corporate Bonds | 1.6 | -2.1 | -6.8 | -11.8 |
| A14 Equities | -0.4 | -6.5 | -19.4 | 2.0 |
| A2 Official | 14.2 | -8.7 | 37.3 | -7.5 |
| A21 Treasury | 13.9 | -9.6 | 38.8 | -9.4 |
| A22 Agency | 1.3 | -1.0 | -1.7 | 0.7 |
| A23 Corporate Bonds | -0.4 | 2.0 | 0.3 | 0.2 |
| A24 Equities | -0.6 | 0.0 | 0.0 | 0.9 |
| B Net US Purchases of LT Foreign Securities | -15.0 | -8.2 | 2.7 | 2.2 |
| B1 Foreign Bonds | 0.6 | -5.0 | 1.0 | 4.1 |
| B2 Foreign Equities | -15.6 | -3.3 | 1.8 | -1.9 |
| C Net Foreign Purchases of US LT Securities | 9.1 | 54.0 | 68.3 | 4.8 |
| D Increase in Foreign Holdings of Dollar Denominated Short-term | -40.0 | 23.0 | -4.9 | -41.0 |
| D1 US Treasury Bills | -32.1 | 28.1 | 3.2 | -11.5 |
| D11 Private | -16.6 | 11.3 | 25.2 | 1.1 |
| D12 Official | -15.4 | 16.9 | -21.9 | -12.7 |
| D2 Other | -8.0 | -5.2 | -8.1 | -29.4 |
C = A + B;
A = A1 + A2
A1 = A11 + A12 + A13 + A14
A2 = A21 + A22 + A23 + A24
B = B1 + B2
D = D1 + D2
D1 = D11 + D12
Sources: http://www.treasury.gov/press-center/press-releases/Pages/tg1384.aspx
Table VA-12 provides major foreign holders of US Treasury securities. China is the largest holder with $1134.1 billion in Oct 2011, slightly lower than $1160.1 billion in Dec 2010. Japan increased its holdings from $882.3 billion in Dec 2010 to $979.0 billion in Oct. The United Kingdom reduced its holdings at $408.1 billion in Oct relative to $421.6 billion in Sep but much higher than $270.4 billion in Dec. Caribbean banking centers increased their holdings by $32.5 billion from Jul to Aug and by another $11.8 billion from Aug to Sep likely in dedicated wealth-management funds and increased them slightly to $175.2 billion in Oct. There was an increase in holdings of Switzerland by $39.1 billion from Jul to Aug also likely in dedicated wealth-management funds but decline by $1.4 billion from Aug to Sep and further decline by $14.4 billion to $131.7 billion in Oct that is much higher than $106.8 billion in Dec.
Table VA-12, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period
| Oct 2011 | Sep 2011 | Dec 2010 | |
| China | 1134.1 | 1148.3 | 1160.1 |
| Japan | 979.0 | 956.8 | 882.3 |
| United Kingdom | 408.4 | 421.6 | 270.4 |
| Oil Exporters | 226.2 | 229.9 | 211.9 |
| Brazil | 209.1 | 206.2 | 186.1 |
| Caribbean Banking Centers | 175.2 | 172.9 | 168.4 |
| Taiwan | 150.3 | 149.3 | 155.1 |
| Switzerland | 131.7 | 146.1 | 106.8 |
| Hong Kong | 110.7 | 109.0 | 134.2 |
| Russia | 92.1 | 94.6 | 151.0 |
Source:
http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
The current account of the US balance of payments is provided in Table VA-13 for IIIQ2010 and IIIQ2011. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US stabilized from $139 billion in IIQ2010 to $131 billion in IIIQ2011. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The current account deficit reached 6.1 percent of GDP in 2006. The current account deficit fell from 3.3 percent in IIQ2011 to 2.9 percent in IIIQ2011.
Table VA-13, US Balance of Payments, Millions of Dollars NSA
| IIIQ2010 | IIIQ2011 | Difference | |
| Goods Balance | -186,377 | -202,149 | 15,772 |
| X Goods | 320,991 | 378,699 | 18.0 ∆% |
| M Goods | -507,368 | -580,848 | 14.5 ∆% |
| Services Balance | 38,334 | 49,102 | 10,768 |
| X Services | 144,357 | 159,807 | 10.7 ∆% |
| M Services | -106,023 | -110,705 | 4.4 ∆% |
| Balance Goods and Services | -148,042 | -153,047 | -5,005 |
| Balance Income | 43,632 | 56,022 | 12,390 |
| Unilateral Transfers | -35,127 | -34,050 | -1,077 |
| Current Account Balance | -139,537 | -131,074 | |
| % GDP | IIQ2011 | IIIQ2011 | |
| 3.3 | 2.9 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: http://www.bea.gov/iTable/index_ita.cfm
Chart VA-28 of the Bureau of Economic Analysis of the Department of Commerce shows on the lower negative panel the sharp increase in the deficit in goods and the deficits in goods and services from 1960 to 2010. The upper panel shows the increase in the surplus in services that was insufficient to contain the increase of the deficit in goods and services. The adjustment has been in the form of contraction of economic activity that reduced demand for goods.
Chart VA-28, US, Balance of Goods, Balance on Services and Balance on Goods and Services, 1960-2010, Millions of Dollars
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
Chart VA-29 of the Bureau of Economic Analysis shows exports and imports of goods and services from 1960 to 2010. Exports of goods and services in the upper positive panel have been quite dynamic but have not compensated for the sharp increase in imports of goods.
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
Chart VA-30 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2010. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.
Chart VA-30, US, Balance on Current Account, 1960-2010, Millions of Dollars
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
Chart VA-31of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2010. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.
Chart VA-31, US, Real GDP, 1960-2010, Billions of Chained 2005 Dollars
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
VB Japan. The Markit Japan Services PMI™ Composite Output Index fell 3.5 percentage points from 52.4 in Oct to 48.9 in Nov, meaning that private-sector activity has fallen into contraction territory (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8899). Alex Hamilton, economist at Markit and author of the report, finds that panelists view unfavorably the outlook of private-sector activity in the coming 12 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8899). The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Japan Manufacturing PMITM registered 49.1 in Nov from 50.6 in Oct for the sharpest acceleration of decline of output since Apr after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Alex Hamilton, economist at Markit and author of the report, finds that weakening demand originated in the appreciated yen together with declining new orders from emerging Asia especially China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Nov ∆% 0.1 |
| Consumer Price Index | Oct SA ∆% 0.1 |
| Real GDP Growth | IIIQ2011 ∆%: 1.4 on IIQ2011; IIIQ2011 SAAR 5.6% |
| Employment Report | Oct Unemployed 2.88 million Change in unemployed since last year: minus 460 thousand |
| All Industry Index | Sep month SA ∆% -0.9 Blog 11/27/11 |
| Industrial Production | Oct SA month ∆%: 2.4 |
| Machine Orders | Total Oct ∆% 3.2 Private ∆%: -9.2 |
| Tertiary Index | Oct month SA ∆% 0.6 |
| Wholesale and Retail Sales | Oct 12 months: |
| Family Income and Expenditure Survey | Oct 12 months ∆% total nominal consumption minus 0.6, real minus 0.4 Blog 12/04/11 |
| Trade Balance | Exports Oct 12 months ∆%: -3.7 Imports Sep 12 months ∆% 17.9 Blog 11/27/11 |
Links to blog comments in Table JPY:
12/11/2011 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial.html
12/0411 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
The tertiary activity index of Japan rose 0.6 percent in Oct and increased 0.5 percent in 12 months, as shown in Table VB-1. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.9 percent in Mar and 3.1 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep was weak: decline of 0.2 percent in Jul, increase of 0.1 percent in Aug and decline of 0.4 percent in Sep, after increasing 1.9 percent in Jun. The index has gained 5.7 percent in the seven months from Apr to Oct, almost erasing the loss in Mar of 5.9 percent.
Table VB-1, Japan, Tertiary Activity Index, ∆%
| Month ∆% SA | 12 Months ∆% NSA | |
| Oct 2011 | 0.6 | 0.5 |
| Sep | -0.4 | 0.0 |
| Aug | 0.1 | -0.2 |
| Jul | -0.2 | -0.2 |
| Jun | 1.9 | 0.9 |
| May | 0.9 | -0.2 |
| Apr | 2.7 | -2.3 |
| Mar | -5.9 | -3.1 |
| Feb | 0.8 | 2.0 |
| Jan | -0.1 | 1.1 |
| Dec 2010 | -0.2 | 1.8 |
| Nov | 0.6 | 2.5 |
| Oct | 0.2 | 0.5 |
| Sep | -0.4 | 1.3 |
| Aug | 0.1 | 2.3 |
| Jul | 0.7 | 1.6 |
| Jun | 0.1 | 1.0 |
| May | -0.3 | 1.2 |
| Dec 2009 | -2.7 | |
| Dec 2008 | -3.3 | |
| Dec 2007 | -0.3 | |
| Dec 2006 | 0.6 | |
| Dec 2005 | 2.6 | |
| Dec 2004 | 1.6 |
Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201110j.pdf
http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html
Month and 12 months rates of growth of the tertiary activity index of Japan and components in Oct are provided in Table VB-2. Electricity, gas, heat supply and water fell 3.6 percent in the 12 months ending in Oct but increased 0.4 percent in the month of Oct. Wholesale and retail trade rose 0.7 percent in the month of Oct but fell 0.3 percent in 12 months.
