Hiring Collapse, Ten Million Fewer Full-time Jobs, Youth Unemployment, World Financial Turbulence and World Economic Slowdown: Part II

 

Hiring Collapse, Ten Million Fewer Full-time Jobs, Youth Unemployment, World Financial Turbulence and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Hiring Collapse

IA Hiring Collapse

IB Labor Underutilization

IC Ten Million Fewer Full-time Jobs

ID Youth Unemployment

II United States Foreign Trade

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 International Monetary Fund (IMF) has revised its World Economic Outlook (WEO) to an environment of lower growth (IMF 2012WEOJan24):

“The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. Global output is projected to expand by 3¼ percent in 2012—a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO).”

The IMF (2012WEOJan24) projects growth of world output of 3.8 percent in 2011 and 3.3 percent in 2012 after 5.2 percent in 2010. Advanced economies would grow at only 1.6 percent in 2011, 1.2 percent in 2012 and 3.9 percent in 2013 after growing at 3.2 percent in 2010. Emerging and developing economies would drive the world economy, growing at 6.2 percent in 2011, 5.4 percent in 2012 and 5.9 percent in 2012 after growing at 7.3 percent in 2010. The IMF is forecasting deceleration of the world economy.

World economic slowing would be the consequence of the mild recession in the euro area in 2012 caused by “the rise in sovereign yields, the effects of bank deleveraging on the real economy and the impact of additional fiscal consolidation” (IMF 2012WEOJan24). After growing at 1.9 percent in 2010 and 1.6 percent in 2010, the economy of the euro area would contract by 0.5 percent in 2012 and grow at 0.8 percent in 2013. The United States would grow at 1.8 percent in both 2011 and 2012 and at 2.2 percent in 2013. The IMF (2012WEO Jan24) projects slow growth in 2012 of Germany at 0.3 percent and of France at 0.2 percent while Italy contracts 2.2 percent and Spain contracts 1.7 percent. While Germany would grow at 1.5 percent in 2013 and France at 1.0 percent, Italy would contract 0.6 percent and Spain 0.3 percent.

The IMF (2012WEOJan24) also projects a downside scenario, in which the critical risk “is intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank deleveraging and sizable contractions in credit and output.” In this scenario, there is contraction of private investment by an extra 1.75 percentage points in relation to the projections of the WEO with euro area output contracting 4 percent relative to the base WEO projection. The environment could be complicated by failure in medium-term fiscal consolidation in the United States and Japan.

There is significant deceleration in world trade volume in the projections of the IMF (2012WEOJan24). Growth of the volume of world trade in goods and services decelerates from 12.7 percent in 2010 to 6.9 percent in 2011, 3.8 percent in 2012 and 5.4 percent in 2013. Under these projections there would be significant pressure in economies in stress such as Japan and Italy that require trade for growth. Even the stronger German economy is dependent on foreign trade. There is sharp deceleration of growth of exports of advanced economies from 12.2 percent in 2010 to 2.4 percent in 2012. Growth of exports of emerging and developing economies falls from 13.8 percent in 2010 to 6.1 percent in 2012. Another cause of concern in that oil prices in the projections fall only 4.9 percent in 2012, remaining at relatively high levels.

The JP Morgan Global Manufacturing & Services PMI^™, produced by JP Morgan and Markit in association with ISM and IPFSM, rose to 54.6 in Jan from 52.7 in Dec, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9159). 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 and Jan. New orders are expanding at a faster rate, increasing from 51.5 in Dec to 54.0 in Jan, suggesting further increase in business ahead. The HSBC Brazil Composite Output Index of the HSBC Brazil Services PMI^™, compiled by Markit, rose from 53.2 in Dec to 53.8 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156). Andre Loes, Chief Economist of HSBC in Brazil, finds that the increase of the services HSBC PMI for Brazil from 54.8 in Dec to 55.0 in Jan, which is the highest level since Mar 2010, strengthen the belief that the worst period of deceleration has already occurred (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156).

VA United States. Table USA provides the data table for the US.

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	Dec 12 months NSA ∆%: headline 2.4; ex food and energy ∆% 1.8 Blog 02/05/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 31.3 million NSA Establishment Survey: Nov Nonfarm Jobs 243,000; Private +257,000 jobs created  Dec 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 0.9% Blog 02/05/12
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 Dec 2011 2.747 million lower by 0.955 million than 3.702 million in Dec 2006 Blog 02/12/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 2.8 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 01/29/12
Personal Income and Consumption	Dec month ∆% SA Real Disposable Personal Income (RDPI) 0.3 Dec month SA ∆% Real Personal Consumption Expenditures (RPCE): -0.1 12 months NSA ∆%: RDPI: -0.1; RPCE ∆%: 1.4 Blog 02/05/2011
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	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
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 IVQ2011∆% SAAE 0.7; IVQ2011/IVQ2010 ∆% 0.5; Unit Labor Costs IVQ2011 ∆% 1.2; IVQ2011/IVQ2010 ∆%: 1.3 Blog 02/05/2012
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	Dec New Orders SA ∆%: 1.1; ex transport ∆%: 0.6 2011 NSA ∆%: 12.1; ex transport ∆% 11.9 Blog 02/05/12
Durable Goods	Dec New Orders SA ∆%: 3.0; ex transport ∆%: 2.1 Jan-Dec months NSA New Orders ∆%: 10.0; ex transport ∆% : 8.7 Blog 01/29/12
Sales of New Motor Vehicles	Jan 2012 913,287; Jan 2011 819,795. Jan SAAR 14.18 million, Dec SAAR 13.56, Jan 2011 SAAR 12.69 million Blog 02/05/12
Sales of Merchant Wholesalers	Jan-Dec 2011/2010 ∆%: Total 13.9; Durable Goods: 12.1; Nondurable Goods 15.4 Blog 02/12/12
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	Dec SAAR month SA ∆%: 1.5 Dec 12 months NSA: 3.7 Blog 02/05/12
Case-Shiller Home Prices	Nov 2011/Nov 2010 ∆% NSA: 10 Cities minus 1.3; 20 Cities: minus 1.3 ∆% Nov SA: 10 Cities minus 0.7 ; 20 Cities: minus 0.7 Blog 02/05/12
FHFA House Price Index Purchases Only	Nov SA ∆% 1.0; 12 month ∆%: minus 1.8 Blog 01/29/12
New House Sales	Dec month SAAR ∆%: minus 2.2 Jan-Dec 2011/Jan-Dec 2010 NSA ∆%: minus 6.2 Blog 01/29/12
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 Dec SA -$48,800 million versus Nov -$47,058 million Exports Dec SA ∆%: 0.7 Imports Dec SA ∆%: 1.0 Goods Exports Jan-Dec 2011/2010 NSA ∆%: 6.3 Good Imports Jan-Dec 2011/2010 NSA ∆%: 15.5 Blog 02/12/12
Export and Import Prices	Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6 Blog 01/15/12
Consumer Credit	Dec ∆% annual rate: 9.3 Blog 02/12/12
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 4.1; Outlays -3.2; Individual Income Taxes 4.9 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Jan $418,756 million Blog 02/12/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 02/05/2012
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: 02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

Sales and inventories of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-1 for Jan-Dec 2011 and percentage changes from the prior month and from Jan-Dec 2010. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 13.9 percent in Jan-Dec 2011 relative to Jan-Dec 2010 and 1.3 percent in Dec relative to Nov. The value of total sales is quite high exceeding four trillion dollars ($4760.9 billion). Value in the breakdown is useful in identifying relative importance of individual categories. Sales of durable goods in Jan-Dec 2011 reached $2133.7 billion, or $2.1 trillion, increasing 2.4 percent in Dec relative to Nov and increasing 12.1 percent in Jan-Dec 2011 relative to Jan-Dec 2010. Sales of automotive products reached $339.7 billion in Jan-Dec 2011, decreasing 3.9 percent in the month and increasing 13.4 percent relative to a year earlier. There is strong performance of 19.4 percent in machinery and 10.1 percent in electrical products. Sales of nondurable goods rose 15.4 percent. The influence of commodity prices is revealed in the increase of 28.8 percent in farm products and 32.1 percent in petroleum products. The final three columns in Table 6 provide the value of inventories and percentage changes from the prior month and from the same month a year earlier. US total inventories of wholesalers increased 0.9 percent in Dec and increased 9.8 percent relative to a year earlier. Inventories of durable goods of $273.2 billion are 57.4 percent of total inventories of $475.9 billion and rose 10.7 percent relative to a year earlier. Automotive inventories jumped 17.2 percent relative to a year earlier. Machinery inventories of $69.4 billion rose 12.9 percent relative to a year earlier. Inventories of nondurable goods of $202.8 percent are 42.6 percent of the total and increased 8.8 percent relative to a year earlier. Inventories of farm products fell 0.3 percent in Dec relative to Nov and they declined 13.2 percent relative to a year earlier. Inventories of petroleum products increased 11.5 percent in Dec and 15.8 percent relative to a year earlier.

