Sunday, January 22, 2012

World Inflation Waves, United States Inflation, Euro Zone Survival Risk and World Economic Slowdown: Part II

 

World Inflation Waves, United States Inflation, Euro Zone Survival Risk and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I World Inflation Waves

II United States Inflation

IIA Long-term US Inflation

IIB Current US Inflation

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

V World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI™, produced by JP Morgan and Markit in association with ISM and IPFSM, rose to 53.0 in Dec from 52.0 in Nov, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9032). This index is highly correlated with global GDP, indicating continued growth of the global economy for nearly two years and a half. The US economy drove growth in the global economy in Dec. The HSBC Brazil Services Business Activity Index of the HSBC Brazil Services PMI™, compiled by Markit, rose from 52.6 in Nov to 54.8 in Dec while the HSBC Brazil Composite Output Index rose to 53.2 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8999

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9007). The table “World-Wide Factory Activity, by Country,” of Real Time Economics produced by WSJ Research and published in the Wall Street Journal on Jan 3 (http://blogs.wsj.com/economics/2012/01/03/world-wide-factory-activity-by-country-21/tab/interactive/) shows only nine countries with manufacturing indexes above 50 in Dec: Australia (50.2), Canada (54.0), India (54.2), Japan (50.2), Russia (51.6), Saudi Arabia (57.7), Switzerland (50.7), Turkey (52.9) and the US (53.9). Andre Loes, Chief Economist, Brazil, at HSBC, finds strength in private-sector services at 53.7 in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8999

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9007). The HSBC Brazil Manufacturing PMI™, compiled by Markit, improved slightly from 48.7 in Nov to 49.1 in Dec, indicating the weakest deterioration in seven months of decline of manufacturing business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8982

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8979). The rate of declining of new manufacturing orders was the weakest in seven months. Both internal demand and foreign orders fell in Dec. Andre Loes, Chief Economist, Brazil at HSBC, finds improvement at the margin because of three consecutive months of increases in the PMI, suggesting that the worst conditions have already occurred (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8982

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8979).

VA United States. The Manufacturing ISM Report on Business® purchasing managers’ index jumped 1.2 percentage points from 53.9 in Nov to 52.7 in Dec, indicating continuing growth for 29 consecutive months at a faster rate of change (http://www.ism.ws/ISMReport/MfgROB.cfm). New orders, which are an indicator of future business, rose 0.9 percentage points, from 56.7 in Nov to 57.6 in Dec, indicating growth at a faster rate. The employment index gained 3.3 percentage points from 51.8 in Nov to 55.1 in Dec, indicating growth at a faster rate of change. Prices paid or costs of inputs rose 2.5 percentage points from 45.0 in Nov to 47.5 in Dec, which is the third reading below 50 since May, indicating decline at a slower rate. The Nonmanufacturing Purchasing Managers’ Index of the Institute for Supply Management increased 0.6 percentage points from 52.0 in Nov to 52.6 in Dec, indicating growth at a faster rate (http://www.ism.ws/ISMReport/NonMfgROB.cfm). The Business Activity/Production Index/ was 56.2 in Dec, unchanged from 56.2 in Nov, indicating growth at the same rate. Nonmanufacturing activity has been growing in the US during 29 consecutive months. The index of new orders increased 0.2 percentage points from 53.0 in Nov to 53.2 in Dec, signaling growth at a faster rate. The employment index rose 0.5 percentage points from 48.9 in Nov to 49.4 in Dec, indicating contraction at a slower rate. The prices paid index fell 1.3 percentage points from 62.5 in Nov to 61.2 in Dec, indicating growth at a slower rate. New export orders fell 4.5 percentage points from 55.5 in Nov to 51.0 in Dec while imports increased 5.5 percentage points from 48.5 in Nov to 54.0 in Dec.

Table USA, US Economic Indicators

Consumer Price Index

Dec 12 months NSA ∆%: 3.0; ex food and energy ∆%: 2.2 Nov month ∆%: 0.0; ex food and energy ∆%: 0.1
Blog 01/22/12

Producer Price Index

Dec 12 months NSA ∆%: 4.8; ex food and energy ∆% 3.0
Dec month SA ∆% = -0.1; ex food and energy ∆%: 0.3
Blog 01/22/12

PCE Inflation

Nov 12 months NSA ∆%: headline 2.5; ex food and energy ∆% 1.7
Blog 12/27/11

Employment Situation

Household Survey: Nov Unemployment Rate SA 8.6%
Blog calculation People in Job Stress Nov: 28.9 million NSA
Establishment Survey:
Nov Nonfarm Jobs 100,000; Private +120,000 jobs created 
Oct 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.6%
Blog 12/04/11

Nonfarm Hiring

Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million
Private-Sector Hiring Nov 2011 3.500 million lower by 1.145 million than 4.645 million in Nov 2006
Blog 01/15/12

GDP Growth

BEA Revised National Income Accounts back to 2003
IQ2011 SAAR ∆%: 0.4
IIQ2011 SAAR ∆%: 1.3

IIIQ2011 SAAR ∆%: 1.8

First three quarters AE

∆% 1.2 
Blog 12/27/11

Personal Income and Consumption

Nov month ∆% SA Real Disposable Personal Income (RDPI) 0.0
Nov month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.2
12 months NSA ∆%:
RDPI: -0.1; RPCE ∆%: 1.3
Blog 12/27/11

Quarterly Services Report

IIIQ11/IIQII SA ∆%:
Information 0.6
Professional 0.8
Administrative 1.7
Hospitals -0.9
Blog 12/11/11

Employment Cost Index

IIIQ2011 SA ∆%: 0.3
Sep 12 months ∆%: 2.0
Blog 10/30/11

Industrial Production

Dec month SA ∆%: 0.4
Dec 12 months SA ∆%: 3.7
Capacity Utilization: 78.1
Blog 01/22/12

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 8.19 Dec to Jan 13.48
New Orders: From 5.99 Dec to 13.70 Jan
Blog 01/22/12

Philadelphia Fed Business Outlook Index

General Index from 6.8 Dec to 8.2 Jan
New Orders from 10.7 Dec to 6.5 Jan
Blog 1/22/12

Manufacturing Shipments and Orders

Nov New Orders SA ∆%: minus 1.8; ex transport ∆%: 0.3
12 months Jan-Nov NSA ∆%: 12.3; ex transport ∆% 12.5
Blog 01/08/12

Durable Goods

Nov New Orders SA ∆%: 3.8; ex transport ∆%: 0.3
Jan-Nov months NSA New Orders ∆%: 9.5; ex transport ∆% : 9.1
Blog 12/27/11

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-Nov 2011/2010 ∆%: Total 14.4; Durable Goods: 12.3; Nondurable
Goods 16.2
Blog 01/15/12

Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers

Oct 11/Oct 10 NSA ∆%: Sales Total Business 9.3; Manufacturers 9.7
Retailers 7.0; Merchant Wholesalers 11.0
Blog 01/15/12

Sales for Retail and Food Services

Jan-Dec 2011/Jan-Dec 2010 ∆%: Retail and Food Services: 7.7; Retail ∆% 7.9
Blog 01/15/12

Value of Construction Put in Place

Nov SAAR month SA ∆%: 1.2 Oct 12 months NSA: 0.5
Blog 01/08/12

Case-Shiller Home Prices

Oct 2011/Oct 2010 ∆% NSA: 10 Cities minus 3.0; 20 Cities: minus 3.4
∆% Oct SA: 10 Cities minus 0.5 ; 20 Cities: minus 0.6
Blog 01/01/12

FHFA House Price Index Purchases Only

Oct SA ∆% -0.2;
12 month ∆%: minus 2.7
Blog 12/27/11

New House Sales

Nov month SAAR ∆%:
1.6
Jan-Nov 2011/Jan-Nov 2010 NSA ∆%: minus 6.1
Blog 12/27/11

Housing Starts and Permits

Dec Starts month SA ∆%:

-4.1; Permits ∆%: -0.1
Jan-Dec 2011/2010 NSA ∆% Starts 3.4; Permits  ∆% 1.2
Blog 1/22/12

Trade Balance

Balance Nov SA -$47,752 million versus Oct -$43,271 million
Exports Nov SA ∆%: -0.9 Imports Nov SA ∆%: 1.3
Goods Exports Jan-Nov 2011/2010 NSA ∆%: 17.0
Good Imports Jan-Nov 2011/2010 NSA ∆%: 16.1
Blog 01/15/12

Export and Import Prices

Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6
Blog 01/15/12

Consumer Credit

Nov ∆% annual rate: 9.9
Blog 01/15/12

Net Foreign Purchases of Long-term Treasury Securities

Nov Net Foreign Purchases of Long-term Treasury Securities: $59.8 billion Nov versus Oct -$41.0 billion
Major Holders of Treasury Securities: China $1133 billion; Japan $1039 billion 
Blog 01/22/12

Treasury Budget

Fiscal Year 2012/2011 ∆%: Receipts 4.4; Outlays -2.6; Individual Income Taxes 5.6
Deficit Fiscal Year 2011 $1,296,80 million

Deficit Fiscal Year 2012 Oct-Dec $321,735 million
Blog 01/15/12

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:

1/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or_08.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/2011 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

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

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 0.4 percent in Dec and 3.7 percent in the 12 months ending in Dec, as shown in Table VA-1. In the six months ending in Dec, industrial production grew at the annual equivalent rate of 4.5 percent. Business equipment rose 0.8 percent in Dec and grew 9.5 percent in the 12 months ending in Dec and at the annual equivalent rate of 10.7 percent in the six months Jun-Dec. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “The capacity utilization rate for total industry rose to 78.1 percent, a rate 2.3 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.federalreserve.gov/releases/g17/current/).

Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, % 

2011

Dec

Nov

Oct

Sep

Aug

Jul

Dec

11/

Dec

10

Total

0.4

-0.3

0.6

0.2

0.2

1.1

3.7

Market
Groups

              

Final Products

0.3

-0.5

0.9

0.1

0.5

0.9

3.2

Consumer Goods

0.2

-0.8

0.7

-0.1

0.3

0.8

0.9

Business Equipment

0.8

0.0

1.3

0.7

1.1

1.2

9.5

Non
Industrial Supplies

0.5

-0.9

-0.3

0.5

0.3

0.9

1.8

Construction

1.0

-0.2

0.0

0.4

-0.4

1.3

4.6

Materials

0.6

0.1

0.5

0.3

0.0

1.4

3.1

Industry Groups

              

Manufacturing

0.9

-0.4

0.5

0.5

0.3

0.8

3.7

Mining

0.3

0.5

1.6

0.2

1.1

1.2

6.5

Utilities

-2.7

-0.6

-0.2

-1.3

-1.2

3.3

-6.6

Capacity

78.1

77.8

78.1

77.7

77.6

77.5

1.2

Sources: http://www.federalreserve.gov/releases/g17/current/

Manufacturing increased 0.9 percent in Dec and 3.8 percent in 12 months. 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 ∆%

Dec 2011

0.9

3.8

Nov

-0.3

4.0

Oct

0.5

4.4

Sep

0.5

4.3

Aug

0.2

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.

clip_image002

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.

clip_image004

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.

clip_image006

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 index of general business conditions 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 successive jumps to solid positive growth territory of 9.19 in Dec and 13.48 in Jan, 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 5.99 in Dec and 21.69 in Jan 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 that was consolidated with 21.69 in Jan. 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, jumping to 12.09 in Jan. 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, consolidating at 53.85 in Jan. Expectations of new employees surged from 0.00 in Sep to 6.74 in Oct and jumped to 14.63 in Nov, 24.43 in Dec and even higher at 28.57 in Jan. 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 with minor decline to 17.58 in Jan.