Table VB-2, Japan, Tertiary Index and Components, Month and 12 Months Rates of Change ∆%
| Sep 2011 | Weight | 12 Months ∆% | Month ∆% |
| Tertiary Index | 10,000.0 | 0.6 | 0.5 |
| Electricity, Gas, Heat Supply & Water | 372.9 | -3.6 | 0.4 |
| Information & Communications | 951.2 | 0.5 | 4.2 |
| Wholesale & Retail Trade | 2,641.2 | -0.3 | 0.7 |
| Finance & Insurance | 971.1 | 1.1 | -0.6 |
| Real Estate & Goods Rental & Leasing | 903.4 | -1.4 | 0.1 |
| Scientific Research, Professional & Technical Services | 551.3 | 1.5 | -2.8 |
| Accommodations, Eating, Drinking | 496.0 | 0.9 | 0.6 |
| Living-Related, Personal, Amusement Services | 552.7 | 2.9 | 5.1 |
| Learning Support | 116.9 | -0.5 | 1.1 |
| Medical, Health Care, Welfare | 921,1 | 3.0 | 0.3 |
| Miscellaneous ex Government | 626.7 | 1.5 | -2.3 |
Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201110j.pdf
VC China. The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 52.6 in Oct to 48.9 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8898
). The composite index combined activity in manufacturing and services such that joint output has moved into contraction territory below 50. A favorable aspect in the index is growth of services employment at the fastest rate in five months, which could maintain demand at high levels. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy could build on the growth of employment in services and the reduction of price pressures to ensure growth above 8 percent in 2012. The HSBC China Manufacturing PMI™ compiled by Markit fell from 51.0 in Oct to 47.7 in Nov, which is the lowest in 32 months, indicating sharp deterioration of manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8859). The good news in the index is the decline in average input costs for the first time in 16 months. The decline in new business was the prime reason for falling output but export business continued to increase. Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC finds that the combination of weakening production and subdued inflation can lead to easing policies that may still ensure growth of 8 percent for China in 2012. The HSBC Flash China Manufacturing PMI™, compiled by Markit, rose from 47.7 in Nov to 49.0 in Dec while the China Manufacturing Output index rose to 49.5 in Dec from 46.1 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8932). Both indexes rose to two-month highs and indicate marginal contraction. Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Nov 12 months ∆%: 2.7 Nov month ∆%: -0.7 |
| Consumer Price Index | Nov month ∆%: -0.2 Nov 12 month ∆%: 4.2 |
| Value Added of Industry | Nov 12 month ∆%: 12.4 Jan-Nov 2011/Jan-Oct 2010 ∆%: 14.0 |
| GDP Growth Rate | Year IIIQ2011 ∆%: 9.1 |
| Investment in Fixed Assets | Total Jan-Nov ∆%: 24.4 Jan-Nov ∆% real estate development: 29.9 |
| Retail Sales | Nov month ∆%: 1.3 Jan-Nov ∆%: 17.0 |
| Trade Balance | Nov balance $14.52 billion Cumulative Nov: $138.55 billion |
Links to blog comments in Table CNY: 12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html
Cumulative rates of value added of industry in China are provided in Table VC-1. In the first eleven months of 2011, value added in total industry increased 14.0 percent relative to a year earlier and 12.4 percent in the 12 months ending in Nov. Heavy industry is the driver of growth with a rate of 12.4 percent in 12 months and 14.4 percent cumulative relative to a year earlier. Growth has decelerated somewhat from 14.9 percent in the 12 months ending in Feb but is not significantly different from 14.1 percent in Jan-Feb relative to a year earlier.
Table VC-1, China, Growth Rate of Value Added of Industry ∆%
| 2011 | Industry | Light Industry | Heavy | State | Private |
| 12 M Nov | 12.4 | 12.4 | 12.4 | 7.8 | 14.4 |
| Jan-Nov | 14.0 | 13.0 | 14.4 | 9.9 | 16.0 |
| 12 M Oct | 13.2 | 12.1 | 13.7 | 8.9 | 15.1 |
| Jan-Oct | 14.1 | 13.0 | 14.5 | 10.1 | 9.1 |
| 12 M Sep | 13.8 | 12.8 | 14.3 | 9.9 | 16.0 |
| Jan-Sep | 14.2 | 13.1 | 14.6 | 10.4 | 16.1 |
| 12 M Aug | 13.5 | 13.4 | 13.5 | 9.4 | 15.5 |
| Jan-Aug | 14.2 | 13.1 | 14.6 | 10.4 | 16.1 |
| 12 M | 14.0 | 12.8 | 14.5 | 9.5 | |
| Jan-Jul | 14.3 | ||||
| 12 M | 15.1 | 13.9 | 15.6 | 10.7 | 20.8 |
| Jan-Jun | 14.3 | 13.1 | 14.7 | 10.7 | 19.7 |
| 12 M May | 13.3 | 12.9 | 13.5 | 8.9 | 18.7 |
| Jan-May | 14.0 | 12.9 | 14.4 | 10.7 | 19.3 |
| 12 M Apr | 13.4 | 11.9 | 14.0 | 10.4 | 18.0 |
| Jan-Apr | 14.2 | 12.9 | 14.7 | 11.2 | 19.5 |
| 12 M Mar | 14.8 | 12.8 | 15.6 | 12.9 | 19.2 |
| Jan-Mar | 14.4 | 13.1 | 14.9 | 11.4 | 19.8 |
| 12 M Feb | 14.9 | 13.1 | 15.6 | 10.5 | 21.7 |
| Jan-Feb | 14.1 | 13.3 | 14.4 | 10.6 | 20.3 |
Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm
http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm
http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm
http://www.stats.gov.cn/english/statisticaldata/index.htm
Yearly rates of growth for the past 12 months and cumulative relative to the earlier year of various segments of industrial production in China are provided in Table VC-2. Rates for Jan-Nov 2011 relative to the same period a year earlier have fluctuated but remain above 10 percent with the exception of motor vehicles and crude oil. There is deceleration in Nov of the 12 months rates of change with only cement at 11.2 percent exceeding 10 percent.
Table VC-2, China, Industrial Production Operation ∆%
| 2011 | Elec- | Pig Iron | Cement | Crude | Non- | Motor Vehicles |
| 12 M Nov | 8.5 | 7.8 | 11.2 | 3.2 | 8.2 | -1.3 |
| Jan-Nov | 12.0 | 13.1 | 17.2 | 5.3 | 10.2 | 3.9 |
| 12 M | 9.3 | 13.4 | 16.5 | -0.9 | 3.7 | 1.3 |
| Jan-Oct | 12.3 | 13.7 | 18.0 | 5.4 | 10.4 | 5.2 |
| 12 M Sep | 11.5 | 18.8 | 15.7 | 1.5 | 13.9 | 2.5 |
| Jan-Sep | 12.7 | 13.9 | 18.1 | 6.0 | 11.2 | 5.5 |
| 12 M Aug | 10.0 | 12.9 | 12.8 | 4.5 | 15.6 | 9.5 |
| Jan-Aug | 13.0 | 13.1 | 18.4 | 6.6 | 4.7 | |
| 12 M | 13.2 | 14.9 | 16.8 | 5.9 | 9.8 | -1.3 |
| Jan-Jul | 13.3 | 13.0 | 19.2 | 6.9 | 9.9 | 4.0 |
| 12 M | 16.2 | 14.8 | 19.9 | -0.7 | 9.8 | 3.6 |
| 12 M | 12.1 | 10.6 | 19.2 | 6.0 | 14.2 | -1.9 |
| 12 M Apr | 11.7 | 8.3 | 22.4 | 6.8 | 6.1 | -1.6 |
| 12 M Mar | 14.8 | 13.7 | 29.8 | 8.0 | 11.6 | 9.9 |
| 12 M Feb | 11.7 | 14.5 | 9.1 | 10.9 | 14.4 | 10.3 |
| 12 M Jan | 5.1 | 3.5 | 16.4 | 12.2 | 1.4 | 23.9 |
| 12 M Dec 2010 | 5.6 | 4.6 | 17.3 | 10.3 | -1.9 | 27.6 |
M: month
Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm
http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm
http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm
Monthly growth rates of industrial production in China are provided in Table VC-3. Monthly rates have fluctuated around 1 percent. The annual equivalent rate in the ten months from Feb to Nov is 12.7 percent.
Table VC-3, China, Industrial Production Operation, Month ∆%
| 2011 | Month ∆% |
| Feb | 0.94 |
| Mar | 1.15 |
| Apr | 0.92 |
| May | 0.95 |
| Jun | 1.34 |
| Jul | 0.82 |
| Aug | 0.92 |
| Sep | 1.12 |
| Oct | 0.88 |
| Nov | 0.91 |
| AE ∆% Feb-Nov | 12.7 |
AE: annual equivalent
Source:http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm
Table VC-4 provides cumulative growth of investment in fixed assets in China in 2011 relative to 2010. Total fixed investment has grown at a high rate fluctuating around 25 percent and fixed investment in real estate development has grown at rates in excess of 30 percent. In Jan-Nov investment in fixed assets in China grew 24.5 percent relative to a year earlier and 29.9 percent in real estate development.
Table VC-4, China, Investment in Fixed Assets ∆% Relative to a Year Earlier
| Total | State | Real Estate Development | |
| Jan-Nov | 24.5 | 11.7 | 29.9 |
| Jan-Oct | 24.9 | 12.4 | 31.1 |
| Jan-Sep | 24.9 | 12.7 | 32.0 |
| Jan-Aug | 25.0 | 12.1 | 33.2 |
| Jan-Jul | 25.4 | 13.6 | 33.6 |
| Jan-Jun | 25.6 | 14.6 | 32.9 |
| Jan-May | 25.8 | 14.9 | 34.6 |
| Jan-Apr | 25.4 | 16.6 | 34.3 |
| Jan-Mar | 25.0 | 17.0 | 34.1 |
| Jan-Feb | 24.9 | 15.6 | 35.2 |
Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771598.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765183.htm
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759856.htm
Chart VC-1 provides cumulative fixed asset investment in China relative to a year earlier. Growth rose to 25.8 percent in Jan-May and then fell back to 24.9 percent in Sep and Oct, declining further to 24.5 percent in Nov.