Table VA-1, US, Sales and Inventories of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, Month ∆%

2011	Sales $ Billions Jan-Dec 2011 NSA	Sales Dec ∆% SA	Sales∆% Jan/Dec 2011 from 2010  NSA	INV $ Billions Dec 2011 NSA	INV  Dec ∆%	INV  ∆% Dec 2011 from Dec 2010 NSA
US Total	4,760.9	1.3	13.9	475.9	0.9	9.8
Durable	2,133.7	2.4	12.1	273.2	-1.0	10.7
Automotive	339.7	3.9	13.4	45.6	1.0	17.2
Prof. Equip.	376.2	-1.1	4.3	31.1	-4.0	6.2
Computer Equipment	181.3	2.8	5.8	12.7	-4.9	4.2
Electrical	367.2	0.6	10.1	41.8	-1.4	11.3
Machinery	359.8	5.2	19.4	69.4	-1.1	12.9
Not Durable	2,627.3	0.4	15.4	202.8	3.6	8.8
Drugs	412.6	-0.1	8.2	35.7	11.4	5.9
Apparel	130.9	-1.7	2.0	21.9	0.5	17.3
Groceries	582.5	1.9	11.1	34.1	-0.8	14.0
Farm Products	259.2	-2.6	28.8	25.8	-0.3	-13.2
Petroleum	711.4	0.6	32.1	26.1	11.5	15.8

Note: INV: inventories

Source: US Census Bureau

http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-2. The total for the US has remained almost unaltered at 1.15 in Dec and 1.15 in Nov relative to 1.16 in Dec 2010. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.47 in Dec 2011 relative to 1.49 in Nov 2011 and 1.50 in Dec 2010. Computer equipment operates with low inventory/sales ratios of 0.72 in Dec 2011 relative to 0.72 in Dec 2010 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.88 in Dec 2011, which is almost equal to 0.87 in Dec 2011 and almost equal to 0.89 in Dec 2010. There are exceptions such as 1.98 in Dec 2011 in apparel that is much higher than 1.84 in Dec 2010 perhaps because of the expectation of stronger holiday sales.

Table VA-2, Inventory/Sales Ratios of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, % SA

	Dec 2011	Nov 2011	Dec 2010
US Total	1.15	1.15	1.16
Durable	1.47	1.49	1.50
Automotive	1.40	1.42	1.50
Prof. Equip.	1.01	1.00	0.98
Comp. Equip.	0.72	0.73	0.72
Electrical	1.20	1.21	1.19
Machinery	2.12	2.21	2.29
Not Durable	0.87	0.87	0.88
Drugs	0.88	0.87	0.89
Apparel	1.98	2.05	1.84
Groceries	0.64	0.65	0.66
Farm Products	1.05	1.06	1.18
Petroleum	0.42	0.42	0.42

Sources: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Chart VA-2 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2011 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.

Chart VA-1, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2002-2011

Source: US Census Bureau

http://www2.census.gov/wholesale/img/mwtsbrf.jpg

The report of consumer credit outstanding of the Board of Governors of the Federal Reserve System is provided in Table VA-3. The data are in seasonally-adjusted annual rates both percentage changes and billions of dollars. Consumer credit is divided into two categories. (1) Revolving consumer credit (REV in Table VA-3) consists mainly of unsecured credit cards. (2) Non-revolving consumer credit (NREV in Table VA-3) consists of consumer loans such as car loans. In Dec 2011, revolving credit was $801 billion, or 32.1 percent of total consumer credit of $2498 billion, and non-revolving credit was $1697 billion, or 67.9 percent of total consumer credit outstanding. Consumer credit grew at relatively high rates before the recession beginning in IVQ2007 and extending to IIQ2009 as dated by the National Bureau of Economic Research or NBER (http://www.nber.org/cycles/cyclesmain.html). Percentage changes of consumer credit outstanding fell already in 2008. Rates were still negative in 2010. Contraction was sharper in revolving credit that fell at the rates of 10.1 percent in IIIQ2010, 2.6 percent in IVQ2010, 3.7 percent in IQ2011 and 2.0 percent in IIIQ2011. There was a sharp jump in consumer credit outstanding in Dec 2011: 9.3 percent total, 4.1 percent revolving and 11.8 percent non-revolving.

Table VA-3, US, Consumer Credit Outstanding, SA, Annual Rate and Billions of Dollars

	Total ∆%	REV ∆%	NRV ∆%	Total $B	REV $B	NREV $B
2011
Dec	9.3	4.1	11.8	2498	801	1697
Nov	9.9	8.4	10.7	2479	798	1681
Oct	3.3	1.0	4.4	2459	793	1666
Sep	3.7	0.7	5.1	2452	792	1659
IVQ	7.6	4.5	9.0	2498	801	1697
IIIQ	1.5	-2.0	3.1	2451	792	1659
IIQ	3.5	1.5	4.5	2443	796	1647
IQ	2.2	-3.7	5.1	2422	793	1629
2010
IVQ	2.5	-2.6	5.0	2408	800	1608
IIIQ	-2.1	-10.1	2.1	2394	805	1588
2011	3.7	0.1	5.5	2498	801	1697
2010	-1.7	-7.5	1.5	2408	800	1608
2009	-4.4	-9.6	-1.2	2450	866	1585
2008	1.6	1.7	1.5	2562	958	1604
2007	5.8	8.1	4.4	2523	942	1581
2006	4.1	5.0	3.6	2385	871	1514

Note: REV: Revolving; NREV: Non-revolving; ∆%: simple annual rate from unrounded data; Total may not add exactly because of rounding

Source: http://www.federalreserve.gov/releases/g19/current/default.htm

Chart VA-2 of the Board of Governors of the Federal Reserve System provides percentage changes of total consumer credit outstanding in the US since 1944. The shaded bars are the cyclical contraction dates of the National Bureau of Economic Research. Consumer credit is cyclical, declining during contractions as shown by negative percentage changes during economic contractions.

Chart VA-2, US, Consumer Credit Outstanding Seasonally Adjusted Annual Percentage Rate

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g19/current/default.htm

The US Treasury budget for fiscal year 2012 in the first four months of Dec, Nov and Oct 2011 and Jan 2012 is shown in Table VA-4. Receipts increased 4.1 percent in the first four months of fiscal year 2012 relative to the same four months in fiscal year 2011 or Oct-Dec 2010 and Jan 2011. Individual income taxes have grown 4.9 percent relative to the same period a year earlier. Outlays were lower by 3.2 percent relative to a year earlier. The final two rows of Table VA-4 provide the projection of the Congressional Budget Office (CBO) of the deficit for fiscal year 2012 at $1.3 trillion not very different from that in fiscal year 2011. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.1 trillion in four years, which is the worst fiscal performance since World War II.