Table VA-3, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index

 

Aug

Sep

Oct

Nov

Dec

Jan

Current Conditions

            

General Business
Conditions

-7.72

-8.82

-8.48

0.61

8.19

13.48

New Orders

-7.82

-8.0

0.16

-2.07

5.99

13.70

Shipments

3.01

-12.88

5.33

9.43

20.06

21.69

Unfilled   Orders

-15.22

-7.61

-4.49

-7.32

-15.12

-5.49

Inventories

-7.61

-11.96

-8.99

-12.2

-3.49

6.59

# Employees

3.26

-5.43

3.37

-3.66

2.33

12.09

Average Employee Workweek

-2.17

-2.17

-4.49

2.44

-2.33

6.59

Expectations Six
Months

            

General Business Conditions

8.70

13.04

6.74

39.02

45.61

54.87

New Orders

6.52

13.04

12.36

35.37

54.65

53.85

Shipments

7.61

13.04

17.98

36.59

51.16

52.75

Unfilled   Orders

-6.52

-6.52

1.12

6.10

8.14

5.49

Inventories

7.61

-2.17

-15.73

2.44

9.30

10.99

# Employees

6.52

0.00

6.74

14.63

24.42

28.57

Average Employee Workweek

-4.35

-6.52

-2.25

8.54

22.09

17.58

Source: http://www.newyorkfed.org/survey/empire/jan2012.pdf

The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct with the movement to 10.8 away from the contraction zone of minus 22.7 in Sep but fell to 3.1 in Nov and then rose to 6.8 in Dec followed by 8.2 in Jan. New orders were signaling increasing future activity, rising from minus 5.5 in Sep to 8.5 in Oct but declined to 3.5 in Nov to rise to 10.7 in Dec and then fall to 6.5 in Jan. Employment or number of workers is stronger with number of employees increasing from 5.0 in Oct to 10.6 in Nov and 11.5 in Dec, remaining at 10.7 in Jan. The average employee workweek increased from minus 11.2 in Aug to 7.1 in Nov but fell to 2.8 in Dec and increased to 3.8 in Jan. 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 28.8 in Oct to 37.7 in Nov, remaining at 40.0 in Dec but increasing to 48.0 in Jan. Expectations of new orders rose from 28.1 in Oct to 36.9 in Nov, 44.1 in Dec and 48.8 in Jan.

Table VA-4, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

 

General
Index

New Orders

Ship-ments

# Workers

Average Work-week

Current

          

Jan 12

8.2

6.5

7.4

10.7

3.8

Dec 11

6.8

10.7

9.1

11.5

2.8

Nov

3.1

3.5

6.0

10.6

7.1

Oct

10.8

8.5

13.6

5.0

4.2

Sep

-12.7

-5.5

-16.6

7.3

-6.2

Aug

-22.7

-22.2

-8.9

-0.9

-11.2

Jul

6.2

0.5

8.2

9.5

-3.9

Future

          

Jan 12

48.0

48.8

47.3

18.5

6.4

Dec 11

40.0

44.1

36.4

10.8

4.5

Nov

37.7

36.9

35.5

25.2

4.0

Oct

28.8

28.1

29.0

15.5

8.4

Sep

25.2

24.6

27.1

14.0

6.8

Aug

6.3

20.6

18.4

11.2

-0.7

Jul

25.8

31.2

26.1

12.9

6.6

Source:

Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

Chart VA-1 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jan 2012. 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 from late 2011 into Jan 2012.

clip_image008

Chart VA-1, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

Chart VA-2 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct. The strength of the first quarter of 2011 has not been recovered.

clip_image009

Chart VA-2, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current New Orders Diffusion Index

Source: Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-5. Housing starts fell 4.1 percent in Dec after jumping 9.1 percent in Nov and falling 2.8 percent in Oct. The increase of 15 percent in Sep was revised to 10.4 percent. Housing permits, indicating future activity fell 0.1 percent in Dec after increasing 9.3 percent in Oct and 5.6 in Nov but falling 5.8 percent in Nov, Monthly rates in starts and permits fluctuate significantly as shown in Table VA-5.

Table VA-5, US, Housing Starts and Permits SSAR Month ∆%

 

Housing 
Starts SAAR

Month ∆%

Housing
Permits SAAR

Month ∆%

Dec 2011

657

-4.1

679

-0.1

Nov

685

9.1

680

5.6

Oct

628

-2.8

644

9.3

Sep

646

10.4

589

-5.8

Aug

585

-4.9

625

4.0

Jul

615

0.0

601

-2.6

Jun

615

11.2

617

1.3

May

553

0.7

609

8.2

Apr

549

-7.4

563

-1.9

Mar

593

14.5

574

7.5

Feb

518

-18.6

534

-6.0

Jan

636

20.9

568

-9.8

Dec 2010

526

-4.5

630

-9.8

Nov

551

2.3

564

1.6

Oct

539

-9.7

555

-1.2

Sep

597

-1.5

562

-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Cumulative housing starts and permits from Jan to Dec 2011 not-seasonally adjusted are provided in Table VA-6. Housing starts increased 3.4 percent in the cumulative of Jan-Dec 2011 relative to the same period in 2010 and in the same period new permits rose 1.2 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 66.4 percent in Jan-Dec 2011 relative to Jan-Dec 2006 and fell 70.7 percent relative to Jan-Dec 2005. Housing permits fell 66.7 percent from Jan-Dec 2006 to Jan-Dec 2011 and fell 71.6 percent from Jan-Dec 2005.

Table VA-6, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

 

Housing Starts

New Permits

Jan-Dec 2011

606.9

611.9

Jan-Dec 2010

586.9

604.6

∆% Jan-Dec 2011/Jan-Dec 2010

3.4

1.2

Jan-Dec 2006

1808.9

1838.0

∆%/Jan-Dec 2011

-66.4

-66.7

Jan-Dec 2005

2068.3

2155.3

∆%/ Jan-Dec 2011

-70.7

-71.6

Source: http://www.census.gov/construction/nrc/pdf/newresconst.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200712.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200612.pdf

Chart VA-3 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-3 shows a mild downward trend or stagnation from mid 2010 to the present.

clip_image011

Chart VA-3, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr020.html

A longer perspective on residential construction in the US is provided by Table VA-7 with annual data from 1960 to 2010. Housing starts fell 71.6 percent from 2005 to 2010, 62.6 percent from 2000 to 2010 and 53.1 percent relative to 1960. Housing permits fell 71.9 percent from 2005 to 2010, 62.0 percent from 2000 to 2010 and 39.4 percent from 1960 to 2010. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-7, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

 

Starts

Permits

2010

586.9

604.6

∆% 2010/2005

-71.6

-71.9

∆% 2010/2000

-62.6

-62.0

∆% 2010/1960

-53.1

-39.4

2009

554,0

583.0

2008

905.5

905.4

2007

1,355,0

1,398.4

2006

1,800.9

1,838.9

2005

2,068.3

2,155.3

∆% 2005/2000

31.8

35.4

2004

1,955.8

2,070.1

2003

1,847.7

1,889,2

2002

1,704.9

1,747.2

2001

1,602.7

1,1637.7

2000

1,568.7

1,592.3

∆% 2000/1990

31.5

43.3

1990

1,192,7

1,110.8

1980

1,292.7

1,190.6

1970

1,433.6

1,351.5

1960

1,252.2

997.6

Source: http://www.census.gov/const/www/newresconstindex.html

Risk aversion channeled funds toward US long-term and short-term securities as shown in Table VA-8. Net foreign purchases of US long-term securities (row C in Table VA-8) in Nov were quite high at $59.8 billion, much higher than $8.2 billion in Oct. Foreign (residents) purchases less sales of US long-term securities (row A in Table VA-8) in Nov were $58.0 billion, much higher than $12.2 billion in Oct. Net US (residents) purchases of long-term foreign securities (row B in Table VA-11) in Oct were $1.9 billion. In Nov,

C = A + B = $58.0 billion + $1.9 billion = $59.8 billion

The is strong demand Table IV-8 in Nov in A1 private purchases by residents overseas of US long-term securities of $40.3 billion of which A11 Treasury securities $30.3 billion and A12 $11.5 billion agency securities and increase of corporate bonds by $3.5 with reduction of $5.1 billion in equities. The sovereign risk crisis in Europe diverted foreign private investment away from risk toward the safe haven of US Treasury securities. Row D shows sharp increase in Nov in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills jumped $26.1 billion (row D11) with foreign official holdings increasing $4.3 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-8, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

 

Nov 2010 12 Months

Nov 2011 12 Months

Oct 2011

Nov 2011

A Foreign Purchases less Sales of
US LT Securities

917.4

539.2

12.2

58.0

A1 Private

776.0

345.7

16.2

40.3

A11 Treasury

537.8

269.6

21.3

30.3

A12 Agency

138.7

51.5

4.1

11.5

A13 Corporate Bonds

-24.7

-15.2

-10.9

3.5

A14 Equities

124.3

39.8

1.8

-5.1

A2 Official

141.4

193.4

-4.0

17.7

A21 Treasury

182.6

178.9

-6.0

23.7

A22 Agency

-40.7

11.8

0.7

-5.3

A23 Corporate Bonds

0.7

-0.5

0.4

1.3

A24 Equities

-1.3

3.2

0.9

-2.0

B Net US Purchases of LT Foreign Securities

-112.0

-108.4

-3.9

1.9

B1 Foreign Bonds

-58.3

-18.6

-1.9

0.9

B2 Foreign Equities

-53.7

-89.8

-2.0

1.0

C Net Foreign Purchases of US LT Securities

805.4

430.8

8.3

59.8

D Increase in Foreign Holdings of Dollar Denominated Short-term 

-90.0

-129.9

-41.0

38.0

D1 US Treasury Bills

-45.3

-109.1

-11.5

26.1

D11 Private

36.4

11.1

1.1

21.8

D12 Official

-81.7

-120.2

-12.7

4.3

D2 Other

-44.7

-20.8

-29.4

11.9

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/tg1394.aspx

Table VA-9 provides major foreign holders of US Treasury securities. China is the largest holder with $1132.6 billion in Nov 2011, slightly lower than $1160.1 billion in Dec 2010. Japan increased its holdings from $882.3 billion in Dec 2010 to $1038.9 billion in Nov. The United Kingdom increased its holdings to $429.4 billion in Nov relative to $411.2 billion in Oct and much higher than $270.4 billion in Dec. Caribbean banking centers increased their holdings from $168.4 billion in Dec 2010 to $185.3 billion in Nov 2011.