Chart VC-1, China, Investment in Fixed Assets, ∆% Cumulative over Year Earlier
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771598.htm
Monetary policy has been used in China in the form of increases in interest rates and required reserves of banks to moderate real estate investment. These policies have been reversed because of lower inflation and weakening economic growth. Chart VC-2 shows decline of fluctuating cumulative growth rates of investment in real estate development relative to a year earlier from 35.2 percent in Jan-Feb to 31.1 percent in Jan-Oct and now 29.9 percent in Jan-Nov.
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771598.htm
Table VC-5 provides monthly growth rates of investment in fixed assets in China from Feb to Nov 2011. Monthly rates have fluctuated from a low of minus 0.60 percent in Jun to a high of 2.25 percent in Apr. The average annual equivalent rate in the ten months from Feb to Nov fell to 10.7 percent because of the negative change of 0.19 percent in Nov.
Table VC-5, China, Investment in Fixed Assets, Month ∆%
| Month ∆% | |
| Feb | 0.21 |
| Mar | 1.65 |
| Apr | 2.25 |
| May | 0.88 |
| Jun | -0.60 |
| Jul | 1.31 |
| Aug | 1.69 |
| Sep | 0.12 |
| Oct | 1.23 |
| Nov | -0.19 |
| AE ∆% Feb-Nov | 10.7 |
AE: annual equivalent
Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771598.htm
VD Euro Area. The Markit Eurozone PMI® Composite Output Index, combining manufacturing and services with high correlation with euro zone GDP, improved from 46.5 in Oct to 47.0 in Nov, meaning contraction of private-sector economic activity for the third consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8887). The output of all big-four economies of the euro zone—Germany, France, Italy and Spain—contracted simultaneously for the first time since Jul 2009. Chris Williamson, Chief Economist at Markit, finds that the data in the index are consistent with economic contraction of the euro zone by 0.6 percent in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8887). Italy’s GDP could decline by 1 percent in IVQ2011 with France and Spain contracting by 0.5 percent. Germany could experience a milder decline but manufacturing is falling with weakness in export orders. The Markit Eurozone Manufacturing PMI® that is highly associated with euro zone manufacturing fell from 47.1 in Oct to 46.4 in Nov, which is the lowest reading in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). Chris Williamson, Chief Economist at Markit, finds that production and new orders declined at the fastest rates since the first half of 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). All individual indexes of countries in the report fell for the first time since the middle of 2009.
Table EUR provides the regional country data table for the euro zone. The Nov index is consistent with a rate of contraction of manufacturing output at 2 percent in the final quarter of 2011. The debt crisis has introduced significant uncertainty in regional business. The Markit Flash Eurozone PMI® Composite Output Index rose to 47.9 in Dec from 47.0 in Nov, indicating milder contraction in the weakest quarter in the euro zone in two and half years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8939). Table EUR provides the regional country data table for the euro zone.
Table EUR, Euro Area Economic Indicators
| GDP | IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 12/04/11 |
| Unemployment | Oct 2011: 10.3% unemployment rate Oct 2011: 16.294 million unemployed Blog 12/04/11 |
| HICP | Nov month ∆%: 0.1 12 months Nov ∆%: 3.0 |
| Producer Prices | Euro Zone industrial producer prices Oct ∆%: 0.1 |
| Industrial Production | Oct month ∆%: -0.1 |
| Industrial New Orders | Sep month ∆%: minus 6.4 Sep 12 months ∆%: 1.6 |
| Construction Output | Jul month ∆%: 1.4 |
| Retail Sales | Oct month ∆%: minus 0.4 |
| Confidence and Economic Sentiment Indicator | Sentiment 93.7 Nov 2011 down from 107 in Dec 2010 Confidence minus 20.4 Oct 2011 down from minus 11 in Dec 2010 Blog 12/04/11 |
| Trade | Jan-Oct 2011/2010 Exports ∆%: 13.3 |
| HICP, Rate of Unemployment and GDP | Historical from 1999 to 2011 Blog 12/04/11 9/04/11 |
Links to blog comments in Table EUR: 12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html
The decline of industrial production by 2.0 percent in Sep interrupted growth of industrial production in the euro zone of 1.0 percent in Jul and 1.4 percent in Aug, as shown in Table VD-1. Growth in Jan-Oct has been at the annual equivalent rate of 0.6 percent. All segments of industrial production fell in Oct with exception of rebound of capital goods by 1.2 percent after sharp drop of 3.9 percent in Sep and growth of nondurable goods by 0.6 percent. Industrial production is highly volatile in larger economies in the euro zone.
Table VD-1, Euro Zone, Industrial Production Month ∆%
| 2011 | Oct | Sep | Aug | Jul | Jun | May | Apr | Mar | Feb | Jan |
| Total Jan Oct AE ∆%: 0.6 | -0.1 | -2.0 | 1.3 | 0.9 | -0.6 | 0.1 | 0.3 | 0.0 | 0.5 | 0.1 |
| Inter-mediate | -0.8 | -2.2 | 1.4 | 0.6 | -0.8 | -0.2 | 0.0 | 0.0 | 0.5 | 2.3 |
| Energy | -0.9 | -1.6 | 1.0 | 0.2 | 1.1 | 0.2 | -3.7 | -0.3 | -1.3 | -4.7 |
| Capital | 1.2 | -3.9 | 2.3 | 2.9 | -1.5 | 1.1 | 0.7 | -0.6 | 2.2 | -1.8 |
| Durable | -0.4 | -3.4 | -0.1 | 3.6 | -2.5 | -0.6 | 1.0 | 0.0 | 0.9 | 1.1 |
| Non | 0.6 | -1.4 | 1.7 | -0.7 | -0.7 | -0.1 | 0.4 | 0.4 | 0.9 | -0.1 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14122011-AP/EN/4-14122011-AP-EN.PDF
Table VD-2 provides 12 months percentage changes of industrial production and major industrial categories in the euro zone. Industrial production increased 1.3 percent in the 12 months ending in Oct but the data in Table VD-1 show that at the margin industrial production in the euro zone is increasing at the annual equivalent of only 0.6 percent in the first ten months of 2011.
Table VD-2, Euro Zone, Industrial Production 12 Months ∆%
| 2011 | Oct 12 Months ∆% |
| Total | 1.3 |
| Intermediate Goods | 2.2 |
| Energy | 6.0 |
| Capital Goods | 4.4 |
| Durable Consumer Goods | 2.8 |
| Nondurable Consumer Goods | 4.3 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14122011-AP/EN/4-14122011-AP-EN.PDF
There has been significant decline in percentage changes of industrial production and major categories in 12 months rates throughout 2011 as shown in Table VD-3. The 12-month rate of growth in Feb of 7.8 percent has fallen to only 1.3 percent in Oct. Trend is difficult to identify because of significant volatility. Capital goods were growing at 15.1 percent in the 12 months ending in Feb and only 4.4 percent in the 12 months ending in Oct but have already rebounded from 6.9 percent in Jun to 13.0 percent in Aug.
Table VD-3, Euro Zone, Industrial Production 12 Months ∆%
| 2011 | Sep | Aug | Jul | Jun | May | Apr | Mar | Feb | Jan |
| Total | 2.2 | 6.0 | 4.4 | 2.8 | 4.3 | 5.4 | 5.7 | 7.8 | 6.2 |
| Inter-mediate | 2.2 | 5.3 | 4.2 | 3.1 | 4.5 | 5.5 | 7.5 | 10.0 | 9.5 |
| Energy | -3.1 | -2.1 | -4.0 | -3.7 | -7.2 | -5.3 | -2.1 | -2.8 | -1.9 |
| Capital | 5.9 | 13.0 | 11.8 | 6.9 | 10.7 | 10.5 | 11.5 | 15.1 | 13.0 |
| Durable | -0.7 | 3.2 | 4.5 | -2.7 | 1.2 | 4.8 | 2.5 | 3.5 | 2.0 |
| Non | 0.3 | 3.1 | -0.7 | 0.9 | 2.7 | 3.7 | 0.7 | 2.6 | 0.5 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14122011-AP/EN/4-14122011-AP-EN.PDF
Blanchard (2011WEOSep) analyzes the difficulty of fiscal consolidation efforts during periods of weak economic growth. Table VD-4 provides euro zone industrial production in the month of Oct and in the 12 months ending in Oct for members of the euro zone and the UK that is a member of the European Union but not of the common currency and central bank under the European Monetary Union (EMU). Industrial production in the 12 months ending in Oct is growing in the larger European economies: 4.2 percent in Germany, 1.4 percent in France and 0.5 percent in the UK. Industrial production is contracting in many of the GIIPS (Greece, Ireland, Italy, Portugal and Spain) countries that are attempting to improve expectations in their fiscal affairs—Greece -12.4 percent, Italy -4.2 percent and Spain -4.0 percent—and increasing only in Ireland, 12.2 percent, and Portugal, 0.6 percent.