Table VA-4, US, Treasury Budget in Fiscal Year to Date Million Dollars

Fiscal Year 2012	Oct 2011 to Jan 2012	Oct 2010 to Jan 2011	∆%
Receipts	789,756	758,347	4.1
Outlays	1,138,903	1,177,103	-3.2
Deficit	-349,147	-418,756	NA
Individual Income Taxes	403,794	384,994	4.9
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
CBO Forecast Fiscal Year 2012	2,522	3,601	-1,079
Fiscal Year 2011	2,302	3,599	-1,296
Fiscal Year 2010	2,162	3,456	-1,294
Fiscal Year 2009	2,105	3,518	-1,413
Fiscal Year 2008	2,524	2,983	-459

Source: http://www.fms.treas.gov/mts/index.html

CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan.

VB. Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) improved for a second consecutive movement from 50.2 in Dec to 50.7 in Jan but still suggesting only marginal growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). New export business grew for the first time in eleven months with improvement in demand both internal and from abroad. Alex Hamilton, economist at Markit and author of the report finds a firmer beginning of the new quarter but with weak growth of new orders resulting from limited demand from China and Europe and valuation of the yen (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). Table JPY provides the country table for Japan.

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	Jan ∆% -0.1 12 months ∆% 0.5 Blog 02/12/12
Consumer Price Index	Dec NSA ∆% minus 0.0 Dec 12 months NSA ∆% -0.2 Blog 01/29/12
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	Dec Unemployed 2.75 million Change in unemployed since last year: minus 240 thousand Unemployment rate: 4.6% Blog 02/05/12
All Industry Indices	Nov month SA ∆% -1.1 12 months NSA ∆% -1.3 Blog 01/22/12
Industrial Production	Dec SA month ∆%: 4.0 12 months NSA ∆% minus 4.1 Blog 02/05/12
Machine Orders	Total Dec ∆% minus 7.2 Private ∆%: minus 22.2 Dec ∆% Excluding Volatile Orders minus 7.1 Blog 02/12/12
Tertiary Index	Nov month SA ∆% -0.8 Nov 12 months NSA ∆% -0.8 Blog 01/22/12
Wholesale and Retail Sales	Dec 12 months: Total ∆%: minus 0.5 Wholesale ∆%: minus 1.6 Retail ∆%: +2.5 Blog 01/29/12
Family Income and Expenditure Survey	Dec 12 months ∆% total nominal consumption 0.3, real 0.5 Blog 02/05/12
Trade Balance	Exports Dec 12 months ∆%: minus 8.0 Imports Dec 12 months ∆% +8.1 Blog 1/29/12

Links to blog comments in Table JPY: 02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.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

Japan’s machinery orders in Table VB-1 fell sharply in Dec after strengthening in Nov. Total orders grew 14.7 percent in Nov but fell 7.2 percent in Dec. Private-sector orders excluding volatile orders, which are closely watched, jumped 14.7 percent in Nov but fell 22.2 percent in Dec. 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 but fell 7.1 percent in Dec. Overseas orders jumped 20.3 percent in Nov after falling 21.7 percent in Sep and increased 5.6 percent in Dec. There is significant volatility in industrial orders in advanced economies.

Table VB-1, Japan, Machinery Orders, Month ∆%, SA 

2011	Dec	Nov	Oct	Sep
Total	-7.2	14.7	3.2	-3.7
Private Sector	-22.2	21.5	-9.2	11.6
Excluding Volatile Orders	-7.1	14.8	-6.9	-8.2
Mfg	-7.1	4.7	5.5	-17.5
Non Mfg ex Volatile	-6.0	-6.2	-7.3	8.5
Government	50.7	-5.3	1.9	-1.0
From Overseas	5.6	20.3	1.6	-21.7
Through Agencies	3.0	0.6	4.0	15.9

Note: Mfg: manufacturing

Source: http://www.esri.cao.go.jp/en/stat/juchu/1112juchu-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 increase in total orders. Fluctuations still prevent detecting longer term trends.

Chart VB-2, Japan, Machinery Orders

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/en/stat/juchu/1112juchu-e.html

Table VB-2 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 2,295,585 million are divided between JPY 1,028,849 overseas orders, or 44.8 percent of the total, and domestic orders of JPY 1,177,247, or 51.2 percent of the total, with orders through agencies of JPY 89,489 million, or 3.9 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 private orders excluding volatile items. The pace of increase declined in Dec with growth in 12 months of 0.8 percent for total orders, 12.6 percent for overseas orders, decline of 8.5 percent for domestic orders and growth of private orders excluding volatile items of 6.3 percent. 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-2, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series  

	Total	Overseas	Domestic	Private ex Volatile
Value Dec 2011	2,295,585	1,028,849	1,177,247	769,303
% Total	100.0	44.8	51.3	33.5
Value Dec 2010	2,277,410	914,067	1,286,616	723,494
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-month ∆%
Dec 2011	0.8	12.6	-8.5	6.3
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/1112juchu-e.html

VC. China. The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing nearly remained flat from 48.7 in Dec to 48.8 in Jan, suggesting marginal deterioration, which now extends over three consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). New orders fell marginally for a third consecutive month with moderate growth of new export business. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, find need of policy stimulus to ensure soft landing that could occur in the form of growth at the rate of 8 percent in IQ2012 relative to IQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 50.8 in Dec to 49.7 in Jan, suggesting stagnation of private-sector business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9153). 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=9153).Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jan 12 months ∆%: 0.7 Jan month ∆%: -0.1 Blog 02/12/12
Consumer Price Index	Jan month ∆%: 1.5 Jan 12 month ∆%: 4.5 Blog 02/12/12
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-Dec ∆%: 23.8 Jan-Dec ∆% real estate development: 27.9 Blog 01/22/11
Retail Sales	Dec month ∆%: 1.41 Dec 12 month ∆%: 18.1 Jan-Nov ∆%: 17.1 Blog 1/22/12
Trade Balance	Jan balance $27.28 billion Exports ∆% -0.5 Imports ∆% -15.3 Cumulative Jan: $27.28 billion Blog 02/12/12

Links to blog comments in Table CNY:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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 exports and imports and their 12 months rates of growth together with the trade balance in Jan are shown in Table VC-1. The 12-month rate of growth of exports fell from 37.7 percent in Jan 2011 to minus 0.5 percent in Jan 2012. The 12-month rate of growth of imports fell from 51.0 percent in Jan 2011 to minus 15.3 percent in Jan 2012. Growth is still extremely high and in comparison with trade data for other countries. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese renminbi yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). This policy has not been aggressively implemented as discussed in VI Valuation of Risk Financial Assets. The trade surplus of China increased from $6.46 billion in Jan 2011 to $27.28 billion in Jan 2012

Table VC-1, China, Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Jan 2012	149.94	-0.5	122.66	-15.3	27.28
Dec 2011	174.72	13.4	158.20	11.8	16.52
Nov	174.46	13.8	159.94	22.1	14.53
Oct	157.49	15.9	140.46	28.7	17.03
Sep	169.67	17.1	155.16	20.9	14.51
Aug	173.32	24.5	155.56	30.2	17.76
Jul	175.13	20.4	143.64	22.9	31.48
Jun	161.98	17.9	139.71	19.3	22.27
May	157.16	19.4	144.11	28.4	13.05
Apr	155.69	29.9	144.26	21.8	11.42
Mar	152.20	35.8	152.06	27.3	0.14
Feb	96.74	2.4	104.04	19.4	-7.31
Jan	150.73	37.7	144.27	51.0	6.46
Dec 2010	154.15	17.9	141.07	25.6	13.08

Source: http://english.customs.gov.cn/publish/portal191/

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

Table VC-2 provides China’s cumulative exports and imports and their yearly growth rates together with the trade balance. China is still enjoying strong trade growth but the trade balance of $155.14 in 2011 is the weakest in three years and much lower than $183.10 billion for 2010. Exports grew at 31.3 percent in 2010 and imports at 38.7 percent with growth declining to 20.3 percent for exports and 24.9 percent for imports. It is quite difficult to separate price and quantity effects.