Table VA-9, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

 

Nov 2011

Oct 2011

Dec 2010

China

1132.6

1134.1

1160.1

Japan

1038.9

979.0

882.3

United Kingdom

429.4

411.2

270.4

Oil Exporters

232.0

226.2

211.9

Brazil

206.4

209.1

186.1

Caribbean Banking Centers

185.3

175.2

168.4

Taiwan

149.6

150.1

155.1

Switzerland

113.9

131.7

106.8

Hong Kong

105.3

110.7

134.2

Russia

89.7

92.1

151.0

Source: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx#ussecs

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

VB Japan. The Markit/JMMA Purchasing Managers’ Index™ (PMI™) increased from 49.1 in Nov to 50.2 in Dec, which is above the contraction zone of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8968). The index suggests only marginal growth. New export business fell in Dec with the contraction extending over ten months. There was marginal improvement in employment. Alex Hamilton, economist at Markit and author of the report finds better operating conditions in Japan’s manufacturing in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8968). The Markit Japan Services PMI™ Composite Output Index increased from 48.9 in Nov to expansion territory at 50.1 in Dec, suggesting marginal growth of the private sector in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8970). Alex Hamilton, economist at Markit and author of the report, finds that services companies are becoming more guardedly optimistic about future activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8970). The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. There appear to be already some effects on exporting economies in Asia. The HSBC South Korea Manufacturing PMI®, compiled by Markit, fell from 47.1 in Nov to 46.4 in Dec, with the deterioration being the worst since Feb 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8996). Output and new orders fell at higher rates. Ronald Man, economist at HSBC in Asia, finds that employment contracted for the first time in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8996). The HSBC Taiwan PMI™ rose from 43.9 in Nov to 47.1 in Dec, indicating continuing deterioration of manufacturing business in Taiwan but at a slower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8995). Donna Kwok, Economist at HSBC in Asia, finds declining production and new business but slowing deterioration in the second consecutive month. Table JPY provides the country data

Table JPY, Japan, Economic Indicators

Historical GDP and CPI

1981-2010 Real GDP Growth and CPI Inflation 1981-2010
Blog 07/31/11

Corporate Goods Prices

Dec ∆% 0.1
12 months ∆% 1.3
Blog 01/22/12

Consumer Price Index

Nov NSA ∆% minus 0.6
Nov 12 months NSA ∆% -0.5
Blog 01/01/12

Real GDP Growth

IIIQ2011 ∆%: 1.4 on IIQ2011;  IIIQ2011 SAAR 5.6%
∆% from quarter a year earlier: -0.7 %
Blog 12/11/11

Employment Report

Nov Unemployed 2.80 million

Change in unemployed since last year: minus 380 thousand
Unemployment rate: 4.5%
Blog 01/01/12

All Industry Indices

Nov month SA ∆% -1.1
12 months NSA ∆% -1.3

Blog 01/22/12

Industrial Production

Nov SA month ∆%: minus 2.6
12 months NSA ∆% minus 0.4
Blog 01/01/12

Machine Orders

Total Nov ∆% 14.7

Private ∆%: 21.5
Nov ∆% Excluding Volatile Orders 14.8
Blog 01/22/12

Tertiary Index

Nov month SA ∆% -0.8
Nov 12 months NSA ∆% -0.8
Blog 01/22/12

Wholesale and Retail Sales

Nov 12 months:
Total ∆%: minus 2.5
Wholesale ∆%: minus 2.6
Retail ∆%: minus 2.3
Blog 01/01/12

Family Income and Expenditure Survey

Nov 12 months ∆% total nominal consumption minus 3.8, real minus 3.2 Blog 01/01/12

Trade Balance

Exports Nov 12 months ∆%: -4.5 Imports Nov 12 months ∆% 11.4 Blog 12/27/11

Links to blog comments in Table JPY:

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/11/2011 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP grew at 1.4 percent in the third quarter, industry at 4.3 percent and the tertiary sector at 1.2 percent. The all industry index grew at 2.0 percent in IIIQ2011. Industry contributed 0.75 percentage points to growth of the all industry index and the tertiary index contributed 0.82 percentage points. All components of the indices of all industry activity grew with the exception of government. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 0.2 percent and flat GDP when it was unexpectedly hit by the Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.2 percent in IIQ2011 relative to IQ2011 but recovery at 3.8 percent in IIIQ2011. Industrial production fell 4.0 percent from IQ2011 into IIQ2011 but grew 4.3 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.9 percent in IQ2011 caused by decline of industrial production by 2.0 percent and services by 1.4 percent with GDP falling 1.7 percent.

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

 

CON

IND

TERT

GOVT

ALL IND

REAL
GDP

Weight
%

5.7

18.3

63.2

11.4

100.0

  

2011

            

IIIQ

3.8

4.3

1.2

-0.4

2.0

1.4

Cont to IIIQ % Change

0.17

0.75

0.82

-0.05

    

IIQ

-7.2

-4.0

0.0

0.7

-0.4

-0.5

IQ

2.7

-2.0

-1.4

0.2

-1.9

-1.7

2010

            

IV Q

-1.8

-0.1

0.3

-0.3

-0.2

0.0

III Q

1.9

-1.0

0.6

0.0

0.7

0.5

IIQ

-0.9

0.7

0.4

-0.2

0.8

-0.1

IQ

0.7

7.4

0.7

-0.4

1.3

2.3

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201111j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201110j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201107j.pdf

There are more details in Table VB-2. The all industry activity index fell 1.1 percent in Nov relative to Oct with decrease of the tertiary or services sector by 0.8 percent and decline of industry of 2.7 percent while construction increased 1.9 percent. Industry subtracted 0.48 percentage points from growth in Nov and the tertiary sector subtracted 0.53 percentage points with positive contribution of 0.08 percentage points by construction. Weakness in Sep and Aug had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

 

CON

IND

TERT

GOVT

ALL IND

Nov 2011

1.9

-2.7

-0.8

0.0

-1.1

Cont to Nov % Change

0.08

-0.48

-0.53

0.00

  

Oct

-3.8

2.2

0.7

0.2

0.8

Sep

2.3

-3.3

-0.4

-0.1

-0.8

Aug

1.8

0.6

0.1

0.0

-0.3

Jul

0.8

0.4

-0.2

-0.6

0.4

Jun

-0.3

3.8

1.9

0.3

2.2

May

3.7

6.2

0.9

1.0

2.0

Apr

-5.7

1.6

2.7

-0.1

1.7

Mar

-8.6

-15.5

-5.9

-0.1

-6.4

Feb

6.3

1.8

0.8

0.2

0.9

Jan

2.3

0.0

-0.1

0.0

-0.5

Dec 2010

-0.5

2.4

-0.2

0.3

0.1

Nov

-1.4

1.6

0.6

-0.4

0.3

Oct

0.1

-1.4

0.2

-0.1

0.0

Sep

-1.9

-0.8

-0.4

-0.1

-0.4

Aug

1.6

-0.1

0.1

0.1

-0.5

Jul

0.8

0.3

0.7

0.1

1.1

Jun

-2.1

-1.5

0.1

-0.1

0.2

May

6.3

-0.1

-0.3

0.0

0.0

Apr

-3.1

0.6

1.6

-0.2

0.9

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201111j.pdf

Rates of change from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

 

CON

IND

TERT

GOVT

ALL IND

REAL
GDP

Weight
%

5.7

18.3

63.2

11.4

100.0

  

Calendar Year

            

2010

-7.0

16.4

1.3

-0.7

3.1

4.4

Cont to 2010 % Change

-0.35

2.62

0.88

-0.09

    

2009

-5.6

-21.9

-5.2

0.1

-7.7

-5.5

2008

-7.6

-3.4

-1.0

-1.4

-1.9

-1.0

2011

            

III Q

-2.9

-2.1

0.1

0.2

-0.4

-0.7

Cont to IIIQ % Change

-0.13

-0.38

0.07

0.02

    

IIQ

-4.8

-6.8

-0.5

0.5

-1.7

-1.7

IQ

1.6

-2.5

-0.1

-0.4

-0.5

-0.2

2010

            

IV Q

-0.6

5.9

1.6

-0.8

2.1

3.1

III Q

-3.2

14.0

1.8

-0.6

3.2

5.4

IIQ

-11.3

21.3

1.4

-0.7

3.5

3.1

IQ

-12.4

28.0

0.8

-0.5

3.9

5.6

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201111j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index fell 1.3 percent in Oct 2011 relative to Oct 2010 with decreases of all segments with the exception of government. Industry fell 4.2 percent in Nov 2011 relative to a year earlier, subtracting 0.79 percentage points from growth of the all industry activity index. The tertiary sector fell 0.8 percent, subtracting 0.53 percentage points. Construction reduced the index by 0.04 percentage points while government increased it by 0.02 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

 

CON

IND

TERT

GOVT

ALL IND

Nov 2011

-0.8

-4.2

-0.8

0.2

-1.3

Cont to Nov % Change

-0.04

-0.79

-0.53

0.02

  

Oct

-3.9

0.1

0.6

-0.2

0.1

Sep

-0.1

-3.3

0.0

0.5

-0.7

Aug

-4.2

0.4

0.6

-0.3

0.2

Jul

-4.5

-3.0

-0.2

1.2

-0.8

Jun

-4.5

-1.7

0.9

1.1

0.2

May

-6.0

-5.5

-0.2

0.1

-1.3

Apr

-3.8

-13.6

-2.3

0.4

-4.0

Mar

-1.1

-13.1

-3.1

-0.3

-4.5

Feb

4.4

2.9

2.0

-0.3

2.0

Jan

1.3

4.6

1.1

-0.5

1.4

Dec 2010

-0.5

5.9

1.8

-0.7

2.1

Nov

-0.5

7.0

2.5

-1.9

2.7

Oct

-1.1

5.0

0.5

0.3

1.3

Sep

-2.8

12.1

1.3

-0.6

2.7

Aug

-1.7

15.5

2.3

-1.1

3.8

Jul

-5.3

14.6

1.6

-0.1

3.3

Jun

-8.3

16.6

1.0

-0.7

3.0

May

-8.1

20.7

1.2

-0.9

3.4

Apr

-17.0

27.0

1.9

-0.4

-

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201111j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201110j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Japan’s machinery orders in Table VB-6 strengthened in Nov. Total orders grew 14.7 percent in Nov. Private-sector orders excluding volatile orders, which are closely watched, jumped 14.8 percent. Orders for manufacturing increased 4.7 percent in Nov after 5.5 percent in Oct in part because of the low level after falling 17.5 percent in Sep. Overseas orders jumped 20.3 percent in Nov after falling 21.7 percent in Sep. There is significant volatility in industrial orders in advanced economies.

Table VB-6, Japan, Machinery Orders, Month ∆%, SA 

2011

Nov

Oct

Sep

Aug

Total

14.7

3.2

-3.7

6.5

Private Sector

21.5

-9.2

11.6

-3.6

Excluding Volatile Orders

14.8

-6.9

-8.2

11.0

Mfg

4.7

5.5

-17.5

13.7

Non Mfg

-6.1

-7.3

8.5

-6.1

Government

-5.3

1.9

-1.0

-5.5

From Overseas

20.3

1.6

-21.7

32.3

Through Agencies

0.6

4.0

15.9

-0.2

Note: Mfg: manufacturing

Source:

http://www.esri.cao.go.jp/en/stat/juchu/1111juchu-e.html

Total orders for machinery and total private-sector orders excluding volatile orders for Japan are shown in Chart VB-1 of Japan’s Economic and Social Research Institute at the Cabinet Office. The trend of private-sector orders excluding volatile orders was increasing smoothly but may be flattening or even declining now even after the jump in Nov. There could be reversal of the trend of decline in total orders. Fluctuations still prevent detecting longer term trends.

clip_image012

Chart VB-1, Japan, Machinery Orders

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/en/stat/juchu/1111juchu-e.html

Table VB-7 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 1,857,814 million are divided between JPY 772,051 overseas orders, or 41.6 percent of the total, and domestic orders of JPY 994,206, or 53.6 percent of the total, with orders through agencies of JPY 91,957 million, or 4.9 percent. Orders through agencies are not shown in the table because of the minor value. There is sharp reversal of 12-month percentage changes in Nov with increase of 11.0 percent in total orders, 8.0 percent in overseas orders, 13.5 percent in domestic orders and 12.5 percent in orders excluding volatile items. There was strong impact from the global recession with total orders falling 23.3 percent in 2008, overseas orders dropping 29.4 percent and domestic orders decreasing 17.4 percent. Recovery was vigorous in 2010 with increase of total orders by 9.4 percent, overseas orders by 3.5 percent and domestic orders by 14.1 percent.