Table VD-4, Euro Zone, Industrial Production, Month and 12 Months ∆%
| Oct 2011 | Month ∆% | 12 Months ∆% |
| Euro Zone | -0.1 | 1.3 |
| Germany | -0.8 | 4.2 |
| France | 0.0 | 1.4 |
| Netherlands | -0.7 | -2.0 |
| Finland | -1.3 | -6.0 |
| Belgium | NA | NA |
| Portugal | -0.7 | 0.6 |
| Ireland | 6.6 | 12.2 |
| Italy | -0.9 | -4.2 |
| Greece | -4.4 | -12.4 |
| Spain | -1.1 | -4.0 |
| UK | -0.7 | -2.0 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14122011-AP/EN/4-14122011-AP-EN.PDF
Euro zone trade growth continues to be strong as shown in Table VD-5. Exports grew at 13.3 percent and imports at 13.8 percent in the first eight ten months of 2011 relative to 2010. The 12 months rates of growth of exports were 5.6 percent in Oct and 7.2 percent for imports, which are lower than those in Sep of 9.7 percent for exports and 8.1 percent for imports. At the margin, rates of growth of trade are declining.
Table VD-5, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA
| Exports | Imports | |
| Jan-Oct 2011 | 1428.9 | 1447.7 |
| Jan-Oct 2010 | 1260.8 | 1271.7 |
| ∆% | 13.3 | 13.8 |
| Oct 2011 | 147.7 | 146.6 |
| Oct 2010 | 139.8 | 136.7 |
| ∆% | 5.6 | 7.2 |
| Sep 2011 | 151.2 | 148.6 |
| Sep 2010 | 137.8 | 137.5 |
| ∆% | 9.7 | 8.1 |
| Trade Balance | Jan-Oct 2011 | Jan-Oct 2010 |
| € Billions | -18.8 | -10.9 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16122011-BP/EN/6-16122011-BP-EN.PDF
The structure of trade of the euro zone in Jan-Sep is provided in Table VD-6. Data are still not available for trade structure for Oct. Manufactured exports grew 12.9 percent in Jan-Sep 2011 relative to Jan-Sep 2010 while imports grew 10.1 percent.
Table VD-6, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, ∆%
| Primary | Manufactured | Other | Total | |
| Exports | ||||
| Jan-Sep 2011 € B | 193.0 | 1053.3 | 34.9 | 1281.2 |
| Jan-Sep 2010 € B | 155.7 | 932.8 | 32.4 | 1121.0 |
| ∆% | 23.9 | 12.9 | 7.7 | 14.3 |
| Imports | ||||
| Jan-Sep 2011 € B | 454.4 | 825.2 | 21.5 | 1301.1 |
| Jan-Sep 2010 € B | 363.7 | 749.6 | 21.7 | 1135.0 |
| ∆% | 24.9 | 10.1 | -0.9 | 14.6 |
| Trade Balance € B | ||||
| Jan-Sep 2011 | -261.4 | 228.1 | 13.4 | -19.9 |
| Jan-Sep 2010 | -207.9 | 183.2 | 10.7 | -14.0 |
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16122011-BP/EN/6-16122011-BP-EN.PDF
VE Germany. The Markit Germany Composite Output Index, combining output of the manufacturing and service sectors, fell below the zone of 50.0 below zero for the first time since Jul 2009, registering 49.4 in Nov compared with 50.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8876
). The decline in manufacturing production offset the Markit Germany Services Business Activity Index at 50.3 in Nov, which was lower than 50.6 in Oct. New work in services is experiencing the longest period of decline since the global recession in 2008 and 2009. Tim Moore, Senior Economist at Markit and author of the report, evaluates that stagnation may be the best outcome for the German economy in IVQ2011. The Markit/BME Germany Purchasing Managers’ Index® (PMI®) fell from 49.1 in Oct to 47.9 in Nov for the seventh consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). The index registered the fastest deterioration of overall manufacturing since Jul 2009. While the declines in output and new orders were the fastest since Jun 2009, the rates of decline are much more benign than those experienced during the global recession of 2008 and 2009. Tim Moore, Senior Economist at Markit and author of the report, finds resilience in output of consumer goods that compensated for declines in manufacturing export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). The Markit Flash Germany PMI® Composite Output Index rose from 49.4 in Nov to 51.3 in Dec, for a four-month high, indicating return to expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8927). Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5 |
| Consumer Price Index | Oct month SA ∆%: 0.0 |
| Producer Price Index | Oct month ∆%: 0.3 |
| Industrial Production | Oct month SA ∆%: minus 0.8 |
| Machine Orders | Oct month ∆%: 5.2 |
| Retail Sales | Oct Month ∆% 0.7 12 Months ∆% -0.4 Blog 12/04/11 |
| Employment Report | Employment Accounts: |
| Trade Balance | Exports Oct 12 month NSA ∆%: 3.8 Blog 12/11/11 |
Links to blog comments in Table DE: 12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html
VF France. There was an improvement in the Markit France Services Activity Index for a two-month high from 44.6 in Oct to mild contraction at 49.6 in Nov that compensated the acceleration of decline in manufacturing. As a result the Markit France Composite Output Index, combining manufacturing and services, rose to a two-month high of 48.8 in Nov from 45.6 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8906). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that weak readings are suggesting contraction of the French economy in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8906). Uncertainty from the euro zone debt crisis is driving down confidence in the service sector. The Markit France Manufacturing Purchasing Managers Index® (PMI®) fell to 47.3 in Nov from 48.5 in Oct, which is the lowest reading since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). The index has been in the contraction zone below 50 during four consecutive months. New orders fell at the sharpest rate since Apr 2009 and have fallen during five consecutive months. Jack Kennedy, Senior Economist at Markit, and author of the France Manufacturing PMI® find increasing weakness in domestic and export demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). The Markit Flash France PMI® Composite Output Index increased from 48.8 in Nov to a three-month high at 49.8 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8926). Table FR provides France’s country data table.
Table FR, France, Economic Indicators
| CPI | Nov month ∆% 0.3 |
| PPI | Oct month ∆%: 0.5 Blog 12/04/11 |
| GDP Growth | IIIQ2011/IIQ2011 ∆%: 0.4 |
| Industrial Production | Oct/Sep SA ∆%: |
| Industrial New Orders | Mfg Sep/Aug ∆% -3.1 YOY ∆% 7.9 Blog 11/20/11 |
| Consumer Spending | Oct Manufactured Goods |
| Employment | IIIQ2011 Unemployed 2.631 million |
| Trade Balance | Oct Exports ∆%: month 0.5, 12 months 6.3 Oct Imports ∆%: month minus 0.3, 12 months 7.4 Blog 12/11/11 |
| Confidence Indicators | Historical averages 100 Dec: France 92 Mfg Business Climate 94 Retail Trade 93 Services 91 Building 99 Household 79 Blog 12/18/11 |
Links to blog comments in Table FR: 12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html
11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html
The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds deteriorating conditions in Dec. Table VF-1 shows the INSEE business climate indicator. The headline synthetic index has fallen to 94 in Dec, which is below the average of 100 since 1976. The final row shows the general production expectations falling to -37 in Dec, well below the average of -8 since 1976. Demand and export order levels has fallen to -19, well below the average of -12 since 1976.
Table VF-1, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA
| Mfg 2011 | Average since 1976 | Jul | Sep | Oct | Nov | Dec |
| Synthetic Index | 100 | 105 | 99 | 97 | 96 | 94 |
| Recent Changes in Output | 5 | 15 | 4 | 0 | 4 | -6 |
| Finished- Goods Inventory Level | 13 | 1 | 12 | 14 | 18 | 14 |
| Demand and Total Order Levels | -17 | -10 | -18 | -19 | -17 | -26 |
| Demand and Export Order Levels | -12 | -5 | -15 | -19 | -25 | -19 |
| Personal Production Expectations | 5 | 6 | 6 | 3 | -5 | -2 |
| General Production Expectations | -8 | 3 | -30 | -30 | -35 | -37 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111216
Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index falls during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011.
Chart VF-1, France, INSEE Business Climate Synthetic Index
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111216
Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions but rebounded in Oct and Nov.
Chart VF-2, INSEE Business Climate Turning Point Indicator
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111216
Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov and Dec.
Chart VF-3, Climate General Production, Personal Production and Recent Changes in Output of INSEE
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111216
The Business Climate Indicator for France of the INSEE business tendency surveys in Table VF-2 deteriorates slightly in Dec to 92 but is 10 points below its level of 105 in Jul. Retail trade has fallen from 102 in Jul to 93 in Nov. Services has fallen from 102 in Jul to 93 in Dec, which is slightly lower than 95 in Oct. Household confidence at 79 in Nov is well below the average level of 100 between Jan 1987 and Dec 2010.