Table VC-2, 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

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

VC Euro Area. The Markit Eurozone PMI^® Composite Output Index rose from 48.3 in Dec to 50.4 in Jan, which is the first reading above the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). Chris Williamson, Chief Economist at Markit, finds that the improvement in Jan suggests stabilization after weak activity in the final four months of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). The Markit Eurozone Manufacturing PMI^® rose to a five-month high at 48.8 in Jan from 46.9 in Dec, still suggesting weakening business environment but at lower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). There is significant divergence in private-sector manufacturing in the euro zone with Austria and Germany above 50 while many countries are in the contraction zone below 50. Manufacturing output in the euro zone increased in Jan, which is the first increase since Jul. Declining euro zone trade affected growth of new export orders. Chris Williamson, Chief Economist at Markit, finds encouraging performance of manufacturing that could help in preventing recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). Table EUR provides the country economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 12/04/11
Unemployment	Dec 2011: 10.4% unemployment rate Dec 2011: 16.469 million unemployed Blog 02/05/12
HICP	Dec month ∆%: 0.3 12 months Dec ∆%: 2.7 Blog 01/22/12
Producer Prices	Euro Zone industrial producer prices Dec ∆%: -0.2 Dec 12 months ∆%: 4.3 Blog 02/05/12
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	Dec month ∆%: minus 0.4 Dec 12 months ∆%: minus 1.6 Blog 02/05/12
Confidence and Economic Sentiment Indicator	Sentiment 93.4 Jan 2012 down from 107 in Dec 2010 Confidence minus 20.7 Jan 2012 down from minus 11 in Dec 2010 Blog 02/05/12
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:

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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

VE Germany. The Markit Germany Services Business Activity Index of the Markit Germany Services PMI^® rose from 52.4 in Dec to 53.7 in Jan, for a fourth consecutive month of expansion above 50, such that the Markit Germany Composite Output Index rose from 51.3 in Dec to 53.9 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9128), indicating expansion at a faster rate in Germany’s private-sector activity. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved significantly from 48.4 in Dec to the expansion territory at 51.0 in Jan, which is the first reading above 50 since Sep 2011 (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). While the index is at the highest level in six month, improvement in manufacturing business is still moderate. The rate of contraction of new orders moderated in Jan but export business contracted sharply for a seventh consecutive month. Tim Moore, Senior Economist at Markit and author of the report finds improvement in manufacturing but that the decline in foreign orders influenced general decline in new orders (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). 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	Jan month SA ∆%: -0.4 Jan 12 months ∆%: 2.1 Blog 02/12/12
Producer Price Index	Dec month ∆%: -0.4 12 months NSA ∆%: 4.0 Blog 02/12/12
Industrial Production	Mfg Dec month SA ∆%: minus 2.7 12 months NSA: 0.7 Blog 02/12/12
Machine Orders	Dec month ∆%: 1.7 Dec 12 months ∆%: 0.0 Blog 02/12/12
Retail Sales	Dec Month ∆% minus 0.9 12 Months ∆% minus 1.4 Blog 02/05/12
Employment Report	Unemployment Rate 7.3% of Labor Force Blog 02/05/12
Trade Balance	Exports Dec 12 months NSA ∆%: 5.0 Imports Nov 12 months NSA ∆%: 5.4 Exports Dec month SA ∆%: minus 4.3; Imports Dec month SA minus 3.9 Blog 02/12/12

Links to blog comments in Table DE: 02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/22/12  http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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

The production industries index of Germany in Table VE-1 shows decline of 2.9 percent in Dec and increase of 0.8 percent in the 12 months ending in Dec. Germany’s industry suffered decline of 7.3 percent in Dec 2008 relative to Dec 2007 and decline of 2.3 percent in 2009. Recovery was vigorous with 14.2 percent in the 12 months ending in Dec 2010. The first quarter of 2011 was quite strong when the German economy outperformed the other advanced economies. The performance of Germany’s industry from 2003 to 2006 was vigorous with average rate of 5.1 percent. Data for the production industries index of Germany fluctuate sharply from month to month and also in 12-month rates.

Table VE-1, Germany, Production Industries, Month and 12-Months ∆%

	12-Month ∆% NSA	Month ∆% Calendar SA
Dec 2011	0.8	-2.9
Nov	4.4	0.0
Oct	0.4	0.9
Sep	5.4	-2.5
Aug	11.3	-0.3
Jul	6.5	3.0
Jun	0.2	-0.9
May	19.0	0.7
Apr	6.0	-0.2
Mar	10.2	1.3
Feb	16.4	1.3
Jan	16.0	1.2
Dec 2010	14.2	0.2
Dec 2009	-2.3	-0.1
Dec 2008	-7.3	-3.5
Dec 2007	-0.1	0.9
Dec 2006	2.5	0.6
Dec 2005	4.9	0.3
Dec 2004	5.3	0.0
Dec 2003	5.1	0.1
Dec 2002	2.0	-2.2

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ProductionManufacturing/liste__piverar,templateId=renderPrint.psml

Table VE-2 provides monthly percentage changes of the German production industries index by components from May to Dec 2011. The production industries index fell 2.9 percent in Dec with negative changes in all components. Manufacturing fell 2.7 percent in Dec, declining in four of the eight months from May to Dec. The investment goods segment also fell 3.6 percent in Dec. Jul was quite strong with monthly growth of 3.0 percent for the index, 3.2 percent for manufacturing, 5.0 percent for investment goods and 14.4 percent for durable goods. It is quite difficult to analyze trends in these data. There is generalized perception that growth in the euro area slowed after the European summer.

Table VE-2, Germany, Production Industries, Industry and Components, Month ∆%

	Dec	Nov	Oct	Sep	Aug	Jul	Jun	May
Production Industries	-2.9	0.0	0.9	-2.5	-0.3	3.0	-0.9	0.7
Industry	-2.7	-0.3	0.7	-2.6	-0.3	3.2	-1.0	1.2
Mfg	-2.7	-1.0	0.7	-2.6	-0.3	3.3	-1.0	1.3
Intermediate Goods	-2.4	-0.2	-0.2	-1.9	-0.3	1.7	0.4	0.6
Investment Goods	-3.6	-0.4	1.7	-4.6	1.1	5.0	-2.1	2.3
Durable Goods	-0.9	-2.4	1.6	0.0	-9.7	14.4	-6.3	0.2
Nondurable Goods	-1.0	-0.2	-0.4	1.7	-3.1	-0.3	-0.3	0.0
Energy	-2.2	-0.2	3.8	-4.2	1.2	-0.8	3.2	-4.8

Seasonally Calendar Adjusted

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ProductionManufacturing/liste__piverar,templateId=renderPrint.psml

Table VE-3 provides 12-month unadjusted percentage changes of industry and components in Germany. Although there are sharp fluctuations in the data there is suggestion of deceleration that would be expected from much higher earlier rates. The deceleration is quite evident in single-digit percentage changes in the quarter Sep to Dec relative to high double-digit percentage changes in Jan-Mar. Growth rates in the recovery from the global recession from IVQ2007 to IIQ2009 were initially very vigorous in comparison with the growth rates before the contraction that are shown in the bottom part of Table VE-3.