Table VB-7, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series  

 

Total

Overseas

Domestic

Private ex Volatile

Value Nov 2011

1,857,814

772,051

994,206

660,717

% Total

100.0

41.6

53.6

35.6

Value Nov 2010

1,673,432

714,663

876,055

587,441

12 Months ∆%

        

Nov 2011

11.0

8.0

13.5

12.5

Oct 2011

-6.8

-11.9

-1.0

1.8

Dec 2010

9.4

3.5

14.1

-0.6

Dec 2009

1.8

0.4

3.6

-1.9

Dec 2008

-23.3

-29.4

-17.4

-24.7

Dec 2007

1.3

9.8

-4.3

-6.4

Dec 2006

0.8

0.9

-0.1

0.1

Note: Total machinery orders = overseas + domestic demand + orders through agencies. Orders through agencies in Oct 2011 were JPY 88,919 million, or 5.4 percent of the total, and are not shown in the table. The data are the original numbers without any adjustments and differ from the seasonally-adjusted data.

Source: http://www.esri.cao.go.jp/en/stat/juchu/1111juchu-e.html

The tertiary activity index of Japan fell 0.8 percent in Nov and also 0.8 percent in the 12 months ending in Nov, as shown in Table VB-8. 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 4.9 percent in the seven eight months from Apr to Nov, almost erasing the loss in Mar of 5.9 percent or at the annual equivalent rate of 7.5 percent. Most of the growth occurred in the quarter from Apr to Jun with gain of 5.6 percent or at annual equivalent rate of 24.3 percent.

Table VB-8, Japan, Tertiary Activity Index, ∆%

 

Month ∆% SA

12 Months ∆% NSA

Nov 2011

-0.8

-0.8

Oct

0.7

0.6

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_201111j.pdf

http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html

Month and 12-month rates of growth of the tertiary activity index of Japan and components in Nov are provided in Table VB-9. Electricity, gas, heat supply and water fell 3.6 percent in the 12 months ending in Nov but increased but were flat in the month of Nov. Wholesale and retail trade fell 2.8 percent in the month of Nov and fell 4.1 percent in 12 months. Information and communications rose 1.1 percent in Nov and 1.2 percent in 12 months.

Table VB-9, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%

Nov 2011

Weight

12 Months ∆%

Month ∆%

Tertiary Index

10,000.0

-0.8

-0.8

Electricity, Gas, Heat Supply & Water

372.9

-3.9

0.0

Information & Communications

951.2

1.2

1.1

Wholesale & Retail Trade

2,641.2

-4.1

-2.8

Finance & Insurance

971.1

-0.4

-1.6

Real Estate & Goods Rental & Leasing

903.4

-1.1

0.2

Scientific Research, Professional & Technical Services

551.3

-1.3

-1.6

Accommodations, Eating, Drinking

496.0

2.4

-0.5

Living-Related, Personal, Amusement Services

552.7

0.6

-3.8

Learning Support

116.9

-0.5

1.1

Medical, Health Care, Welfare

921,1

2.6

-0.3

Miscellaneous ex Government

626.7

4.1

2.0

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201111j.pdf

http://www.meti.go.jp/english/statistics/tyo/sanzi/index.html

VC China. The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, summarizing conditions in China’s manufacturing rose from 47.7 in Nov to 48.7 in Dec, indicating marginally deteriorating business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8969). Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC finds weakness in external demand that is causing slowdown in the economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8969), supporting fiscal and monetary policies that can avoid hard landing. Owen Fletcher, writing on Jan 1, on “Signs of strength in Chinese economy,” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203550304577133822170242612.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that China’s official purchasing managers’ index increased from 49.0 in Nov to expansion territory at 50.3 in Dec (http://professional.wsj.com/article/SB10001424052970203550304577133822170242612.html?mod=WSJ_hp_LEFTWhatsNewsCollection). 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 rose from 48.9 in Nov to expansion territory at 50.8 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8971). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy measures are required to steer the economy toward higher growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8971). Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry

Dec 12 months ∆%: 1.7
Jan-Dec ∆%: 6.0

Dec month ∆%: -0.3
Blog 01/15/12

Consumer Price Index

Dec month ∆%: -0.3 Dec 12 month ∆%: 4.1
Jan-Dec ∆%: 5.4
Blog 01/15/12

Value Added of Industry

Dec 12 month ∆%: 12.8

Jan-Dec 2011/Jan-Dec 2010 ∆%: 13.9
Blog 1/22/12

GDP Growth Rate

Year IVQ2011 ∆%: 8.9
Quarter IIQ2011 ∆%: 2.0
Blog 1/22/12

Investment in Fixed Assets

Total Jan-Nov ∆%: 24.4

Jan-Nov ∆% real estate development: 29.9
Blog 12/18/11

Retail Sales

Dec month ∆%: 1.41
Dec 12 month ∆%: 18.1

Jan-Nov ∆%: 17.1
Blog 1/22/12

Trade Balance

Dec balance $16.52 billion
Exports ∆% 13.4
Imports ∆% 11.8

Cumulative Dec: $155.14 billion
Blog 01/15/12

Links to blog comments in Table CNY:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

China’s GDP grew at a lower but still high rate of 8.9 percent in IVQ2011, as shown in Table VC-1. Growth in China is driven by industry and services with rates of growth of 10.6 percent and 8.9 percent respectively. The rate of 2.0 percent in IVQ2011 relative to the prior quarter is also the lowest in 2011.

Table VC-1, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter

 

IQ2011

IIQ2011

IIIQ2011

IVQ2011

GDP

9.7

9.5

9.1

8.9

Primary Industry

3.5

3.2

3.8

4.5

Secondary Industry

11.1

11.0

10.8

10.6

Tertiary Industry

9.1

9.2

9.0

8.9

GDP ∆% Relative to a Prior Quarter

2.1

2.2

2.3

2.0

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Table VC-2 provides GDP cumulative growth in a year relative to the earlier year for 2010 and 2011. Growth in 2011 relative to 2010 was 9.2 percent, which is still high but lower than in 2010.

Table VC-2, China, Cumulative Percentage Growth of GDP on Year Earlier

 

IQ

IIQ

IIIQ

IVQ

2010

12.1

11.2

10.7

10.4

2011

9.7

9.6

9.4

9.2

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Chart VC-1 of the National Bureau of Statistics of China plots the cumulative growth rates of GDP in 2010 and 2011. There has been deceleration of growth that possibly was unsustainable at 12.1 percent as in IQ2010.

clip_image013

Chart VC-1, China, Cumulative Percentage Growth of GDP on Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Chart VC-2 of the National Bureau of Statistics of China provides percentage growth of real disposable income of urban households. Real disposable income has been growing at very high rates.

clip_image014

Chart VC-2, China, Percentage Growth of Real Disposable Income of Urban Households

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Demographic data for China at the end of 2010 are provided in Table VC-3. Total population is 1.347 billion. For the first time, urban population with a share of 51.3 percent in total population exceeded rural population. The natural growth rate of the population of 4.79 percent is obtained by deducting the death rate of 7.1 percent from birth rate of 11.9 percent. There is significant disparity between real disposable income of urban households of yuan 21,810 and per capita consumption expenditure of yuan 15,161 in relation to much lower per capita consumption expenditure of rural households of yuan 5,221.

Table VC-3, China, Demography, Millions and %

Year-End 2011

  

Total Population Millions

1,347.4

Natural Growth Rate ∆%

4.79

Urban Population

690.8

Percent of Total

51.3

Rural Population

656.6

Percent of Total

48.7

Birth Rate %

11.9

Death Rate %

7.1

Per Capita Disposable Income of Urban Households Yuan

21,810

Per Capita Consumption Expenditure of Urban Households Yuan

15,161

Per Capita Consumption Expenditure of Rural Households Yuan

5,221

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Chart VC-3 of the National Bureau of Statistics of China provides total population and its natural growth rate. The natural growth rate of population fell from 5.28 percent in 2006 to 4.79 percent in 2010 and 2011.

clip_image015

Chart VC-3, China, Total Population and Natural Growth Rate

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Chart VC-4 of the National Bureau of Statistics of China provides percentage growth rates of real per capita income of rural households. Growth rates are quite high, increasing from 2010 to 2011.

clip_image016

Chart VC-4, China, Percentage Growth of Real per Capita Income of Rural Households

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Cumulative and 12-months rates of value added of industry in China are provided in Table VC-4. Value added in total industry in 2011 increased 13.9 percent relative to a year earlier and 12.8 percent in the 12 months ending in Dec. Heavy industry is the driver of growth with a rate of 13.0 percent in 12 months and 14.3 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-4, China, Growth Rate of Value Added of Industry ∆%

2011

Industry

Light Industry

Heavy
Industry

State
Owned

Private

12 M Dec

12.8

12.6

13.0

9.2

14.7

Jan-Dec

13.9

13.0

14.3

9.9

15.8

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
Jul

14.0

12.8

14.5

9.5

  

Jan-Jul

14.3

        

12 M
Jun

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/t20120117_402779577.htmhttp://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

Chart VC-5 provides cumulative growth rates of value added of industry in 2010 and 2011. Growth rates of value added of industry in the first five months of 2010 were higher than in 2011 as would be expected in an earlier phase of recovery from the global recession. Growth rates have converged in the second half of 2011 to those in 2010.

clip_image017

Chart VC-5, China, Growth Rate of Total Value Added of Industry, Cumulative Year-on-Year ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.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-5. Rates for Jan-Dec 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 Dec of the 12-month rates of change with only nonferrous metals at 13.2 percent exceeding 10 percent.

Table VC-5, China, Industrial Production Operation ∆%

2011

Elec-
tricity

Pig Iron

Cement

Crude
Oil

Non-
ferrous
Metals

Motor Vehicles

12 M Dec

9.7

3.7

7.0

4.0

13.2

-6.5

Jan-Dec

12.0

8.4

16.1

4.9

10.6

3.0

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
Oct

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
Jul

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
Jun

16.2

14.8

19.9

-0.7

9.8

3.6

12 M
May

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/t20120117_402779577.htmhttp://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-6. Monthly rates have fluctuated around 1 percent. The monthly equivalent rate of growth of 12.0 for 2011 is 0.949 percent.

Table VC-6, China, Industrial Production Operation, Month ∆%

2011

Month ∆%

Feb

0.95

Mar

1.14

Apr

0.93

May

0.96

Jun

1.36

Jul

0.84

Aug

0.94

Sep

1.14

Oct

0.91

Nov

0.93

Dec

1.10

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Table VC-7 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-Dec investment in fixed assets in China grew 23.8 percent relative to a year earlier and 27.9 percent in real estate development. There was slight deceleration in the final two months of 2011.