Table VF-2, France, Confidence Indicators
| 2011 | Average | Jul | Sep | Oct | Nov | Dec |
| France | 100 | 105 | 96 | 95 | 93 | 92 |
| Business Climate Mfg | 100 since 1976 | 105 | 99 | 97 | 95 | 94 |
| Household Confidence | 100 between Jan 1987 and Dec 2010 | 82 | 80 | 82 | 79 | |
| Wholesale trade Business Climate | 100 since 1979 | 105 | 99 | NA | 95 | NA |
| Retail Trade | 100 | 102 | 93 | 95 | 93 | 93 |
| Services | 100 | 103 | 95 | 94 | 92 | 91 |
| Building | 100 | 102 | 101 | 100 | 99 | 99 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20111216
VG Italy. The Markit/ADACI Business Activity Index rose from 43.9 in Oct to 45.8 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8900). Business activity in Italian services has contracted during seven consecutive months. Phil Smith, economist at Markit and author of the Italy Services PMI®, finds increasing evidence that the economy of Italy may have moved into recession during the second half of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8900). Cost inflation fell to the lowest since Feb 2010. The Markit/ADACI Italy Purchasing Managers’ Index® (PMI®) rose slightly from the 28-month low of 43.3 in Oct to 44.0 in Nov in the fourth month of deterioration of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8842). The pace of decline of new business for Italy’s manufacturing continued at the two-and-a half year low registered in Oct and export business declined at the fastest rhythm since Aug 2009. Table IT provides the data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Nov month ∆%: -0.1 |
| Producer Price Index | Oct month ∆%: -0.2 Blog 12/04/11 |
| GDP Growth | IIQ2011/IIQ2010 SA ∆%: 0.8 |
| Labor Report | Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11 |
| Industrial Production | Oct month ∆%: minus 0.9 |
| Retail Sales | Sep month ∆%: -0.4 Sep 12 months ∆%: minus 1.6 Blog 11/27/11 |
| Business Confidence | Mfg Nov 94.4, Jun 100.2 Construction Oct 80.1, Jun 74.5 Blog 12/04/11 |
| Consumer Confidence | Consumer Confidence Nov 96.5, Oct 93.3 Economy Nov 83.4, Oct 76.0 Blog 11/27/11 |
| Trade Balance | Balance Sep SA -€ 1350 million versus Aug -€ 2405 |
Links to blog comments in Table IT: 12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html
11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html
09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html
VH United Kingdom. The Markit/CIPS UK Services PMI® finds a recurring pattern of weakness in manufacturing partly compensated by relatively stronger services. The Markit/CIPS Business Activity Index registered 52.1 in Nov, suggesting modest growth somewhat higher than 51.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8903). The index has exceeded the no change zone of 50 in all the first ten months of 2011. Chris Williamson, Chief Economist at Markit, finds that the sharp drop of manufacturing combined with modest improvement in services suggests stagnation of the UK economy in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8903).The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) declined to 47.6 in Nov from the upwardly revised 47.8 in Oct for the lowest level since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8853). There have been three consecutive monthly declines of manufacturing output in the UK and the rate of decline in Nov was the fastest in more than two-and-a-half year. Declining new orders determined the decline in output as a result of weak domestic and international markets. Table UK provides the data table for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | Nov month ∆%: 0.2 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IIIQ2011 prior quarter ∆% 05; year earlier same quarter ∆%: 0.5 |
| Industrial Production | Oct 2011/Oct 2010 NSA ∆%: Industrial Production minus 1.7; Manufacturing 0.3 |
| Retail Sales | Nov month SA ∆%: -0.4 |
| Labor Market | Aug-Oct Unemployment Rate: 8.3% |
| Trade Balance | Balance Oct minus ₤1,552 million |
Links to blog comments in Table UK: 12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html
12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html
11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html
Labor market statistics of the UK for the quarter Aug-Oct 2011 are provided in Table VH-1. The unemployment rate rose to 8.3 percent and the number unemployed increased 128,000 in Aug-Oct, reaching 2.64 million. There are 868,000 unemployed over one year and 430,000 unemployed over two years. The employment rate is 70.3 percent. Earnings growth including bonuses was 2.0 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 5.0 percent, unchanged in the quarter. There are 7.82 million people working part time in Jul-Sep. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992.
Table VH-1, UK, Labor Market Statistics
| Quarter Aug/Oct 2011 | |
| Unemployment Rate | 8.3% +0.4 % points 0n quarter, highest since Jan 1996 |
| Number Unemployed | (1) +128,000 in Aug-Oct to reach 2.64 million, highest unemployed number since Sep 1994 (2) Unemployment rate 16 to 24 years of age +1.2 % points to 22.0% of that age group; number unemployed 16 to 24 years up 54,000 to 1.03 million; unemployment rate and number for 16-24 years highest since 1992 when records begin |
| Number Unemployed > one and two years | (1) Number unemployed over one year: 868,000 Aug-Oct, 19,000 on quarter (2) Number unemployed over two years: 430,000 Aug-Oct, +15,000 on quarter |
| Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking or are unable to work) | (1) 23.2%, down 0.1 % points on quarter (2) Economically inactive 16-64 years +54,000 on quarter to 9.33 million, +37,000 over year earlier |
| Employment Rate | 70.3% Aug-Oct, down 0.2 % points on quarter |
| Number Employed | (1) Down 63,000 on quarter (2) Down 14,000 on year to reach 29.11 million, lower than peak of 29.57 million in Mar-May 2008 (3) Number of employees down 252,000 on quarter, fastest decline since 1992 (when records begin) (4) Self-employed +166,000 on quarter to 4.14 million, largest number since 1992 (5) Number in other job categories +23,000 to 201,000 |
| Earnings Growth Rates Year on Year | (1) Total +2.0% (including bonuses) over year earlier, down 0.3% on Jul-Sep; private sector rose 1.8% on year earlier, public sector rose 2.1% on year earlier (2) Regular +1.8% (excluding bonuses) over year earlier, down 0.1 % points on Jul-Sep |
| Full-time and Part-time | (1) Number full-time 21.28 million, down 55,000 on quarter (2) Number part-time 7.82 million in Jul-Sep, down 8,000 on quarter |
| Nov 2011 | |
| Claimant Count (Jobseeker’s Allowance, JSA) | (1) Latest estimate: 1.60 million in Nov; +3,000 since Oct and +138,000 on year earlier (2) Number claiming JSA for up to six month 962,000 +129,000 from prior year (rate: 5.0%, unchanged in quarter but +0.4 percentage points from year earlier) |
Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2011/index.html
Table VH-2 UK provides indicators of the labor force survey of the UK for Aug-Oct 2011 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.9 percent to 8.3 percent.
Table VH-2, UK, Labor Force Survey Indicators
| LFHP | EMP | PART | UNE | RATE | |
| Aug-Oct 11 | 40,181 | 29,107 | 70.3 | 2,638 | 8.3 |
| May-Jul 11 | 40,176 | 29,169 | 70.5 | 2,510 | 7.9 |
| Feb-Apr 11 | 40,133 | 29,239 | 70.6 | 2,430 | 7.7 |
| Nov-Jan 11 | 40,088 | 29,159 | 70.5 | 2,518 | 7.9 |
| Aug-Oct 11 | 40,045 | 28,121 | 70.6 | 2,499 | 7.9 |
| Aug-Oct 09 | 39,834 | 28,892 | 70.6 | 2,480 | 7.9 |
Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 to 64 in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed in thousands ; Rate: Number Unemployed as % of Employed plus Unemployed
Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2011/index.html
The volume of retail sales in the UK fell 0.4 percent in Nov and rose 0.7 percent in the 12 months ending in Nov, as shown in Table VH-3. The annual equivalent rate in Jan-Nov is 1.9 percent. There has been significant volatility in monthly retail sales in the UK.
Table VH-3, UK, Volume of Retail Sales ∆%
| Month SA ∆% | 12 Months ∆% | |
| Nov 2011 | -0.4 | 0.7 |
| Oct | 1.0 | 1.1 |
| Sep | 0.6 | 0.5 |
| Aug | -0.5 | -0.8 |
| Jul | 0.0 | -0.5 |
| Jun | 0.6 | -0.2 |
| May | -1.5 | -0.4 |
| Apr | 1.2 | 2.2 |
| Mar | 0.3 | 0.4 |
| Feb | -1.1 | 0.3 |
| Jan | 1.6 | 3.9 |
| AE ∆% Jan-Out | 1.9 | |
| Dec 2010 | -1.1 | -1.8 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/index.html
Retail sales in the UK struggle with relatively high inflation. Table VH-4 provides the 12 month percentage change of the implied deflator of UK retail sales. The implied deflator of all retail sales rose 3.6 percent in the 12 months ending in Nov while that of sales excluding fuel rose 2.6 percent. Both 12 months percentage changes of implied deflators for total sales and excluding fuel were lower in Nov in this new wave of lower commodity prices because of risk aversion. The implied deflator of auto fuel sales rose to 17.0 in Sep, which is the highest 12 month increase in 2011, but then declined to 14.8 percent in Oct and 12.6 percent in Nov. The percentage change of the implied deflator of sales of food stores at 4.6 percent in Nov is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 as shown in Table VH-4. UK inflation is particularly sensitive to increases in commodity prices.
Table VH-4, UK, 12 Months Rates Implied Deflator of Retail Sales ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| Nov 2011 | 3.6 | 2.6 | 4.6 | 1.3 | 12.6 |
| Oct | 4.4 | 3.2 | 5.0 | 1.8 | 14.8 |
| Sep | 4.9 | 3.4 | 6.0 | 1.2 | 17.0 |
| Aug | 5.2 | 3.8 | 5.9 | 2.1 | 16.3 |
| Jul | 4.9 | 3.7 | 5.9 | 1.9 | 14.5 |
| Jun | 4.4 | 3.1 | 6.0 | 0.8 | 14.5 |
| May | 4.4 | 3.2 | 5.5 | 1.5 | 13.2 |
| Apr | 4.1 | 3.1 | 4.7 | 1.7 | 12.3 |
| Mar | 4.1 | 2.7 | 4.2 | 1.5 | 15.0 |
| Feb | 4.7 | 3.4 | 5.4 | 1.6 | 15.1 |
| Jan | 3.8 | 2.6 | 5.3 | 0.8 | 14.5 |
| Dec 2010 | 3.1 | 2.4 | 5.1 | 0.6 | 12.4 |
| Dec 2009 | 3.4 | 2.0 | 2.1 | 1.4 | 17.0 |
| Dec 2008 | -0.5 | 0.2 | 6.9 | -4.4 | -9.7 |
| Dec 2007 | 1.7 | 0.4 | 3.9 | -2.0 | 15.4 |
| Dec 2006 | 1.0 | 0.8 | 3.3 | -1.1 | 1.1 |
| Dec 2005 | -0.4 | -1.0 | 1.3 | -2.6 | 6.6 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/index.html
Chart VH-1 of the UK Office for National Statistics provides the retail sales index of the UK from Aug 2010 to Oct 2011. Retail sales trended upwardly into Sep and Oct.