Table VE-3, Germany, Industry and Components, 12 Months ∆% Unadjusted

	IND	MFG	INTG	INVG	DG	NDG	EN
2011
Dec	0.6	0.7	2.1	0.1	0.3	-0.6	-14.2
Nov	5.0	5.2	4.3	7.2	1.3	-0.4	-7.6
Oct	1.2	1.3	0.8	3.5	-3.3	-3.2	-8.5
Sep	6.6	6.6	6.8	8.9	3.3	0.3	-9.3
Aug	12.9	12.7	11.2	20.2	4.0	1.4	-5.1
Jul	8.1	8.3	6.8	13.0	7.3	-0.3	-9.4
Jun	1.0	1.0	1.8	2.0	-10.5	-2.1	-6.3
May	21.4	21.5	18.0	28.2	21.6	13.2	-11.7
Apr	7.5	7.6	6.2	11.0	4.8	2.3	-7.5
Mar	10.7	10.9	10.2	14.8	8.5	1.9	-0.3
Feb	17.0	17.2	16.3	22.4	11.0	6.1	-2.9
Jan	17.1	17.2	17.0	23.2	11.2	4.4	-3.0
2010
Dec	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Nov	13.8	13.8	13.1	19.0	7.9	3.6	2.9
Oct	9.9	10.1	10.1	13.9	6.5	0.9	0.2
Sep	9.5	9.3	12.1	10.0	7.9	1.7	-2.4
Aug	17.2	17.2	19.0	20.3	19.5	6.9	-2.1
Jul	9.1	8.8	12.7	8.7	7.2	0.9	-0.2
Jun	16.2	16.1	20.5	16.0	20.5	5.3	-2.5
May	13.3	13.3	20.2	11.6	10.7	1.7	12.8
Apr	14.9	14.8	21.8	15.3	8.5	0.0	9.9
Mar	14.2	14.5	20.4	11.7	11.8	6.4	7.2
Feb	7.1	7.5	10.8	7.0	7.4	-1.2	5.4
Jan	0.6	0.9	6.7	-3.4	-0.4	-3.9	3.3
Dec 2010	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Dec 2009	-3.3	-3.2	3.3	-9.9	-0.1	1.1	3.8
Dec 2008	-7.6	-7.4	-14.4	-5.5	-11.2	3.7	-9.0
Dec 2007	0.1	-0.3	-0.6	2.5	-10.0	-2.6	1.7
Dec 2006	3.1	3.1	5.2	2.3	8.7	-1.0	-5.4
Dec 2005	5.8	5.8	3.5	8.9	3.2	2.2	0.6
Dec 2004	5.2	5.6	7.6	3.4	0.9	5.7	9.6
Dec 2003	5.5	5.3	5.6	6.3	1.6	4.6	0.3
Dec 2002	3.7	3.4	5.3	3.4	-5.9	2.2	-2.6

Note: IND: Industry; MFG: Manufacturing; INTG: Intermediate Goods; INVG: Investment Goods; DG: Durable Goods; NDG: Nondurable Goods; EN: Energy

Source:  Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ProductionManufacturing/liste__piverar,templateId=renderPrint.psml

Broader perspective since 2002 is provided by Chart VE-1 of the Statistiche Bundesamt Deutschland, Federal Statistical Agency of Germany. The index rises by more than one third between 2003 and 2008 with sharp fluctuations and then collapses during the global recession during 2008. Recovery has been in a steep upward trajectory that has recovered at the more recent peaks the losses during the contraction. Recovery was reversed by the drop in Dec.

Chart VE-1, Germany, Production Industries, Not Adjusted, 2005=100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ProductionManufacturing/liste__piverar,templateId=renderPrint.psml

More detail is provided by Chart VE-2 of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, with the unadjusted production industries index and trend from 2007 to 2011. There could be some flattening in recent months as depicted by trend.

Chart VE-2, Germany, Production Index, Production Industries, Not Adjusted Index and Trend, 2005=100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/Production/Content100/kpi111graf0.psml

Table VE-4 provides month and 12-month rates of growth of manufacturing in Germany in 2011. There are fluctuations in both the rates for a month and in the past 12 months. Deceleration appears in the annual equivalent rate of 10.3 percent for Jan-May but minus 5.1 percent in the annual equivalent Jun-Dec.

Table VE-4, Germany, Manufacturing Month and 12 Months ∆%

	12 Months ∆% NSA	Month ∆% SA and Calendar Adjusted
Dec 2011	0.7	-2.7
Nov	5.2	-0.3
Oct	1.3	0.7
Sep	6.6	-2.6
Aug	12.7	-0.3
Jul	8.3	3.3
Jun	1.0	-1.0
AE ∆% Jun-Dec		-5.1
May	21.5	1.3
Apr	7.6	0.2
Mar	10.9	1.1
Feb	17.2	1.5
Jan	17.2	0.0
AE ∆% Jan-May		10.3
Dec	17.6	1.4

AE: Annual Equivalent

Source:

Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ProductionManufacturing/liste__piverar,templateId=renderPrint.psml

Chart VE-3 of the Statistiche Bundesamt Deutschland, or Federal Statistical Office of Germany, provides the manufacturing index of Germany from 2007 to 2011. Manufacturing was already flattening in 2007 and fell sharply in 2008 to the beginning of 2010. Manufacturing grew sharply in the initial phase of recovery but has flattened in recent months as revealed by the trend.

Chart VE-3, Germany, Manufacturing Index, Not Adjusted Index and Trend, 2005=100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/Production/Content100/kpi112graf0.psml

Several tables and charts facilitate analysis of machinery orders in Germany. Table VE-5 reveals strong fluctuations in an evident deceleration of total orders for industry of Germany. The same behavior is observed for total, foreign and domestic orders with decline in 12-month rates from two-digit levels to single digits and some negative changes. An important aspect of Germany is that the bulk of orders is domestic or from other European countries while foreign orders have been growing rapidly. Total orders increased 1.7 percent in Dec 2011 with growth of 4.3 percent in foreign orders compensating decline of 1.4 percent in domestic orders.

Table VE-5, Germany, Volume of Orders Received in Manufacturing, Total, Domestic and Foreign, ∆%

	Total 12 M	Total M	Foreign 12 M	Foreign M	Home 12 M	Home M
2011
Dec	0.0	1.7	-0.8	4.3	1.2	-1.4
Nov	-4.3	-4.9	-7.6	-7.8	-0.2	-1.1
Oct	1.9	5.0	4.3	8.1	-1.0	1.2
Sep	2.2	-4.6	1.1	-5.8	3.5	-3.0
Aug	6.5	-1.3	4.3	0.3	9.3	-3.2
Jul	5.7	-2.4	5.3	-7.0	6.1	3.6
Jun	2.9	0.8	6.2	11.0	-1.2	-10.1
May	22.5	1.9	15.7	-5.2	30.5	10.7
Apr	7.3	2.9	10.5	3.5	3.4	2.2
Mar	8.8	-2.8	11.6	-2.8	5.5	-2.7
Feb	21.1	1.9	24.8	1.6	16.9	2.1
Jan	20.1	2.3	23.6	0.9	16.0	4.2
2010
Dec	22.2	-2.9	27.3	-3.0	15.8	-2.8
Nov	21.5	5.0	26.8	7.6	15.6	1.8
Oct	14.1	1.7	17.7	1.4	10.4	2.0
Sep	13.9	-2.8	16.0	-4.9	11.6	-0.2
Aug	23.5	3.3	31.9	6.5	14.4	-0.4
Jul	14.2	-1.9	21.7	-3.4	6.3	-0.3
Jun	28.5	3.3	32.0	5.4	24.3	0.9
May	24.4	0.5	28.9	1.0	19.9	-0.1
Apr	29.3	2.6	33.0	2.7	25.2	2.4
Mar	29.4	5.7	32.3	6.2	26.4	5.1
Feb	23.4	-0.7	27.6	-0.7	18.6	-0.8
Jan	16.7	4.7	23.6	4.4	9.7	5.1
Dec 2009	9.2	-2.1	10.6	-2.4	7.4	-1.7
Dec 2008	-28.2	-7.1	-31.5	-9.8	-23.7	-3.9
Dec 2007	7.1	-1.5	9.1	-2.4	4.5	-0.4
Dec 2006	2.9	0.3	3.4	0.0	2.2	0.5
Dec 2005	4.9	-0.9	10.5	-1.6	-1.5	0.0
Dec 2004	12.7	6.6	12.9	8.4	12.7	4.9
Dec 2003	10.7	2.4	16.4	5.4	5.1	-0.8
Dec 2002	-0.2	-3.4	-0.8	-6.6	0.2	-0.3

Notes: AE: Annual Equivalent; M: Month; M: Calendar and seasonally-adjusted; 12 M: Non-adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg,templateId=renderPrint.psml

Orders for investment goods of Germany are shown in Table VE-6. Total investment goods orders increased 2.8 percent in Dec with foreign orders increasing 3.3 percent and domestic orders increasing 1.9 percent. The same behavior as for total orders is observed in the form of declining orders from all sources for total orders for investment goods. There has been evident deceleration from 2010 and early 2011 with growth rates falling from two digit levels to single digits and multiple negative changes. An important aspect of Germany’s economy shown in Tables VE-5 and VE-6 is the success in increasing the competitiveness of its economic activities as shown by rapid growth of orders for industry after the recession of 2001 in the period before the global recession beginning in late 2007.