Table VC-7, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

 

Total

State

Real Estate Development

Jan-Dec

23.8

11.1

27.9

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/t20120117_402779577.htmhttp://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-6 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 and 23.8 percent in Dec.

clip_image018

Chart VC-6, China, Investment in Fixed Assets, ∆% Cumulative over Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.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-7 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, 29.9 percent and 27.9 percent in Jan-Dec.

clip_image019

Chart VC-7, China, Investment in Real Estate Development, Cumulative ∆% Cumulative Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Table VC-8 provides monthly growth rates of investment in fixed assets in China from Feb to Dec 2011. Monthly rates have fluctuated with negative rates of 0.38 percent in Jun, 0.41 in Nov, 0.14 percent in Dec and 0.02 percent in Sep and the highest rate of 2.32 percent in Apr. The monthly equivalent average rate for 23.8 percent is 1.795 percent.

Table VC-8, China, Investment in Fixed Assets, Month ∆%

 

Month ∆%

Feb

0.18

Mar

1.66

Apr

2.32

May

0.94

Jun

-0.38

Jul

1.01

Aug

1.61

Sep

-0.02

Oct

1.10

Nov

-0.41

Dec

-0.14

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Growth rates of retail sales in China monthly, 12 months and cumulative relative to a year earlier are in Table VC-9. The monthly equivalent rate for cumulative growth of 17.1 percent is 1.324 percent.

Table VC-9, China, Total Retail Sales of Consumer Goods ∆%

2011

Month ∆%

12 Months ∆%

Cumulative ∆%/
Cumulative
Year Earlier

Dec

1.41

18.1

17.1

Nov

1.28

17.3

17.0

Oct

1.30

17.2

17.0

Sep

1.35

17.7

17.0

Aug

1.29

17.0

16.9

Jul

1.30

17.2

16.8

Jun

1.40

17.7

16.8

May

1.31

16.9

16.6

Apr

1.33

17.1

16.5

Mar

1.35

17.4

17.4

Feb

1.30

11.6

15.8

Jan

  

19.9

19.9

Note: there are slight revisions of month relative to earlier month data but not of the month on the same month year earlier or cumulative relative to cumulative year earlier in the databank

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111209_402771402.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765083.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746163.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Chart VC-8 of the National Bureau of Statistics of China provides 12-month rates of growth of retail sales in 2010 and 2010. There were wide swings in the first quarter of both years. Growth rates of retail sales in 2011 have been quite high but lower than in 2010.

clip_image020

Chart VC-8, China, Total Retail Sales of Consumer Goods 12 Months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Table VC-10 provides cumulative exports, imports and the trade balance of China together with percentage growth of exports and imports. China’s trade has continued to grow at very high rates. The trade balance in 2011 of $155.14 billion is lower than those from 2008 to 2010.

Table VC-10, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%

 

Exports
USD
Billion

∆% Relative
Year Earlier

Imports USD
Billion

∆% Relative
Year Earlier

Balance
USD
Billion

Dec 2011

1,898.60

20.3

1,743.46

24.9

155.14

Nov

1,724.01

21.1

1585.61

26.4

138.40

Oct

1,549.71

22.0

1,425.68

26.9

124.03

Sep

1,392.27

22.7

1,285.17

26.7

107.10

Aug

1,222.63

23.6

1,129.90

27.5

92.73

Jul

1,049.38

23.4

973.17

26.9

76.21

Jun

874.3

24.0

829.37

27.6

44.93

May

712.37

25.5

689.41

29.4

22.96

Apr

555.30

27.4

545.02

29.6

10.28

Mar

399.64

26.5

400.66

32.6

-1.02

Feb

247.47

21.3

248.36

36.0

-0.89

Jan

150.7

37.7

144.27

51.0

6.46

Dec 2010

1577.93

31.3

1394.83

38.7

183.10

2009

1201.6

  

1005.9

  

195.7

2008

1430.7

  

1132.6

  

298.1

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Growth rates of base money in China are provided in Chart VC-9. Policy has been concerned with excessively high growth of money that could accommodate higher inflation, creating excessive real estate development.

clip_image021

Chart VC-9, China, Percentage Growth of Base Money (M2)

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Inflation of consumer prices did increase in China throughout 2010 and 2011, as shown in Chart VC-10. Consumer price inflation peaked at 6.5 percent in Jul 2011. Inflation rates have fallen significantly to 4.1 percent in Dec 2011.

clip_image022

Chart VC-10, China, Consumer Price Index, Percentage Changes Year-on-Year

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

Producer price inflation in China peaked at 7.5 percent in Jul 2011, as shown in Chart VC-11. Producer price inflation collapsed to 1.7 percent in Dec 2011.

clip_image023

Chart VC-11, China, Producer Price Index of Manufactured Goods, Percentage Changes Year-on-Year

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

VD Euro Area. The Markit Eurozone PMI® Composite Output Index rose from 47.0 in Nov to 48.3 in Dec, indicating contracting at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). Chris Williamson, Chief Economist at Markit, finds that the improvement in Dec does not eliminate the risk of recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). The index for IVQ2011 is the weakest since the spring of 2009 and continuing decline of orders may adversely affect output and employment in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). The Markit Eurozone Services Business Activity Index of the Markit Eurozone Services PMI® rose from 47.5 in Nov to 48.8 in Dec, indicating slower rate of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8974). Chris Williamson, Chief Economist at Markit, finds that the index has contracted during four consecutive months with divergence of performance in the form of growth in Germany and France but weaker performance in Spain and Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8974). The Markit Eurozone Manufacturing PMI® improved slightly to 46.9 in Dec from 46.4 in Nov, which was a low in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8950). Chris Williamson, Chief Economist at Markit, finds that manufacturing output fell at a quarterly rate of 1.5 percent in the fourth quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8950). Lower levels of manufacturing output were experienced in all members of the euro zone for the second consecutive month. 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 

Nov 2011: 10.3% unemployment rate

Nov 2011: 16.372 million unemployed

Blog 01/08/12

HICP

Dec month ∆%: 0.3

12 months Dec ∆%: 2.7
Blog 01/22/12

Producer Prices

Euro Zone industrial producer prices Nov ∆%: 0.2
Nov 12 months ∆%: 5.3
Blog 01/08/12

Industrial Production

Nov month ∆%: -0.1
Nov 12 months ∆%: -0.3
Blog 01/15/12

Industrial New Orders

Oct month ∆%: minus 1.8 Oct 12 months ∆%: 1.6
Blog 01/08/12

Construction Output

Nov month ∆%: 0.8
Nov 12 months ∆%: 0.2
Blog 01/22/12

Retail Sales

Nov month ∆%: minus 0.8
Nov 12 months ∆%: minus 2.5
Blog 01/08/12

Confidence and Economic Sentiment Indicator

Sentiment 93.3 Dec 2011 down from 107 in Dec 2010

Confidence minus 21.1 Nov 2011 down from minus 11 in Dec 2010

Blog 01/08/12

Trade

Jan-Nov 2011/2010 Exports ∆%: 13.1
Imports ∆%: 13.1
Blog 01/15/12

HICP, Rate of Unemployment and GDP

Historical from 1999 to 2011 Blog 1/22/12

Links to blog comments in Table EUR:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

Construction is weak throughout most advanced economies. Growth of euro zone construction output in Table VD-1 has fluctuated with alternation of negative change. Jul is the only strong month with monthly percentage increase of 1.7 percent and 2.4 percent in 12 months. Percentage changes have been negative since Jul. In Oct, construction output fell 1.4 percent and fell 2.5 percent in 12 months. Construction rebounded in Nov with increase of 0.8 percent in the month and 0.2 percent in 12 months.

Table VD-1, Euro Zone, Construction Output ∆%

 

Month ∆%

12 Months ∆%

Nov 2011

0.8

0.2

Oct

-1.4

-2.5

Sep

-1.4

0.5

Aug

-0.2

2.2

Jul

1.7

2.4

Jun

-1.2

-11.0

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-18012012-AP/EN/4-18012012-AP-EN.PDF

VE Germany. The Markit Germany Services Business Activity Index of the Markit Germany Services PMI® rose from 50.3 in Nov to 52.4 in Dec, for a third consecutive month of expansion above 50, such that the Markit Germany Composite Output Index rose from 49.4 in Nov to 51.3 in Dec although manufacturing was weak (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8992). The Markit/BME Germany Purchasing Managers’ Index® (PMI®)) improved slightly from 47.9 in Nov to 48.4 in Dec but falling again below 50 indicates business and output decline at lower rates than in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8991). Tim Moore, Senior Economist at Markit and author of the report, finds that demand weakened in Europe during the summer, spreading subsequently to emerging markets. Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP

IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5
Blog 11/27/11

2011/2010: 3.0%

Blog 01/15/12

Consumer Price Index

Dec month SA ∆%: 0.7
Dec 12 months ∆%: 2.1
Blog 01/25/12

Producer Price Index

Dec month ∆%: -0.4
12 months NSA ∆%: 4.0
Blog 01/22/15

Industrial Production

Mfg Nov month SA ∆%: minus 1.0
12 months NSA: 1.4
Blog 12/11/11

Machine Orders

Nov month ∆%: -4.8
Nov 12 months ∆%: -4.4
Blog 01/08/12

Retail Sales

Nov Month ∆% 0.8

12 Months ∆% -0.9

Blog 01/08/12

Employment Report

Employment Accounts:
Nov Employed 12 months NSA ∆%: 3.1
Labor Force Survey:
Aug Unemployment Rate: 5.5%
Blog 01/08/12

Trade Balance

Exports Nov 12 month NSA ∆%: 8.3
Imports Nov 12 months NSA ∆%: 6.7
Exports Nov month SA ∆%: 2.5; Imports Nov month SA minus 0.4

Blog 01/15/12

Links to blog comments in Table DE:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

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. The Markit France Services Activity Index of the Markit France Services PMI® rose from 49.6 in Nov to 50.3 in Dec such that the Markit France Composite Output Index stabilized at 50 in Dec above 48.8 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9012). The pace of deterioration of manufacturing business slowed with the Markit Purchasing Managers’ Index® (PMI®)) improving slightly from 47.3 in Nov to 48.9 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8981). The improvement reflected less sharp reduction in new orders in part because of slower decline of new export orders. The index has been below 50 since Aug. Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds fragility in French manufacturing with uncertainty in consumers and business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8981). Table FR provides France’s country data table.

Table FR, France, Economic Indicators

CPI

Dec month ∆% 0.4
12 months ∆%: 2.5
01/15/12

PPI

Oct month ∆%: 0.4
Oct 12 months ∆%: 5.6

Blog 12/27/11

GDP Growth

IIIQ2011/IIQ2011 ∆%: 0.3
IIIQ2011/IIIQ2010 ∆%: 1.5
Blog 12/27/11

Industrial Production

Nov/Oct SA ∆%:
Industrial Production 1.1;
Manufacturing minus 1.3
Nov YOY NSA ∆%:
Industrial Production 1.1;
Manufacturing 2.2
Blog 01/15/12

Industrial New Orders

Mfg Nov ∆% 1.0

YOY ∆% 2.8

Blog 01/22/12

Consumer Spending

Nov Manufactured Goods
∆%: 0.0
Nov 12 Months Manufactured Goods
∆%: minus 1.9
Blog 01/08/12

Employment

IIIQ2011 Unemployed 2.631 million
Unemployment Rate: 9.3%
Employment Rate: 63.8%
Blog 12/04/11

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:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/0812 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

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

France’s industrial new orders are provided in Table VF-1. Manufacturing new orders rose 1.0 percent in Nov, increasing 2.8 percent relative to a year earlier. Nondomestic manufacturing new orders increased 1.2 percent in Nov and 2.6 percent relative to a year earlier. Motor vehicles new orders fell 1.7 percent in Nov and are 6.9 percent below a year earlier.