Chart VH-1, UK, Retail Sales Index SA
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/rsi/retail-sales/october-2011/sum.html
http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/sum.html
UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Growth of total volume of sales in Sep by 1.0 percent and Oct by 1.0 percent interrupted monthly declines such as minus 1.5 percent in May and minus 0.5 percent in Aug. The all retail index fell 0.4 percent in Nov with declines in all major categories with exception of an increase of 1.9 percent in auto fuel.
Table VH-5, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| Nov 2011 | -0.4 | -0.7 | -0.8 | -1.0 | 1.9 |
| Oct | 1.0 | 0.9 | 1.1 | 1.1 | 1.1 |
| Sep | 0.6 | 0.7 | 0.0 | 1.2 | -0.4 |
| Aug | -0.5 | -0.4 | 0.0 | -0.9 | -0.9 |
| Jul | 0.0 | -0.1 | 0.9 | -0.5 | 0.8 |
| Jun | 0.6 | 0.8 | 0.4 | 0.6 | -1.1 |
| May | -1.5 | -1.8 | -3.6 | -0.7 | 0.8 |
| Apr | 1.2 | 1.4 | 2.7 | 0.3 | -0.1 |
| Mar | 0.3 | 0.4 | 1.2 | -0.2 | -0.4 |
| Feb | -1.1 | -1.3 | -0.8 | -1.9 | 0.9 |
| Jan | 1.6 | 1.0 | 0.1 | 1.7 | 6.5 |
| Dec 2010 | -1.1 | -0.5 | -1.5 | -0.5 | -5.9 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/index.html
Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales grew 0.7 percent in the 12 months ending in Nov with increase of 0.5 percent in sales excluding auto fuel.
Table VH-6, UK, Growth of Retail Sales Volume by Component Groups 12 Month ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| Nov 2011 | 0.7 | 0.5 | -0.6 | -0.7 | 2.7 |
| Oct | 1.1 | 1.1 | 0.9 | 0.0 | 1.3 |
| Sep | 0.5 | 0.3 | -0.2 | -1.0 | 2.8 |
| Aug | -0.8 | -1.1 | -0.4 | -3.0 | 1.8 |
| Jul | -0.5 | -0.6 | -0.9 | -2.2 | 2.1 |
| Jun | -0.2 | -0.8 | -3.9 | 0.2 | 2.8 |
| May | -0.4 | -0.5 | -3.2 | -0.3 | 2.2 |
| Apr | 2.2 | 2.0 | 1.7 | 1.0 | 3.7 |
| Mar | 0.4 | 0.0 | -1.0 | -0.2 | 3.9 |
| Feb | 0.3 | -0.1 | -2.3 | 0.1 | 4.6 |
| Jan | 3.9 | 3.6 | -2.4 | 7.5 | 7.3 |
| Dec 2010 | -1.8 | -1.1 | -3.8 | 0.2 | -8.1 |
| Dec 2009 | 1.4 | 2.1 | 2.5 | 1.0 | -3.9 |
| Dec 2008 | 1.3 | 2.6 | -1.1 | 4,3 | -9.0 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/index.html
Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to the 12 months percentage changes of value and volume of retail sales in the UK. (1) The volume of retail sales increased 0.7 percent in the 12 months ending in Nov. Sales of predominantly food stores with weight of 41.7 percent fell 0.6 percent in the 12 months ending in Nov, contributing minus 0.3 percentage points. Mostly nonfood stores with weight of 43.2 percent fell 0.7 percent and contributed minus 0.3 percentage points. Positive contributions to 12-month percentage changes of volume were made by non-store retailing with weight of 4.9 percent, growth of 18.9 percent and positive contribution of 1.0 percentage points and automotive fuel with weight of 10.2 percent, growth of 2.7 percent and positive contribution of 0.3 percentage points. The value of retail sales increased 4.6 percent in the 12 months ending in Nov. There were positive contributions to all general categories of retails sales: 1.7 percentage points for predominantly food stores, 0.3 percentage points for predominantly nonfood stores, 1.0 percentage points for non-store retailing and 1.6 percentage points for automotive fuel.
Table VH-7, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors
| Nov 2011 | Weight | Volume SA | PP Cont. | Value SA | PP Cont. |
| All Retailing | 100.00 | 0.7 | 4.6 | ||
| Mostly | 41.7 | -0.6 | -0.3 | 4.1 | 1.7 |
| Mostly Nonfood Stores | |||||
| Total | 43.2 | -0.7 | -0.3 | 0.7 | 0.3 |
| Non- | 7.8 | 2.7 | 0.2 | 3.1 | 0.2 |
| Textile, Clothing & Footwear | 12.2 | 0.1 | 0.0 | 2.9 | 0.4 |
| Household Goods Stores | 9.7 | 0.1 | 0.0 | 0.4 | 0.0 |
| Other | 13.5 | -4.0 | -0.5 | -2.5 | -0.3 |
| Non-store Retailing | 4.9 | 18.9 | 1.0 | 19.1 | 1.0 |
| Automotive Fuel | 10.2 | 2.7 | 0.3 | 15.4 | 1.6 |
Cont.: Contribution
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2011/index.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Table VI-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 9.4 percent by Fri Dec 16, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.
Table VI-1, Volatility of Assets
| DJIA | 10/08/02-10/01/07 | 10/01/07-3/4/09 | 3/4/09- 4/6/10 | |
| ∆% | 87.8 | -51.2 | 60.3 | |
| NYSE Financial | 1/15/04- 6/13/07 | 6/13/07- 3/4/09 | 3/4/09- 4/16/07 | |
| ∆% | 42.3 | -75.9 | 121.1 | |
| Shanghai Composite | 6/10/05- 10/15/07 | 10/15/07- 10/30/08 | 10/30/08- 7/30/09 | |
| ∆% | 444.2 | -70.8 | 85.3 | |
| STOXX EUROPE 50 | 3/10/03- 7/25/07 | 7/25/07- 3/9/09 | 3/9/09- 4/21/10 | |
| ∆% | 93.5 | -57.9 | 64.3 | |
| UBS Com. | 1/23/02- 7/1/08 | 7/1/08- 2/23/09 | 2/23/09- 1/6/10 | |
| ∆% | 165.5 | -56.4 | 41.4 | |
| 10-Year Treasury | 6/10/03 | 6/12/07 | 12/31/08 | 4/5/10 |
| % | 3.112 | 5.297 | 2.247 | 3.986 |
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 12/16 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.304 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 12/16 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3484 |
| New House | 1963 | 1977 | 2005 | 2009 |
| Sales 1000s | 560 | 819 | 1283 | 375 |
| New House | 2000 | 2007 | 2009 | 2010 |
| Median Price $1000 | 169 | 247 | 217 | 203 |
| 2003 | 2005 | 2007 | 2010 | |
| CPI | 1.9 | 3.4 | 4.1 | 1.5 |
Sources: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.census.gov/const/www/newressalesindex_excel.html
http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Table VI-2 extracts four rows of Table VI-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VI-4 below, the dollar has devalued again to USD 1.304/EUR or by 9.4 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3484/USD on Fri Dec 16, 2011, or by an additional 6.9 percent, for cumulative revaluation of 23.3 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-3 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Nov 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.
Table VI-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
| USD/EUR | 12/26/03 | 7/14/08 | 6/07/10 | 12/16 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.304 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 12/16 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3484 |
| Weekly Rates | 11/25/ 2011 | 12/02/ 2011 | 12/09/ | 12/16/ 2011 |
| CNY/USD | 6.3816 | 6.3603 | 6.3644 | 6.3484 |
| ∆% from Earlier Week* | -0.4 | 0.3 | -0.1 | 0.3 |
*Negative sign is depreciation, positive sign is appreciation
Source: Table VI-1 and same table in earlier blog posts.
Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table VI-3. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.
Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| US | 15065 | -7.9 | -3.1 | 72.6 | -3.1 | -2.2 | 86.7 |
| Japan | 5855 | -8.9 | 2.5 | 130.5 | -8.4 | 2.4 | 160.0 |
| UK | 2481 | -5.7 | -2.7 | 72.9 | 0.4 | -0.9 | 75.2 |
| Euro | 13355 | -1.5 | 0.1 | 68.6 | 1.5 | 0.5 | 69.3 |
| Ger | 3629 | 0.4 | 5.0 | 56.9 | 2.1 | 4.7 | 55.3 |
| France | 2808 | -3.4 | -2.7 | 80.9 | -2.5 | 0.6 | 83.9 |
| Italy | 2246 | 0.5 | -3.5 | 100.4 | 4.5 | -2.0 | 96.7 |
| Can | 1759 | -3.7 | -3.3 | 34.9 | 0.3 | -2.6 | 35.1 |
| China | 6988 | -1.6 | 5.2 | 22.2 | 0.1 | 7.0 | 12.9 |
| Brazil | 2518 | 3.2 | -2.3 | 38.6 | 2.9 | -3.2 | 34.1 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
FD is primary except total for China; Debt is net except gross for China
Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx
There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VI-1 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill recession. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table VI-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 12/16/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. After the surge in the week of Dec 2, mixed performance of markets in the week of Dec 9 and renewed risk aversion in the week of Dec 16 there are now four financial values with negative change in valuation in column “∆% Trough to 12/16/11:” NYSE Financial minus 7.7 percent, Japan’s Nikkei Average minus 4.8 percent, Shanghai Composite minus 6.6 percent and STOXX 50 minus 1.1 percent. The highest valuations are by US equities indexes: DJIA 22.5 percent and S&P 500 19.3 percent. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 22.5 percent from the trough and of the S&P 500 by 19.3 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. 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. Before the current round of risk aversion, all assets in the column “∆% Trough to 12/16/11” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations show increases of less than 10 percent: Dow Global is 2.9 percent above the trough; Dow Asia Pacific is now higher by 0.3 percent; and Dax is 0.6 percent above the trough on May 25, 2010. Japan’s Nikkei Average is 4.8 percent below the trough on Aug 31, 2010 and 26.3 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8401.72 on Fri Dec 16, which is 18.1 percent lower than 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 9.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 12/16/2011” in Table VI-4 shows declines of all risk financial assets in the week of Dec 16. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. 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 12/16/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Dec 2, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 12/16/11” but also relative to the peak in column “∆% Peak to 12/16/11.” There are now only two US equity indexes above the peak in Table VI-4: DJIA 5.9 percent and S&P 500 0.2 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 26.4 percent, Nikkei Average by 26.3 percent, Shanghai Composite by 29.7 percent, STOXX 50 by 16.3 percent, Dow Global by 16.1 percent and Dow Asia Pacific by 12.2 percent. 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 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. The situation of risk financial assets has worsened.