Table VE-6, Germany, Volume of Orders Received of Investment Goods Industries, Total, Foreign and Domestic, ∆%

	Total 12 M	Total M	Foreign 12 M	Foreign M	Domestic 12 M	Domestic M
2011
Dec	1.2	2.8	-0.3	3.3	3.9	1.9
Nov	-5.8	-6.5	-9.2	-10.5	-0.1	0.2
Oct	5.2	8.1	10.0	12.4	-1.9	1.3
Sep	2.8	-4.7	1.8	-5.7	4.6	-2.9
Aug	6.0	-1.1	3.5	0.7	10.2	-3.7
Jul	8.5	-6.3	7.7	-11.9	9.6	3.6
Jun	7.1	3.1	10.6	17.1	1.2	-14.8
May	26.8	2.8	17.9	-7.0	40.4	19.0
Apr	11.8	5.0	15.6	6.7	6.3	2.2
Mar	10.7	-5.3	13.7	-4.8	6.5	-6.1
Feb	28.9	3.5	32.8	3.3	23.1	3.8
Jan	24.3	1.4	28.6	0.5	17.9	2.6
2010
Dec	27.3	-4.6	31.0	-6.1	21.3	-2.1
Nov	30.1	8.1	35.9	12.2	21.5	2.2
Oct	20.6	1.7	23.9	0.3	16.0	4.0
Sep	18.1	-3.9	20.4	-6.2	14.6	-0.2
Aug	29.3	6.8	42.8	10.4	12.0	1.4
Jul	14.1	-4.7	28.4	-6.9	-2.3	-1.3
Jun	33.5	5.6	41.3	8.8	22.2	0.7
May	25.9	2.0	35.6	1.8	13.6	2.5
Apr	30.1	2.2	40.1	3.2	17.4	0.6
Mar	26.2	7.5	33.8	8.6	16.1	5.7
Feb	20.3	-1.9	30.3	-1.5	8.1	-2.5
Jan	16.9	4.6	29.5	3.3	2.5	6.6
Dec 2009	8.1	-1.4	13.6	-1.9	0.5	-0.8
Dec 2008	-32.2	-7.6	-36.7	-10.7	-24.4	-3.1
Dec 2007	9.6	-0.6	11.6	-2.7	6.3	2.7
Dec 2006	3.6	1.8	3.8	1.9	3.1	1.9
Dec 2005	1.9	-2.8	9.8	-3.8	-8.5	-1.3
Dec 2004	19.4	11.2	18.6	12.2	20.5	9.8
Dec 2003	11.7	2.1	17.2	5.0	5.4	-1.6
Dec 2002	-2.8	-4.3	-3.7	-8.1	-1.8	0.2

Notes: AE: Annual Equivalent; M: Month; M: Calendar and seasonally-adjusted; 12 M: Non-adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg,templateId=renderPrint.psml

Chart VE-4 of the German Statistisches Bundesamt Deutschland shows the sharp upward trend of total orders in manufacturing before the global recession. There is also an obvious upward trend in the recovery from the recession with Germany’s economy being among the most dynamic in the advanced economies until the slowdown late in 2011.

Chart VE-4, Germany, Volume of Total Orders in Manufacturing, Non-Adjusted, 2005=100

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg,templateId=renderPrint.psml

Chart VE-5 of the German Statistisches Bundesamt Deutschland provides unadjusted volume of total orders in manufacturing and a trend curve. The final segment on the right could be the beginning of flattening of the trend curve but it is early to reach conclusions.

Chart VE-5, Germany, Volume of Total Orders in Manufacturing and Trend, Non-Adjusted, 2005=100

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/OrdersRecieved/Content100/kae211graf0.psml

Twelve-month rates of growth Germany’s exports and imports are shown in Table VE-7. There was sharp decline in the rates in Jun and Jul to single-digit levels especially for exports. In the 12 months ending in Aug, exports rose 14.4 percent and imports 13.2 percent. In Sep, exports grew 10.5 percent relative to a year earlier and imports grew 12.0 percent. Growth rates in 12 months ending in Oct fell significantly to 3.7 percent for exports and 8.9 percent for imports. Lower prices may explain part of the decline in nominal values. Exports grew 8.3 percent in Nov and imports 6.7 percent. In Dec, exports grew 5.0 percent in 12 months and imports 5.4 percent. Growth had been much stronger in the recovery during 2010 and 2011 from the fall from 2007 to 2009. Germany’s trade grew at high rates in 2006 and 2005. 

Table VE-7, Germany, Exports and Imports NSA Euro Billions and 12-Month ∆%

	Exports EURO Billions	12- Month ∆%	Imports EURO Billions	12-Month ∆%
Dec 2011	85.1	5.0	72.1	5.4
Nov	94.8	8.2	78.9	7.0
Oct	89.2	3.7	77.9	8.9
Sep	95.0	10.5	77.8	12.0
Aug	85.1	14.4	73.5	13.2
Jul	85.7	5.3	75.3	10.0
Jun	88.1	3.3	75.6	6.2
May	92.0	20.8	77.4	17.2
Apr	84.3	12.1	73.4	18.1
Mar	98.2	14.7	79.4	14.5
Feb	84.1	20.1	72.1	27.1
Jan	78.6	24.1	68.5	24.4
Dec 2010	81.0	20.0	68.4	24.3
Nov	87.6	21.2	73.7	30.9
Oct	86.0	18.7	71.5	19.1
Sep	86.0	21.2	69.5	17.0
Aug	74.4	23.8	64.9	27.1
Jul	81.4	15.3	68.4	24.4
Jun	85.3	27.5	71.2	33.9
May	76.2	25.6	66.0	31.2
Apr	75.2	16.7	62.2	14.5
Mar	85.6	22.0	69.3	18.0
Feb	70.0	9.7	56.8	3.2
Jan	63.4	-0.3	55.1	-1.9
Dec 2009	67.5	1.2	55.0	-7.3
Dec 2008	66.7	-8.6	59.4	-5.0
Dec 2007	73.0	-0.6	62.5	-0.1
Dec 2006	73.4	10.2	62.6	8.5
Dec 2005	66.6	11.5	57.7	18.1
Dec 2004	59.7	9.2	48.9	10.8
Dec 2003	54.7	7.6	44.1	3.9
Dec 2002	50.8	5.5
Dec 2001	48.2	-3.7
Dec 2000	50.0

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__044__51,templateId=renderPrint.psml

Table VE-8 provides monthly rates of growth of exports and imports of Germany. Exports surged in Aug after weak negative growth in Jul and Jun. Exports grew again 0.8 percent in Sep but fell 2.9 percent in Oct. Exports increased 2.6 percent in Nov and fell 4.2 percent in Dec. The trade account has benefitted from declines in imports of 0.9 percent in Sep, 0.2 percent in percent in Nov and 3.9 percent in Dec.

Table VE-8, Germany, Exports and Imports Month ∆% Calendar and Seasonally Adjusted 

	Exports	Imports
Dec 2011	-4.3	-3.9
Nov	2.6	-0.2
Oct	-2.9	0.1
Sep	0.8	-0.9
Aug	3.2	0.0
Jul	-1.0	0.5
Jun	-0.5	-0.3
May	2.9	3.0
Apr	-4.0	-1.9
Mar	5.5	2.6
Feb	2.5	3.2
Jan	0.3	3.6
Dec 2010	-1.1	-2.6

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__044__51,templateId=renderPrint.psml

Chart VE-6 of the Statistisches Bundesamt Deutschland shows exports and trend of German exports. Growth has been with fluctuations around a strong upward trend.