Table VF-1, France, Industrial New Orders, ∆%

2011

Weight

Nov/  Oct

Oct/  Sep

Quarter on Quarter

Year on Year*

Mfg

931

1.0

0.3

-2.3

2.8

Mfg Non-Domestic

477

1.2

-0.2

-2.1

2.6

Electric and Electronic

212

2.3

-0.7

-1.7

2.4

Motor Vehicles

240

-1.1

1.9

-6.6

-6.9

Other Mfg

479

1.3

0.0

-1.2

6.2

Notes: Mfg: Manufacturing; * Last three months/same three months last year

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=91&date=20120120

VG Italy. The Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI® fell from 45.8 in Nov from 44.5 in Dec, indicating sharp contraction in services output in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8967). Italy’s Markit/ADACI Purchasing Managers’ Index® (PMI®)) improved slightly from 44.0 in Nov to 44.3 in Dec but still showing deterioration for Italian manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8962). Deterioration of manufacturing business originates in decline of new orders with weakening internal and foreign demand. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds that declining orders may challenge future output and employment. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index

Dec month ∆%: 0.4
Dec 12 months ∆%: 3.3
Blog 01/22/12

Producer Price Index

Nov month ∆%: 0.2
Nov 12 months ∆%: 4.5

Blog 01/01/12

GDP Growth

IIIQ2011/IIIQ2010 SA ∆%: 0.2
IIIQ2011/IIQ2011 NSA ∆%: -0.2
Blog 12/27/11

Labor Report

Nov 2011

Participation rate 62.2%

Employment ratio 56.9%

Unemployment rate 8.6%

Blog 01/08/12

Industrial Production

Nov month ∆%: 0.3
12 months ∆%: minus 4.1
Blog 01/15/12

Retail Sales

Oct month ∆%: -0.5

Oct 12 months ∆%: minus 1.5

Blog 12/27/11

Business Confidence

Mfg Dec 92.5, Aug 98.5

Construction Dec 80.1, Aug 77.3

Blog 01/01/12

Consumer Confidence

Consumer Confidence Dec 91.6, Nov 96.1

Economy Dec 77.2, Nov 83.1

Blog 12/27/11

Trade Balance

Balance Nov SA -€1417 million versus Oct -€1946
Exports Nov month SA ∆%: +3.2; Imports Nov month SA ∆%: +0.5
Exports 12 months NSA ∆%: +6.5 Imports 12 months NSA ∆%: +0.5
Blog 01/22/12

Links to blog comments in Table IT:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

Exports and imports of Italy and monthly growth rates SA are provided in Table VG-1. There have been significant fluctuations. Seasonally-adjusted exports fell 3.2 percent in Oct but increased 2.3 percent in Nov while imports fell 1.1 percent in Oct but increased 0.5 percent in Nov. The SA trade deficit fell from €1946 million in Oct to €1417 million in Nov.

Table VG-1, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%

 

Exports

€ M

Exports
Month ∆%

Imports

€ M

Imports
Month ∆%

Balance

€ M

Nov 2011

31,609

2.3

33,026

0.5

-1,417

Oct

30,902

-3.2

32,848

-1.1

-1,946

Sep

31,908

2.0

33,224

-0.8

-1,317

Aug

31,271

-0.2

33,508

0.1

-2,237

Jul

31,318

1.3

33,465

2.2

-2,147

Jun

30,915

-0.8

32,757

-4.1

-1,842

May

31,172

-0.1

34,158

-0.3

-2,986

Apr

31,208

0.5

34,272

-1.2

-3,064

Mar

31,057

2.0

34,685

4.4

-3,628

Feb

30,436

-1.4

33,220

-0.8

-2,784

Jan

30,877

3.7

33,488

1.1

-2,611

AE ∆% Jan-Nov

 

6.6

  

-0.3

  

Dec 2010

29,789

0.4

33,132

0.4

-3,343

AE: annual equivalent

Source: http://www.istat.it/it/archivio/50960

Italy’s trade not seasonally adjusted is provided in Table VG-2. Values are different because the data are original and not adjusted. Twelve-month rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.4 percent. In Nov, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. The actual or not seasonally adjusted trade balance fell from €1881 million in Sep to €1077 million in Oct but increased to €1581 in Nov. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table VG-2, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

 

Exports

€ M

Exports
12 Months ∆%

Imports

€ M

Imports
12 Months ∆%

Balance

€ M

Nov 2011

32,442

6.5

34,023

0.5

-1,581

Oct

32,131

4.5

33,186

-0.4

-1,055

Sep

32,997

10.2

34,878

3.6

-1,881

Aug

24,177

14.9

27,082

12.1

-2,905

Jul

35,264

5.8

33,743

6.1

1,521

Jun

32,605

7.9

34,309

1.6

-1,704

May

33,491

19.8

35,722

18.4

-2,231

Apr

31,045

12.5

33,869

18.0

-2,824

Mar

34,418

14.0

38,203

19.8

-3,785

Feb

29,595

17.7

32,621

16.2

-3,026

Jan

26,146

24.6

32,455

28.4

-6,309

Dec 2010

29,714

20.2

32,732

31.7

-3,018

Year

          

2010

337,346

15.6

367,390

23.4

-30,044

2009

291,733

-20.9

297,609

-22.1

-5,876

2008

369,016

1.2

382,050

2.3

-13,034

Source: http://www.istat.it/it/archivio/50960

Growth rates of Italy’s trade and major products are provided in Table VG-3 for the period Jan-Nov 2011 relative to Jan-Nov 2010. Growth rates are high for the total and all segments with the exception of decline of durable goods imports of 6.4 percent. Capital goods exports increased 11.1 percent relative to a year earlier and intermediate exports by 14.4 percent.

Table VG-3, Italy, Exports and Imports % Share of Products in Total and ∆%

 

Exports
Share %

Exports
∆% Jan-Nov 2011/ Jan-Nov 2010

Imports
Share %

Imports
∆% Jan-Nov 2011/ Jan-Nov 2010

Consumer
Goods

29.5

9.4

25.3

8.0

Durable

6.3

4.7

3.5

-6.4

Non
Durable

23.2

10.6

21.8

10.3

Capital Goods

32.4

11.1

22.4

1.3

Inter-
mediate Goods

33.5

14.4

33.9

13.9

Energy

4.6

16.1

18.4

19.6

Total ex Energy

95.4

11.7

81.6

8.6

Total

100.0

11.9

100.0

10.6

Source: http://www.istat.it/it/archivio/50960

Table VG-4 provides Italy’s trade balance by product categories in Nov and Jan-Nov 2011. Italy’s trade balance excluding energy is a surplus of €30,523 in Jan-Nov 2011 but the energy trade balance is a deficit of €56,301 million. Italy has significant competitiveness in contrast with some other countries with debt difficulties.

Table VG-4, Italy, Trade Balance by Product Categories, € Millions

 

Nov 2011

Jan-Nov 2011

Consumer Goods

877

7,361

  Durable

876

9,256

  Nondurable

1

-1,896

Capital Goods

3,075

33,579

Intermediate Goods

78

-10,417

Energy

-5,610

-56,301

Total ex Energy

4,030

30,523

Total

-1,581

-25,778

Source: http://www.istat.it/it/archivio/50960

Italy’s structure of regional trade in Jan-Sep 2011 and growth rates is in Table VG-5. Exports to members of the European Union are 57.3 percent of the total. Exports to the euro zone or European Monetary Union (EMU) are 43.6 percent. Imports from members of the European Union account for 54.8 percent of the total and imports from members of EMU are 44.6 percent of the total. After years of integration, members of EMU are dependent on each other such that the end of the common currency could be disruptive. The resolution of the sovereign debt crisis requires growth of Italy with devaluation to promote exports, which is difficult within the common currency.

Table VG-5, Italy, Exports and Imports by Regions and Countries, % Share and 12 Months  ∆%

 

Exports
% Share

∆% Jan-Nov 2011/ Jan-Nov 2010

Imports
% Share

Imports
∆% Jan-Nov 2011/ Jan-Nov 2010

EU

57.3

9.5

54.8

6.9

EMU 17

43.6

9.6

44.6

6.4

France

11.6

11.9

8.8

4.2

Germany

13.0

13.2

16.1

6.4

Spain

5.8

2.3

4.6

8.1

UK

5.2

-1.0

2.7

9.4

Non EU

42.7

15.2

45.2

15.1

Europe non EU

12.0

24.4

10.3

20.2

USA

6.0

11.9

3.0

18.5

China

2.6

16.5

7.8

5.3

OPEC

5.3

-1.3

9.5

-0.4

Total

100.0

11.9

100.0

10.6

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/50960

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 54.0 in Dec, suggesting growth higher than 52.1 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9031). 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 improvement in services suggests the UK economy did not fall into recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9031).The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) increased from 47.7 in Nov to 49.6 in Dec, still in contraction territory (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8994). The average for IVQ2011 is the lowest since IIQ2009. There is stabilization after contraction. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators

   

CPI

Dec month ∆%: 0.4
Nov 12 months ∆%: 4.2
Blog 01/22/12

Output/Input Prices

Output Prices:
Dec 12 months NSA ∆%: 4.8; excluding food, petroleum ∆%: 3.0
Input Prices:
Dec 12 months NSA
∆%: 8.7
Excluding ∆%: 6.9
Blog 01/15/12

GDP Growth

IIIQ2011 prior quarter ∆% 0.6; year earlier same quarter ∆%: 0.5
Blog 12/27/11

Industrial Production

Nov 2011/Nov 2010 NSA ∆%: Industrial Production minus 3.1; Manufacturing minus 0.6
Blog 01/15/12

Retail Sales

Dec month SA ∆%: +0.6
Dec 12 months ∆%: +2.6
Blog 01/22/12

Labor Market

Sep/Nov Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.9%
Blog 01/22/12

Trade Balance

Balance Nov minus ₤2566 million
Exports Nov ∆%: -0.9 Sep/Nov ∆%: 9.0
Imports Nov ∆%: 0.8 Sep/Nov ∆%: 7.5
Blog 01/15/12

Links to blog comments in Table UK:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

Labor market statistics of the UK for the quarter Sep-Nov 2011 are provided in Table VH-1. The unemployment rate rose to 8.4 percent and the number unemployed increased 118,000 in Sep-Nov, reaching 2.685 million. There are 857,000 unemployed over one year, down 10,000 on the quarter, and 424,000 unemployed over two years, down 1000 on the quarter. The employment rate is 70.3 percent. Earnings growth including bonuses was 1.9 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 5.0 percent, unchanged in the quarter.  There are 7.86 million people working part time in Sep-Nov. The number of employees and self-employed part-time because they could not find full-time employment increased 44,000 to 1.31 million, which is the highest since 1992 when records begin. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992 but other data show higher numbers in the mid 1980s.