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 12/16 /11 | ∆% Week 12/16/ 11 | ∆% Trough to 12/16 11 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 5.9 | -2.6 | 22.5 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 0.2 | -2.8 | 19.3 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -26.4 | -4.3 | -7.7 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -16.1 | -4.3 | 2.9 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -12.2 | -2.4 | 0.3 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -26.3 | -1.6 | -4.8 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -29.7 | -3.9 | -6.6 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -16.3 | -2.3 | -1.1 |
| DAX | 4/26/ | 5/25/ | -10.5 | -9.9 | -4.8 | 0.6 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 13.8 | 2.5 | -9.4 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -5.5 | -4.2 | 10.5 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.847 |
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
Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VI-5 for Dec 2 shows that the S&P 500 is now 0.6 percent above the Apr 26, 2010 level and the DJIA is 5.9 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.
Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from prior date | ∆% DJIA from | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 1 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 8 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16 | -2.6 | 5.9 | -2.8 | 0.6 |
Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014
Table VI, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 15.8 percent to ZAR 8.378/USD on Dec 16, which is still 27.6 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 3.1 percent stronger at SGD 1.306/USD on Dec 16 relative to the trough of depreciation but still stronger by 15.9 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 6.6 percent relative to the trough to BRL 1.851/USD on Dec 16 but still stronger by 23.8 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):
“Copom reduces the Selic rate to 11.00 percent
30/11/2011 7:47:00 PM
Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.
The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”
Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.
Table VI-6, Exchange Rates
| Peak | Trough | ∆% P/T | Dec 16, 2011 | ∆T Dec 16 2011 | ∆P Dec 16 2011 | |
| EUR USD | 7/15 | 6/7 2010 | 12/16 2011 | |||
| Rate | 1.59 | 1.192 | 1.304 | |||
| ∆% | -33.4 | 8.6 | -21.9 | |||
| JPY USD | 8/18 | 9/15 | 12/16 2011 | |||
| Rate | 110.19 | 83.07 | 77.72 | |||
| ∆% | 24.6 | 6.4 | 29.5 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 12/16 2011 | |||
| Rate | 1.225 | 1.025 | 0.936 | |||
| ∆% | 16.3 | 8.7 | 23.6 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 12/16 2011 | |||
| Rate | 2.006 | 1.388 | 1.554 | |||
| ∆% | -44.5 | 10.7 | -29.1 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 12/16 | |||
| Rate | 1.0215 | 1.6639 | 0.996 | |||
| ∆% | -62.9 | 39.7 | 1.7 | |||
| ZAR USD | 10/22 2008 | 8/15 | 12/16 2011 | |||
| Rate | 11.578 | 7.238 | 8.378 | |||
| ∆% | 37.5 | -15.8 | 27.6 | |||
| SGD USD | 3/3 | 8/9 | 12/16 | |||
| Rate | 1.553 | 1.348 | 1.306 | |||
| ∆% | 13.2 | 3.1 | 15.9 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 12/16 | |||
| Rate | 7.813 | 7.752 | 7.783 | |||
| ∆% | 0.8 | -0.4 | 0.4 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 12/16 2011 | |||
| Rate | 2.43 | 1.737 | 1.851 | |||
| ∆% | 28.5 | -6.6 | 23.8 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 12/16 | |||
| Rate | 22.19 | 18.693 | 19.42 | |||
| ∆% | 15.7 | -3.9 | 12.5 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 12/16 2011 | |||
| Rate | 9.313 | 7.108 | 6.92 | |||
| ∆% | 23.7 | 2.6 | 25.7 | |||
| CNY USD | 7/20 2005 | 7/15 | 12/16 | |||
| Rate | 8.2765 | 6.8211 | 6.3484 | |||
| ∆% | 17.6 | 6.9 | 23.3 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.
Chart VI-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar
Source: Board of Governors of the Federal Reserve System
Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.847 percent at the close of market on Fri Dec 16 would be equivalent to price of 107.0741 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.7 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Dec 14, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2885 billion, or $2.9 trillion, with portfolio of long-term securities of $2609 billion, or $2.6 trillion, consisting of $1577 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $106 billion Federal agency debt securities and $858 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1613 billion or $1.6 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.
Table VI-7, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note
| Date | Yield | Price | ∆% 11/04/10 |
| 05/01/01 | 5.510 | 78.0582 | -22.9 |
| 06/10/03 | 3.112 | 95.8452 | -5.3 |
| 06/12/07 | 5.297 | 79.4747 | -21.5 |
| 12/19/08 | 2.213 | 104.4981 | 3.2 |
| 12/31/08 | 2.240 | 103.4295 | 2.1 |
| 03/19/09 | 2.605 | 100.1748 | -1.1 |
| 06/09/09 | 3.862 | 89.8257 | -11.3 |
| 10/07/09 | 3.182 | 95.2643 | -5.9 |
| 11/27/09 | 3.197 | 95.1403 | -6.0 |
| 12/31/09 | 3.835 | 90.0347 | -11.1 |
| 02/09/10 | 3.646 | 91.5239 | -9.6 |
| 03/04/10 | 3.605 | 91.8384 | -9.3 |
| 04/05/10 | 3.986 | 88.8726 | -12.2 |
| 08/31/10 | 2.473 | 101.3338 | 0.08 |
| 10/07/10 | 2.385 | 102.1224 | 0.8 |
| 10/28/10 | 2.658 | 99.7119 | -1.5 |
| 11/04/10 | 2.481 | 101.2573 | - |
| 11/15/10 | 2.964 | 97.0867 | -4.1 |
| 11/26/10 | 2.869 | 97.8932 | -3.3 |
| 12/03/10 | 3.007 | 96.7241 | -4.5 |
| 12/10/10 | 3.324 | 94.0982 | -7.1 |
| 12/15/10 | 3.517 | 92.5427 | -8.6 |
| 12/17/10 | 3.338 | 93.9842 | -7.2 |
| 12/23/10 | 3.397 | 93.5051 | -7.7 |
| 12/31/10 | 3.228 | 94.3923 | -6.7 |
| 01/07/11 | 3.322 | 94.1146 | -7.1 |
| 01/14/11 | 3.323 | 94.1064 | -7.1 |
| 01/21/11 | 3.414 | 93.4687 | -7.7 |
| 01/28/11 | 3.323 | 94.1064 | -7.1 |
| 02/04/11 | 3.640 | 91.750 | -9.4 |
| 02/11/11 | 3.643 | 91.5319 | -9.6 |
| 02/18/11 | 3.582 | 92.0157 | -9.1 |
| 02/25/11 | 3.414 | 93.3676 | -7.8 |
| 03/04/11 | 3.494 | 92.7235 | -8.4 |
| 03/11/11 | 3.401 | 93.4727 | -7.7 |
| 03/18/11 | 3.273 | 94.5115 | -6.7 |
| 03/25/11 | 3.435 | 93.1935 | -7.9 |
| 04/01/11 | 3.445 | 93.1129 | -8.0 |
| 04/08/11 | 3.576 | 92.0635 | -9.1 |
| 04/15/11 | 3.411 | 93.3874 | -7.8 |
| 04/22/11 | 3.402 | 93.4646 | -7.7 |
| 04/29/11 | 3.290 | 94.3759 | -6.8 |
| 05/06/11 | 3.147 | 95.5542 | -5.6 |
| 05/13/11 | 3.173 | 95.3387 | -5.8 |
| 05/20/11 | 3.146 | 95.5625 | -5.6 |
| 05/27/11 | 3.068 | 96.2089 | -4.9 |
| 06/03/11 | 2.990 | 96.8672 | -4.3 |
| 06/10/11 | 2.973 | 97.0106 | -4.2 |
| 06/17/11 | 2.937 | 97.3134 | -3.9 |
| 06/24/11 | 2.872 | 97.8662 | -3.3 |
| 07/01/11 | 3.186 | 95.2281 | -5.9 |
| 07/08/11 | 3.022 | 96.5957 | -4.6 |
| 07/15/11 | 2.905 | 97.5851 | -3.6 |
| 07/22/11 | 2.964 | 97.0847 | -4.1 |
| 07/29/11 | 2.795 | 98.5258 | -2.7 |
| 08/05/11 | 2.566 | 100.5175 | -0.7 |
| 08/12/11 | 2.249 | 103.3504 | 2.1 |
| 08/19/11 | 2.066 | 105.270 | 3.7 |
| 08/26/11 | 2.202 | 103.7781 | 2.5 |
| 09/02/11 | 1.992 | 105.7137 | 4.4 |
| 09/09/11 | 1.918 | 106.4055 | 5.1 |
| 09/16/11 | 2.053 | 101.5434 | 0.3 |
| 09/23/11 | 1.826 | 107.2727 | 5.9 |
| 09/30/11 | 1.912 | 106.4602 | 5.1 |
| 10/07/11 | 2.078 | 104.9161 | 3.6 |
| 10/14/11 | 2.251 | 103.3323 | 2.0 |
| 10/21/11 | 2.220 | 103.6141 | 2.3 |
| 10/28/11 | 2.326 | 102.6540 | 1.4 |
| 11/04/11 | 2.066 | 105.0270 | 3.7 |
| 11/11/11 | 2.057 | 105.1103 | 3.8 |
| 11/18/11 | 2.003 | 105.6113 | 4.3 |
| 11/25/11 | 1.964 | 105.9749 | 4.7 |
| 12/02/11 | 2.042 | 105.2492 | 3.9 |
| 12/09/11 | 2.065 | 105.0363 | 3.7 |
| 12/16/11 | 1.847 | 107.0741 | 5.7 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
VII Economic Indicators. Crude oil input in refineries was virtually unchanged, falling 0.04 percent to 14,816 thousand barrels per day on average in the four weeks ending on Dec 9 from 14,822 thousand barrels per day in the four weeks ending on Dec 2, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 85.7 percent on Dec 9, 2011, which is almost equal to 85.9 percent on Dec 10, 2010 at 84.9 percent and equal to 85.7 percent on Dec 10, 2010. Imports of crude oil fell 0.7 percent from 8,809 thousand barrels per day on average in the four weeks ending on Dec 2 to 8,749 thousand barrels per day in the week of Dec 9. Almost identical utilization in refineries but with decreasing imports resulted in decrease of commercial crude oil stocks by 1.9 million barrels from 336.1 million barrels on Dec 2 to 334.2 million barrels on Dec 9. Motor gasoline production increased 1.1 percent from 9,230 thousand barrels per day in the week of Dec 2 to 9,332 thousand barrels per day on average in the week of Dec 9. Gasoline stocks increased 3.8 million barrels and stocks of fuel oil increased 0.5 million barrels. Supply of gasoline fell from 9,054 thousand barrels per day on Dec 10, 2010, to 8,650 thousand barrels per day on Dec 9, 2011, or by 4.5 percent, while fuel oil supply rose 1.9 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VII-1 also shows increase in the WTI price of crude oil by 13.2 percent from Dec 10, 2010 to Dec 9, 2011. Gasoline prices rose 10.3 percent from Dec 13, 2010 to Dec 12, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.
Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 12/09/11 | 12/02/11 | 12/10/10 |
| Crude Oil Refineries Input | 14,816 Week ∆%: -0.04 | 14,822 | 14,569 |
| Refinery Capacity Utilization % | 85.7 | 85.7 | 85.9 |
| Motor Gasoline Production | 9,332 Week ∆%: +1.1 | 9,230 | 9,117 |
| Distillate Fuel Oil Production | 4,902 Week ∆%: +1.2 | 4,845 | 4,429 |
| Crude Oil Imports | 8,749 Week ∆%: -0.7 | 8,809 | 8,520 |
| Motor Gasoline Supplied | 8,650 ∆% 2011/2010= -4.5% | 8,640 | 9,054 |
| Distillate Fuel Oil Supplied | 3,796 ∆% 2011/2010 = +1.9% | 3,855 | 3,727 |
| 12/09/11 | 12/02/11 | 12/10/10 | |
| Crude Oil Stocks | 334.2 | 336.1 | 346.0 |
| Motor Gasoline Million B | 218.8 ∆= +3.8 MB | 215.0 | 214.8 |
| Distillate Fuel Oil Million B | 141.5 | 141.0 | 161.3 |
| WTI Crude Oil Price $/B | 99.41 ∆% 2011/2010 13.2 | 100.20 | 87.81 |
| 12/12/11 | 12/05/11 | 12/13/10 | |
| Regular Motor Gasoline $/G | 3.286 ∆% 2011/2010 | 3.290 | 2.980 |
B: barrels; G: gallon
Chart VII-1 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but have been increasing in the past few weeks.
Chart VII-1, US, Weekly Crude Oil Ending Stocks
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W
Chart VII-2 of the US Energy Information Administration provides closer view of US crude oil stocks since Dec 2009. Crude oil stocks rose in a clear trend throughout 2010 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower. The final part of the chart shows the increase in oil stocks in the weeks of Nov 25 and Dec 2.
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.
![clip_image035[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfilesE1C6CC\WTI1219RCLC1d%5b4%5d.jpg "clip_image035[1]")
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims fell 19,000 from 385,000 on Dec 3 to 366,000 on Dec 10. Claims not adjusted for seasonality fell 95,506, from 528,793 on Dec 3 to 433,287 on Dec 10. There is strong seasonality in layoffs early in Dec.
Table VII-2, US, Initial Claims for Unemployment Insurance
| 2011 | SA | NSA | 4-week MA SA |
| Dec 10 | 366,000 | 433,287 | 387,750 |
| Dec 3 | 385,000 | 528,793 | 394,250 |
| Change | -19,000 | -95,506 | -6,500 |
| Nov 26 | 404,000 | 372,640 | 396,250 |
| Prior Year | 427,000 | 491,776 | 426,750 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 760,481 on Dec 6, 2008 to 491,766 on Dec 11, 2010 and now to 433,287 on Dec 10, 2011. There is strong indication of significant decline in the level of layoffs in the US.
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Dec 02, 2000 | 390,088 | 321,000 |
| Dec 08, 2001 | 491,836 | 393,000 |
| Dec 07, 2002 | 547,430 | 425,000 |
| Dec 6, 2003 | 486,202 | 367,000 |
| Dec 11, 2004 | 370,604 | 316,000 |
| Dec 10, 2005 | 391,961 | 327,000 |
| Dec 09, 2006 | 384,123 | 311,000 |
| Dec 08, 2007 | 423,130 | 331,000 |
| Dec 06, 2008 | 760,481 | 563,000 |
| Dec 12, 2009 | 561,655 | 496,000 |
| Dec 11, 2010 | 491,776 | 427,000 |
| Dec 10, 2011 | 433,287 | 366,000 |
Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp
VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In Jul-Nov 2011, CPI inflation for all items seasonally adjusted was 2.7 percent in annual equivalent, that is, compounding inflation in Jul-Nov and assuming it would be repeated for a full year. In the 12 months ending in Nov, CPI inflation of all items not seasonally adjusted was 3.4 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 1.9 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is minus 0.01 percent for three months, 0.03 percent for six months, 0.10 percent for 12 months, 0.22 percent for two years, 0.34 percent for three years, 0.80 percent for five years, 1.30 percent for seven years, 1.85 percent for ten years and 2.85 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.
Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| ∆% 12 Months Nov 2011/Nov | ∆% Annual Equivalent Jul-Nov 2011 SA | |
| CPI All Items | 3.4 | 2.7 |
| CPI ex Food and Energy | 2.2 | 1.9 |
Source: http://www.bls.gov/news.release/pdf/cpi.pdf
VII Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first three quarters of 1.2 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 29 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. The crucial issue of “let’s twist again “monetary policy is if lowering the yields of long-term Treasury securities would have any impact on investment and consumption or aggregate demand. The decline of long-term yields of Treasury securities would have to cause decline of yields of asset-backed securities used to securitize loans for investment by firms and purchase of durable goods by consumers. The decline in costs of investment and consumption of durable goods would ultimately have to result in higher investment and consumption. It is possible that the decline in yields captured by event studies is ephemeral. The decline in yields just after “let’s twist again” monetary policy was caused by the flight out of risk financial assets into Treasury securities, which is the opposite of the desired effect of encouraging risk-taking in asset-backed securities and lending. The yield curve edged upwardly in spite of “let’s twist again monetary policy” (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)
http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10).
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© Carlos M. Pelaez, 2010, 2011
Appendix I. The Great Inflation
Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”
The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:
“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”
Chart I1, Brazil, Phillips Circuit 1963-1987
©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4.5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.
Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994
| 1994 | FF | 30Y | 30P | 10Y | 10P | MOR | CPI |
| Jan | 3.00 | 6.29 | 100 | 5.75 | 100 | 7.06 | 2.52 |
| Feb | 3.25 | 6.49 | 97.37 | 5.97 | 98.36 | 7.15 | 2.51 |
| Mar | 3.50 | 6.91 | 92.19 | 6.48 | 94.69 | 7.68 | 2.51 |
| Apr | 3.75 | 7.27 | 88.10 | 6.97 | 91.32 | 8.32 | 2.36 |
| May | 4.25 | 7.41 | 86.59 | 7.18 | 88.93 | 8.60 | 2.29 |
| Jun | 4.25 | 7.40 | 86.69 | 7.10 | 90.45 | 8.40 | 2.49 |
| Jul | 4.25 | 7.58 | 84.81 | 7.30 | 89.14 | 8.61 | 2.77 |
| Aug | 4.75 | 7.49 | 85.74 | 7.24 | 89.53 | 8.51 | 2.69 |
| Sep | 4.75 | 7.71 | 83.49 | 7.46 | 88.10 | 8.64 | 2.96 |
| Oct | 4.75 | 7.94 | 81.23 | 7.74 | 86.33 | 8.93 | 2.61 |
| Nov | 5.50 | 8.08 | 79.90 | 7.96 | 84.96 | 9.17 | 2.67 |
| Dec | 6.00 | 7.87 | 81.91 | 7.81 | 85.89 | 9.20 | 2.67 |
Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months
Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t
© Carlos M. Pelaez, 2010, 2011
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