Chart VE-6, Germany, Exports Original Value and Trend 2007-2011

Source: Statistisches Bundesamt Deutschland

Chart VE-7 of the Statistisches Bundesamt Deutschland provides German imports and trend. Imports also fell sharply and have been recovering with fluctuations around a strong upward trend that could be flattening

Chart VE-7, Germany, Imports Original Value and Trend 2007-2011

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/ForeignTrade/Content100/kah611graf0.psml

Chart VE-8 of the Statistisches Bundesamt Deutschland shows the trade balance of Germany since 2007. There was sharp decline during the global recession and fluctuations around a mild upward trend during the recovery with stabilization followed by stronger trend in recent months.

Chart VE-8, Germany, Trade Balance Original and Trend 2007-2011

Source:

Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/ForeignTrade/Content100/kah613graf0.psml

There is extremely important information in Table VE-9 for the current sovereign risk crisis in the euro zone. Table VE-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Dec. German exports to other European Union members are 47.4 percent of total exports in Dec and 59.2 percent in Jan-Dec. Exports to the euro area are 31.8 percent in Dec and 39.7 percent in Jan-Dec. Exports to third countries are 44.3 percent of the total in Dec and 40.8 percent in Jan-Dec. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of its high share in exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.

Table VE-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Dec 2011 € Billions	12 Months ∆%	Jan-Dec 2011 € Billions	Jan-Dec 2011/ Jan-Dec 2010 ∆%
Total Exports	85.1	5.0	1,060.1	11.4
A. EU Members	47.4 % 55.7	-1.6	627.3 % 59.2	9.9
Euro Area	31.8 % 37.4	-3.3	420.9 % 39.7	8.6
Non-euro Area	15.5 % 18.2	2.2	206.4 % 19.5	12.6
B. Third Countries	37.7 % 44.3	14.7	432.8 % 40.8	13.6
Total Imports	72.1	5.4	902.0	13.2
C. EU Members	45.9 % 63.7	5.1	572.6 % 63.5	13.8
Euro Area	31.9 % 44.2	3.5	401.5 % 44.5	12.9
Non-euro Area	14.0 % 19.4	8.8	171.1 % 18.9	16.1
D. Third Countries	26.2 % 36.3	6.1	329.4 % 36.5	12.0

Notes: Total Exports = A+B; Total Imports = C+D

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__044__51,templateId=renderPrint.psml

VF France. The Markit France Services Activity Index of the Markit France Services PMI^® rose from 50.3 in Dec to 52.3 in Jan such that the Markit France Composite Output Index increased from stability at 50 in Dec to growth at 51.2 in Jan, which is a high in five months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9154). The pace of deterioration of manufacturing business slowed with the Markit Purchasing Managers’ Index^® (PMI^®)) fell slightly from 48.9 in Dec to 48.5 in Jan, suggesting modest deterioration of business conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). There were additional declines in new orders and output in Jan. There was only marginal decline in foreign new orders. Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds challenging conditions with special weakness in domestic demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Dec month ∆% 0.4 12 months ∆%: 2.5 01/15/12
PPI	Dec month ∆%: -0.1 Dec 12 months ∆%: 4.7 Blog 02/05/12
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.3 IIIQ2011/IIIQ2010 ∆%: 1.5 Blog 12/27/11
Industrial Production	Dec/Nov SA ∆%: Industrial Production minus 1.4; Manufacturing minus 1.4 Dec YOY NSA ∆%: Industrial Production 0.6; Manufacturing 2.1 Blog 02/12/12
Industrial New Orders	Mfg Nov ∆% 1.0 YOY ∆% 2.8 Blog 01/22/12
Consumer Spending	Dec Manufactured Goods ∆%: minus 0.7 Dec 12 Months Manufactured Goods ∆%: minus 2.4 Blog 02/05/12
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/04/11
Trade Balance	Dec Exports ∆%: month minus 2.7, 12 months 7.2 Dec Imports ∆%: month minus 0.4, 12 months 5.3 Blog 02/12/12
Confidence Indicators	Historical averages 100 Dec: France 91 Mfg Business Climate 91 Retail Trade 89 Services 92 Building 100 Household 81 Blog 1/29/12

Links to blog comments in Table FR:

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/29 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

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

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

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

France’s industrial production by segments is provided in Table VF-1. Total industry fell 1.4 percent in Dec after increasing 1.1 percent in Nov and manufacturing fell 1.4 percent in Dec after increasing 1.4 percent in Nov. Construction fell 2.0 percent in Dec after increasing 1.7 percent in Nov. Mining fell 1.3 percent in Dec and declined 0.7 percent in Nov. There were declines for all categories in the quarter. Industry rose 0.6 percent relative to the same quarter a year earlier and manufacturing grew 2.1 percent while mining fell 8.5 percent.

Table VF-1, France, Industrial Production ∆%

	Dec/Nov	Nov/Oct	QOQ	YOY
Industry	-1.4	1.1	-0.8	0.6
Manufacturing	-1.4	1.4	-0.5	2.1
Mining, Mining, Energy, Water, Waste Mgt	-1.3	-0.7	-2.9	-8.5
Construction	-2.0	1.7	-0.7	3.1

Note: QOQ: quarter on quarter; YOY:most recent quarter on the same quarter a year earlier

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120210

Table VF-2 provides longer historical perspective of manufacturing in France. The decline of 1.4 percent in Dec corresponded to increase of 0.8 percent in 12 months. There is similar strength earlier in the recovery in 2010 and early 2011 with less strong performance in the latter part of 2011. Manufacturing fell 12.7 percent in 2008 during the global contraction and an additional 2.8 percent in 2009.

Table VF-2, France, Manufacturing, Month and 12-Month ∆%

	Month ∆%	12-Month ∆%
Dec 2011	-1.4	0.8
Nov	1.4	2.6
Oct	0.3	2.8
Sep	-2.0	1.8
Aug	0.3	4.7
Jul	1.8	3.9
Jun	-2.0	3.2
May	1.2	4.1
Apr	-0.3	3.4
Mar	-0.9	4.4
Feb	0.6	7.1
Jan	1.9	6.6
Dec 2010	0.4	5.0
Dec 2009		-2.8
Dec 2008		-12.7
Dec 2007		-0.2
Dec 2006		2.4
Dec 2005		-0.1
Dec 2004		1.5
Dec 2003		0.3
Dec 2002		-0.5
Dec 2001		-4.8
Dec 2000		5.1
Average ∆% 1990-2000		1.5

Source:

Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120210

Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques shows indices of manufacturing in France from 2007 to 2011. Manufacturing, which is CZ in Chart VF-1, fell deeply in 2008 and part of 2009. All curves of industrial indices tend to flatten recently with oscillations.

Chart VF-1, France, Industrial Production Indices 2007-2011

Legend : CZ : Manufacturing - (C1) : Manufacture of food products and beverages - (C3) : Electrical and electronic equipment; machine equipment - (C4) : Manufacture of transport equipment - (C5) : Other manufacturing

Source: Institut National de la Statistique et des Études Économiques

France has been running a trade deficit fluctuating around €6,000 million, as shown in Table VF-3. Exports fell 2.7 percent in Dec while imports increased 5.3 percent, resulting in increase of the trade deficit from €4140 million in Nov to €4993 million in Dec.

Table VF-3, France, Exports, Imports and Trade Balance, € Millions 

	Exports	Imports	Trade Balance
Dec 2011	36,458	41,451	-4,993
Nov	37,460	41,600	-4,140
Oct	36,049	41,796	-5,747
Sep	35,953	42,053	-6,100
Aug	37,719	42,362	-4,643
Jul	35,134	41,592	-6,458
Jun	34,863	40,067	-5,204
May	34,846	41,487	-6,641
Apr	34,561	41,493	-6,932
Mar	35,098	41,214	-6,116
Feb	34,786	41,165	-6,379
Jan	34,380	40,869	-6,489
Dec 2010	34,023	39,380	-5,357

Source: http://lekiosque.finances.gouv.fr/AppChiffre/nationales/surcadre_nationales.asp?TF=revue

Month and 12-month rates of growth of exports and imports of France are provided in Table VF-4. Exports fell 2.7 percent in Dec and grew 7.2 percent in 12 months. Imports fell 0.4 percent in Dec and grew 5.3 percent in 12 months. Growth of exports and imports has fluctuated in 2011 as a result of price surges of commodities and raw materials.