Table VH-1, UK, Labor Market Statistics

 

Quarter Sep/Nov 2011

Unemployment Rate

8.4% +0.3 % points 0n quarter and +0.5 from year earlier, highest since Sep-Nov 1995

Number Unemployed

(1) +118,000 in Sep-Nov to reach 2.685 million, highest unemployed number since Jun-Aug 1994           

(2) Unemployment rate 16 to 24 years of age +1.0 % points from Jun-Aug to 22.3% of that age group; number unemployed 16 to 24 years up 52,000 to 1.04 million; unemployment rate and number for 16-24 years highest since 1992 when records begin but other data show higher unemployment ages 16 to 24 in mid 1980s

(3) Unemployed 16 to 24 years excluding those in full-time education 729,000, up 8,000 from Jun-Aug; unemployment rate 20.7%, up 0.5 % points from Jun-Aug

Number Unemployed > one and two years

(1) Number unemployed over one year: 857,000 Sep-Nov, down 10,000 on quarter  

(2) Number unemployed over two years: 424,000 Sep-Nov, +1,000 on quarter

Inactivity Rate 16-64 Years of Age

(Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks)

(1) 23.1%, down 0.2 % points on quarter Jun-Aug and from year earlier             

(2) Economically inactive 16-64 years down 61,000 on quarter and 71,000 on year to 9.29 million

Employment Rate

70.3% Sep-Nov, down 0.1 % points on quarter

Number Employed

(1) Up 18,000 on quarter to 29.119 million                              

(2) Number of employees down 109,000 on quarter to 24.79 million, fastest decline since 1992 (when records begin)                                      (3) Self-employed +101,000 on quarter to 4.12 million, largest number since 1992           

(5) Number in other job categories +26,000 to 210,000

Earnings Growth Rates Year on Year

(1) Total +1.9% (including bonuses) over year earlier, down 0.2% on Aug-Oct; private sector rose 2.0 on year earlier, public sector rose 1.9% on year earlier, lowest since 2001                                      (2) Regular private +2.0% (excluding bonuses) over year earlier; regular public 1.4% on year earlier

Full-time and Part-time

(1) Number full-time 21.26 million, down 57,000 on quarter                               

(2) Number part-time 7.86 million in Sep-Nov, up 75,000 on quarter

(3) Number employees and self-employed working part-time because they could not find full-time employment up 44,000 to 1.31 million, highest since 1992 when records begin
 

Dec 2011

Claimant Count (Jobseeker’s Allowance, JSA)

(1) Latest estimate: 1.60 million in Dec; +1,200 on Nov and +142,000 on year earlier                                

(2) Number claiming JSA for up to six month 928,200 down 16,500 Nov to Dec 129,000 from prior year (rate: 5.0%, unchanged in quarter but +0.4 percentage points from year earlier)

Labor Productivity

(1) Output per worker rose 1.2% from IIQ2011 to IIIQ2011
(2) Unit labor costs increased 0.5% from IIQ2011 to IIIQ2011

Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/january-2012/index.html

Table VH-2 UK provides indicators of the labor force survey of the UK for Sep-Nov 2011 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.8 percent to 8.4 percent.

Table VH-2, UK, Labor Force Survey Indicators

 

LFHP

EMP

PART

UNE

RATE

Sep-Nov 2011

40,183

29,119

70.3

2,685

8.4

Jun-Aug 11

40,178

29,101

70.4

2,566

8.1

Mar-May 11

40,147

29,279

70.7

2,452

7.7

Dec-Feb 11

40,103

29,229

70.7

2,478

7.8

Sep-Nov 10

40,059

29,092

70.4

2,495

7.9

Sep-Nov 09

39,853

28,899

70.6

2,455

7.8

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/january-2012/index.html

The volume of retail sales in the UK increased 0.6 percent in Dec and rose 2.6 percent in the 12 months ending in Dec, as shown in Table VH-3. There has been significant volatility in monthly retail sales in the UK.

Table VH-3, UK, Volume of Retail Sales ∆%

 

Month SA ∆%

12 Months ∆%

Dec 2011

0.6

2.6

Nov

-0.5

0.4

Oct

0.9

1.0

Sep

0.7

0.5

Aug

-0.5

-1.0

Jul

0.2

-0.6

Jun

0.5

-0.4

May

-1.6

-0.5

Apr

1.2

2.1

Mar

0.3

0.4

Feb

-1.0

0.3

Jan

1.9

3.9
     

Dec 2010

-1.5

-1.9

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/december-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 2.4 percent in the 12 months ending in Nov while that of sales excluding auto fuel rose 1.9 percent. Both 12 months percentage changes of implied deflators for total sales and excluding fuel were lower in Dec 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, 12.6 percent in Nov and 9.1 percent in Dec. The percentage change of the implied deflator of sales of food stores at 4.2 percent in Dec 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
Fuel

Food
Stores

Non-
Food

Auto
Fuel

Dec 2011

2.4

1.9

4.2

0.3

9.1

Nov

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/december-2011/index.html

UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Growth of total volume of sales in Dec by 0.6 percent and Oct by 0.9 percent interrupted monthly declines such as minus 1.6 percent in May and minus 0.5 percent in Aug. There were increases in all major categories in Dec in contrast with broad-based decline in Oct with exception of sales of auto fuel.

Table VH-5, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%

 

All Retail

Ex Auto
Fuel

Food
Stores

Non-
Food

Auto
Fuel

Dec 2011

0.6

0.6

0.4

1.0

0.6

Nov

-0.5

-0.8

-0.7

-1.4

2.5

Oct

0.9

0.9

0.8

1.3

1.2

Sep

0.7

0.8

0.0

1.4

-0.2

Aug

-0.5

-0.4

0.0

-0.9

-0.9

Jul

0.2

0.1

0.9

-0.4

0.8

Jun

0.5

0.6

0.4

0.4

-1.2

May

-1.6

-1.8

-3.8

-0.6

0.8

Apr

1.2

1.3

2.6

0.1

-0.1

Mar

0.3

0.4

1.2

-0.1

-0.4

Feb

-1.0

-1.3

-0.8

-1.9

0.9

Jan

1.9

1.3

0.3

2.2

6.8

Dec 2010

-1.5

-1.0

-1.8

-1.3

-6.1

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/december-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 2.6 percent in the 12 months ending in Dec with increase of 1.7 percent in sales excluding auto fuel.

Table VH-6, UK, Growth of Retail Sales Volume by Component Groups 12 Month ∆%

 

All Retail

Ex Auto
Fuel

Food
Stores

Non-
Food

Auto
Fuel

Dec 2011

2.6

1.7

1.2

1.1

11.2

Nov

0.4

0.0

-1.0

-1.2

3.7

Oct

1.0

0.9

0.5

0.0

1.5

Sep

0.5

0.2

-0.3

-1.0

3.0

Aug

-1.0

-1.3

-0.5

-3.3

1.9

Jul

-0.6

-0.6

-1.0

-2.5

2.1

Jun

-0.4

-0.8

-4.0

-0.3

2.9

May

-0.5

-0.8

-3.3

-0.4

2.3

Apr

2.1

1.9

1.7

0.7

3.8

Mar

0.4

0.0

-1.0

-0.3

4.0

Feb

0.3

-0.1

-2.2

0.1

4.7

Jan

3.9

3.6

-2.4

7.5

7.4

Dec 2010

-1.9

-1.2

-3.8

0.0

-8.3

Dec 2009

1.3

2.0

2.5

0.9

-4.1

Dec 2008

1.3

2.6

-1.1

4,3

-9.0

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/december-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 2.6 percent in the 12 months ending in Dec. Sales of predominantly food stores with weight of 41.7 percent fell increased 1.2 percent in the 12 months ending in Dec, contributing minus 0.5 percentage points. Mostly nonfood stores with weight of 43.2 percent increased 1.1 percent and contributed 0.5 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 10.1 percent and positive contribution of 0.5 percentage points and automotive fuel with weight of 10.2 percent, growth of 11.2 percent and positive contribution of 1.1 percentage points. The value of retail sales increased 6.2 percent in the 12 months ending in Dec. There were positive contributions to all general categories of retails sales: 2.4 percentage points for predominantly food stores, 1.0 percentage points for predominantly nonfood stores, 0.5 percentage points for non-store retailing and 2.3 percentage points for automotive fuel.

Table VH-7, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Nov 2011

Weight
% of All
Retailing

Volume SA
12 Months ∆%

PP Cont.
% points

Value SA
12 Months ∆%

PP Cont.
% points

All Retailing

100.0

2.6

  

6.2

  

Mostly
Food Stores

41.7

1.2

0.5

5.8

2.4

Mostly Nonfood Stores

          

Total

43.2

1.1

0.5

2.1

1.0

Non-
specialized

7.8

3.4

0.3

2.9

0.3

Textile, Clothing & Footwear

12.2

6.3

0.8

8.2

1.0

Household Goods Stores

9.7

-3.6

-0.3

-0.9

-0.1

Other

13.5

-1.9

-0.3

-1.8

-0.3

Non-store Retailing

4.9

10.1

0.5

9.7

0.5

Automotive Fuel

10.2

11.2

1.1

22.5

2.3

Cont.: Contribution

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/december-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 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 V-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 of 8.5 percent by Fri Jan 20, 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

01/20
/2012

Rate

1.1423

1.5914

1.192

1.293

CNY/USD

01/03
2000

07/21
2005

7/15
2008

01/20/

2012

Rate

8.2798

8.2765

6.8211

6.334

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 1.272/EUR or by 8.5 percent {[(1.293/1.192)-1]100}. 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 6.334/USD on Fri Jan 20, 2012, or by an additional 7.1 percent, for cumulative revaluation of 23.5 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-2 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 Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. 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

01/20
/2012

Rate

1.1423

1.5914

1.192

1.293

CNY/USD

01/03
2000

07/21
2005

7/15
2008

01/13

2012

Rate

8.2798

8.2765

6.8211

6.334

Weekly Rates

12/30/2011

01/06/2011

01/13/2012

01/20/2012

CNY/USD

6.294

6.3094

6.3068

6.334

∆% from Earlier Week*

0.7

-0.2

0.04

-0.4

*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
$B

2011

FD
%GDP
2011

CAD
%GDP
2011

Debt
%GDP
2011

FD%GDP
2015

CAD%GDP
2015

Debt
%GDP
2015

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 01/20/12,” 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, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the week of Jan 20, there are now only two financial value with negative change in valuation in column “∆% Trough to 01/20/12:” Japan’s Nikkei Average minus 0.7 percent and Shanghai Composite minus 2.7 percent. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 31.3 percent and S&P 500 28.6 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 31.3 percent from the trough and of the S&P 500 by 28.6 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 01/20/12” had double digit gains relative to the trough around Jul 2, 2010 but now only two valuations show increases of less than 10 percent: Dow Asia Pacific is now higher by 7.6 percent and STOXX 50 Europe is 6.6 percent above the trough. DJ UBS Commodities is 13.9 percent above the trough; Dow Global is 12.0 percent above the trough; and DAX is 12.9 percent above the trough. Japan’s Nikkei Average is 0.7 percent below the trough on Aug 31, 2010 and 23.1 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8766.36 on Fri Jan 20, 2012, which is 14.5 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 8.5 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 01/13/12” in Table VI-4 shows strong performance of risk financial assets in the week of Jan 20, 2012. 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 01/20/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jan 6, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 01/20/12” but also relative to the peak in column “∆% Peak to 01/20/12.” There are now only two US equity indexes above the peak in Table VI-4: DJIA 13.5 percent and S&P 500 8.1 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 17.3 percent, Nikkei Average by 23.1 percent, Shanghai Composite by 26.7 percent, STOXX 50 by 9.7 percent, Dow Global by 8.6 percent and Dow Asia Pacific by 5.8 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 01/20

/12

∆% Week 01/20/ 12

∆% Trough to 01/20

12

DJIA

4/26/
10

7/2/10

-13.6

13.5

2.4

31.3

S&P 500

4/23/
10

7/20/
10

-16.0

8.1

2.0

28.6

NYSE Finance

4/15/
10

7/2/10

-20.3

-17.3

4.5

3.8

Dow Global

4/15/
10

7/2/10

-18.4

-8.6

3.6

12.0

Asia Pacific

4/15/
10

7/2/10

-12.5

-5.8

3.1

7.6

Japan Nikkei Aver.

4/05/
10

8/31/
10

-22.5

-23.1

3.1

-0.7

China Shang.

4/15/
10

7/02
/10

-24.7

-26.7

3.3

-2.7

STOXX 50

4/15/10

7/2/10

-15.3

-9.7

2.1

6.6

DAX

4/26/
10

5/25/
10

-10.5

-1.1

4.3

12.9

Dollar
Euro

11/25 2009

6/7
2010

21.2

14.5

-2.0

-8.5

DJ UBS Comm.

1/6/
10

7/2/10

-14.5

-2.6

0.5

13.9

10-Year T Note

4/5/
10

4/6/10

3.986

2.026

    

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 Jan 20, 2012, shows that the S&P 500 is now 8.5 percent above the Apr 26, 2010 level and the DJIA is 13.5 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. Relaxed risk aversion has contributed to recovery of valuations. 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
Apr 26

∆% S&P 500 from prior date

∆% S&P 500 from
Apr 26

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

Dec 23

3.6

9.7

3.7

4.4

Dec 30

-0.6

9.0

-0.6

3.8

Jan 6 2012

1.2

10.3

1.6

5.4

Jan 13

0.5

10.9

0.9

6.4

Jan 20

2.4

13.5

2.0

8.5

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table VI-6, 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 9.8 percent to ZAR 7.949/USD on Jan 20, 2012, which is still 31.3 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 5.7 percent stronger at SGD 1.271/USD on Jan 6 relative to the trough of depreciation but still stronger by 18.2 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 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 1.5 percent relative to the trough to BRL 1.763/USD on Jan 20, 2012 but still stronger by 27.4 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

Jan 20, 2012

∆T

Jan 20, 2012

∆P

Jan 20

2012

EUR USD

7/15
2008

6/7 2010

  

01/20

2012

    

Rate

1.59

1.192

  

1.293

    

∆%

    

-33.4

  

7.8

-22.9

JPY USD

8/18
2008

9/15
2010

  

01/20

2012

    

Rate

110.19

83.07

  

77.00

    

∆%

    

24.6

  

7.3

30.1

CHF USD

11/21 2008

12/8 2009

  

01/20

2012

    

Rate

1.225

1.025

  

0.934

    

∆%

    

16.3

  

8.9

23.8

USD GBP

7/15
2008

1/2/ 2009

  

01/20 2012

    

Rate

2.006

1.388

  

1.557

    

∆%

    

-44.5

  

10.8

-28.8

USD AUD

7/15 2008

10/27 2008

  

01/20
2012

    

Rate

1.0215

1.6639

  

1.048

    

∆%

    

-62.9

  

42.7

6.6

ZAR USD

10/22 2008

8/15
2010

  

01/20 2012

    

Rate

11.578

7.238

  

7.949

    

∆%

    

37.5

  

-9.8

31.3

SGD USD

3/3
2009

8/9
2010

  

01/20
2012

    

Rate

1.553

1.348

  

1.271

    

∆%

    

13.2

  

5.7

18.2

HKD USD

8/15 2008

12/14 2009

  

01/20
2012

    

Rate

7.813

7.752

  

7.761

    

∆%

    

0.8

  

-0.1

0.7

BRL USD

12/5 2008

4/30 2010

  

01/20

2012

    

Rate

2.43

1.737

  

1.763

    

∆%

    

28.5

  

-1.5

27.4

CZK USD

2/13 2009

8/6 2010

  

01/20
2012

    

Rate

22.19

18.693

  

19.608

    

∆%

    

15.7

  

-4.9

11.6

SEK USD

3/4 2009

8/9 2010

  

01/20

2012

    

Rate

9.313

7.108

  

6.78

    

∆%

    

23.7

  

4.6

27.2

CNY USD

7/20 2005

7/15
2008

  

01/20
2012

    

Rate

8.2765

6.8211

  

6.334

    

∆%

    

17.6

  

7.1

23.5

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.

clip_image025

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

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=122e3bcb627e8e53f1bf72a1a09cfb81&lastObs=260&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/JRXWTFB_N.B,H10/H10/JRXWTFN_N.B,H10/H10/JRXWTFO_N.B%7d

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 2.026 percent at the close of market on Fri Jan 20, 2012 would be equivalent to price of 105.3976 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.1 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 V-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 Jan 4, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2901 billion, or $2.9 trillion, with portfolio of long-term securities of $2571 billion, or $2.6 trillion, consisting of $1555 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $847 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1542 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

12/23/11

2.027

105.3883

4.1

12/30/11

1.871

106.8476

5.5

01/06/12

1.957

106.0403

4.7

01/13/12

1.869

106.8664

5.5

01/20/12

2.026

105.3976

4.1

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 flat at 14,716 thousand barrels per day on average in the four weeks ending on Jan 13, 2012 from 14,721 thousand barrels per day in the four weeks ending on Jan 6, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.6 percent on Jan 13, 2012, which is lower than 86.3 percent on Jan 14, 2010, and 84.9 percent on Jan 6, 2012. Imports of crude oil increased 1.9 percent from 8,840 thousand barrels per day on average in the four weeks ending on Jan 6 to 9,010 thousand barrels per day in the week of Jan 13. The Energy Information Administration (EIA) informs that “US crude oil imports averaged just under 8.3 million barrels per day last week [Jan 6]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Flat utilization in refineries but with sharply decreasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 3.4 million barrels from 334.6 million barrels on Jan 6 to 331.2 million barrels on Jan 13. Motor gasoline production decreased 1.7 percent from 9,117 thousand barrels per day in the week of Jan 6 to 8,966 thousand barrels per day on average in the week of Jan 13. Gasoline stocks increased 3.7 million barrels and stocks of fuel oil increased 0.4 million barrels. Supply of gasoline fell from 8,962 thousand barrels per day on Jan 14, 2010, to 8,414 thousand barrels per day on Jan 13, 2011, or by 6.1 percent, while fuel oil supply fell 4.4 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 7.8 percent from Jan 14, 2011 to Jan 13, 2012. Gasoline prices rose 9.2 percent from Jan 17, 2011 to Jan 16, 2012. 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

01/13/12

01/06/12

01/14/11

Crude Oil Refineries Input

14,716

Week ∆%: -0.03

14,721

14,746

Refinery Capacity Utilization %

84.6

84.9

86.3

Motor Gasoline Production

8,966

Week ∆%: -1.7

9,117

8,949

Distillate Fuel Oil Production

4,736

Week ∆%: -2.8

4,870

4,524

Crude Oil Imports

9,010

Week ∆%:

+1.9

8,840

8,755

Motor Gasoline Supplied

8,414

∆% 2011/2010=

-6.1%

8,634

8,962

Distillate Fuel Oil Supplied

3,562

∆% 2011/2010

= -4.4%

3,753

3,727
 

1/13/12

1/6/12

1/14/11

Crude Oil Stocks
Million B

331.2
∆= -3.4 MB

334.6

335.7

Motor Gasoline Million B

227.5    

∆= 3.7 MB

223.8

227.7

Distillate Fuel Oil Million B

148.0
∆= +0.4MB

147.6

165.8

WTI Crude Oil Price $/B

98.69

∆% 2011/2010

7.8

101.56

91.53
 

1/16/12

1/09/12

1/17/11

Regular Motor Gasoline $/G

3.391

∆% 2011/2010
9.2

3.382

3.104

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

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 with fluctuations.

clip_image026

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 Jun 2010. Crude oil stocks rose in a clear trend in 2011 but began to drop on a downward trend after 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 and the declines in the weeks of Dec 9 and Dec 16 with increases in the weeks of Dec 23, Dec 30 and Jan 6, 2012. The last change in Chart VII-2 is the decrease in stocks in the week of Jan 13.

clip_image027

Chart VII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

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 during 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_image028

Chart VII-3, 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

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 50,000 from upwardly revised 402,000 on Jan 7, 2012 to 352,000 on Jan 14. Claims not adjusted for seasonality decreased but by much higher 124,606 from 646,219 on Jan 7 to 521,613 on Jan 14. Strong seasonality is preventing clear analysis of labor markets.

Table VII-2, US, Initial Claims for Unemployment Insurance

 

SA

NSA

4-week MA SA

Jan 14, 12

352,000

521,613

379,000

Jan 7, 12

402,000

646,219

382,500

Change

-50,000

-124,606

-3,500

Dec 31, 11

375,000

540,057

374,000

Prior Year

415,000

549,688

418,500

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 2001 to 2012. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 956,791 on Jan 10, 2009 to 549,688 on Jan 15, 2011, and now to 521,613 on Jan 14, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered.

Table VII-3, US, Unemployment Insurance Weekly Claims

 

Not Seasonally Adjusted Claims

Seasonally Adjusted Claims

Jan 13, 2001

599,562

318,000

Jan 12, 2002

799,246

418,000

Jan 11, 2003

724,111

378,000

Jan 10, 2004

677,897

354,000

Jan 15, 2005

467,862

332,000

Jan 14, 2006

439,873

285,000

Jan 20, 2007

367,583

336,000

Jan 12, 2008

547,943

317,000

Jan 10, 2009

956,791

543,000

Jan 16, 2010

659,173

501,000

Jan 15, 2011

549,688

415,000

Jan 14, 2012

521,613

352,000

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 Oct-Dec 2011, CPI inflation for all items seasonally adjusted was minus 0.4 percent in annual equivalent, that is, compounding inflation in Oct-Dec and assuming it would be repeated for a full year. In the 12 months ending in Dec, CPI inflation of all items not seasonally adjusted was 3.0 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 2.0 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 0.04 percent for three months, 0.06 percent for six months, 0.10 percent for 12 months, 0.24 percent for two years, 0.37 percent for three years, 0.89 percent for five years, 1.45 percent for seven years, 2.02 percent for ten years and 3.10 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 Dec 2011/Dec
2010 NSA

∆% Annual Equivalent Oct-Dec 2011 SA

CPI All Items

3.0

-0.4

CPI ex Food and Energy

2.2

2.0

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 1.1 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. Unconventional monetary policy of zero interest rates and large-scale purchases of assets using the central bank’s balance sheet is designed to increase aggregate demand by stimulating consumption and investment. In practice, there is no control of how cheap money will be used. An alternative allocation of cheap money is through the carry trade from zero interest rates and short dollar positions to exposures in risk financial assets such as equities, commodities and so on. After a decade of unconventional monetary policy it may be prudent to return to normalcy so as to avoid adverse side effects of financial turbulence and inflation waves. Normal monetary policy would also encourage financial intermediation required for financing sound long-term projects that can stimulate economic growth and full utilization of resources. (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, 2012

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

clip_image029

©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.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

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, 2012

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