Table VF-4, France, Exports and Imports, Month and 12-Month ∆%

	Exports Month ∆%	Exports 12-Month ∆%	Imports Month ∆%	Imports 12-Month ∆%
Dec 2011	-2.7	7.2	-0.4	5.3
Nov	3.9	8.1	-0.5	5.2
Oct	0.3	9.1	-0.6	14.9
Sep	-4.7	8.3	-0.7	10.9
Aug	7.4	11.2	1.9	9.1
Jul	0.8	2.3	3.8	9.6
Jun	0.3	3.8	-3.1	7.9
May	0.8	15.4	0.0	16.2
Apr	-1.5	7.7	0.7	14.3
Mar	0.9	11.4	0.1	14.6
Feb	1.2	14.0	0.7	21.6
Jan	1.0	13.8	3.8	20.1
Dec 2011		7.2		5.3
Dec 2010		14.6		15.1
Dec 2009		-9.9		-2.2
Dec 2008		-7.3		-11.3
Dec 2007		6.1		8.4
Dec 2006		7.4		6.9
Dec 2005		11.0		14.8
Dec 2004		-3.6		5.9
Dec 2003		7.1		1.6

Source: http://lekiosque.finances.gouv.fr/AppChiffre/nationales/surcadre_nationales.asp?TF=revue

Table VF-5 provides exports, imports and the trade balance of France from 2002 to 2011. The trade balance deteriorated sharply from deficit of €44,935 million in 2009 to deficit of €69,592 million in 2011. The rate of import growth of 11.7 percent in 2011 exceeded that rate of export growth of 8.6 percent.

Table VF-5, France, Cumulative Exports, Imports and Trade Balance, € Millions and ∆%, 2002-2011

	Exports	∆%	Imports	∆%	Balance
2011	428,802	8.6	498,394	11.7	-69,592
2010	394,760	14.0	446,287	14.1	-51,527
2009	346,248	-17.1	391,183	-17.4	-44,935
2008	417,634	2.7	473,853	5.5	-56,219
2007	406,487	3.0	448,981	5.8	-42,494
2006	394,621	9.5	424,549	10.4	-29,928
2005	360,376	4.4	384,588	9.6	-24,212
2004	345,256	5.4	350,996	7.0	-5,740
2003	327,653	-1.7	327,884	-0.6	-231
2002	333,423	NA	329,875	nA	3,548

Source: http://lekiosque.finances.gouv.fr/AppChiffre/nationales/surcadre_nationales.asp?TF=revue

VG Italy. The Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® increased from 44.5 in Dec to 44.8 in Jan, indicating sharp contraction in services output in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9146). Italy’s Markit/ADACI Purchasing Managers’ Index^® (PMI^®)) improved further from 44.3 in Dec to 46.8 in Jan but still showing significant deterioration of business conditions for Italian manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Improvement originated in slower rhythm of decline of new orders and manufacturing product but new orders have declined during eight months. An important finding in the survey is that the declining euro relative to the dollar resulted in success of Italian entities in obtaining new business in the US. Phil Smith, Economist at Markit and author of the report, finds improvement of Italian manufacturing in moving away from contraction but with still weakening new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jan month ∆%: 0.3 Jan 12 months ∆%: 3.3 Blog 02/05/12
Producer Price Index	Dec month ∆%: 0.1 Dec 12 months ∆%: 4.0 Blog 02/05/12
GDP Growth	IIIQ2011/IIIQ2010 SA ∆%: 0.2 IIIQ2011/IIQ2011 NSA ∆%: -0.2 Blog 12/27/11
Labor Report	Dec 2011 Participation rate 62.5% Employment ratio 56.9% Unemployment rate 8.9% Blog 02/05/12
Industrial Production	Dec month ∆%: 1.4 12 months ∆%: minus 1.7 Blog 02/12/12
Retail Sales	Nov month ∆%: minus 1.8 Nov 12 months ∆%: minus 0.3 Blog 01/29/12
Business Confidence	Mfg Jan 92.1, Sep 94.4 Construction Jan 82.2, Sep 79.0 Blog 02/05/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
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:

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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

Italy’s industrial production increased 1.4 percent in Dec but is lower by 1.7 percent relative to a year earlier. Industrial production increased 0.3 percent in Nov but fell 4.1 percent in 12 months, as shown in Table VG-1. Industrial production fell 18.8 percent in 2009 after falling 3.2 percent in 2008.

Table VG-1, Italy, Industrial Production ∆% 

	Month ∆% SA	12 Months ∆% Calendar Adjusted
Dec 2011	1.4	-1.7
Nov	0.3	-4.1
Oct	-0.8	-4.0
Sep	-4.7	-2.7
Aug	3.6	4.7
Jul	-0.6	-1.1
Jun	-0.7	0.1
May	-0.8	1.8
Apr	0.8	3.9
Mar	0.4	3.5
Feb	1.1	2.4
Jan	-1.7	0.4
Dec 2010	-0.6	6.3
Nov	0.8	5.2
Oct	0.1	3.8
Sep	0.3	5.5
Aug	-0.4	11.0
Jul	0.5	7.0
Jun	0.9	9.6
May	1.1	8.4
Apr	0.7	9.1
Mar	-0.3	7.8
Feb	-0.5	4.2
Jan	3.7	0.7
Dec 2009	-1.3	-6.6
Year
2011		0.0
2010		6.4
2009		-18.8
2008		-3.2

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/53027

Month and 12-month rates of growth of Italy’s industrial production and major categories are provided in Table VG-2 for Dec 2011. The 12-month rates of change are all negative and relatively high. Total industrial production increased 1.4 percent in Dec but fell 1.7 percent relative to a year earlier. In the month of Dec, consumer goods increased 1.8 percent, durable goods 3.0 percent and nondurable goods 1.6 percent.

Table VG-2, Italy, Industrial Production Rate of Change ∆%

Dec 2011	Month ∆%	12-Month ∆%
Total	1.4	-1.7
Consumer Goods	1.8	-0.8
Durable	3.0	-4.7
Nondurable	1.6	-0.1
Capital Goods	3.6	3.2
Intermediate Goods	0.0	-3.6
Energy	-2.0	-10.3

Source:

Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/53027

VH United Kingdom. The Markit/CIPS UK Services PMI^® rose from 54.0 in Dec to 56.0 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Chris Williamson, Chief Economist at Markit, finds strength in services, manufacturing and construction, constituting significant improvement over IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Dec month ∆%: 0.4 Nov 12 months ∆%: 4.2 Blog 01/22/12
Output/Input Prices	Output Prices: Jan 12 months NSA ∆%: 4.1; excluding food, petroleum ∆%: 2.4 Input Prices: Jan 12 months NSA ∆%: 7.0 Excluding ∆%: 5.4 Blog 02/12/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.8 Blog 01/29/12
Industrial Production	Dec 2011/Dec 2010 NSA ∆%: Industrial Production minus 3.3; Manufacturing 0.8 Blog 02/12/12
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 Dec minus ₤1109 million Exports Dec ∆%: 0.5 Oct/Dec ∆%: 7.8 Imports Dec ∆%: 0.9 Oct/Dec ∆%: 4.1 Blog 02/12/12

Links to blog comments in Table UK:

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

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

Table VH-1, UK, Output of the Production Industries, Chain Volume Indices of Gross Value Added, 12-Month ∆%

	PROD IND	MNG	MFG	ENGY	CON DUR	CON NDUR	CAP
2011
Dec	-3.3	-14.6	0.8	-15.4	-4.6	0.1	5.7
Nov	-3.6	-15.0	-1.0	-12.7	0.1	-0.8	4.1
Oct	-2.7	-14.1	-0.3	-11.6	-1.5	-1.3	4.8
Sep	-2.0	-18.3	1.0	-12.1	-1.4	0.0	6.4
Aug	-1.5	-16.0	0.9	-9.9	-1.7	1.6	4.0
Jul	-1.4	-17.3	2.0	-11.4	1.4	3.1	4.4
Jun	-0.7	-16.8	2.9	-10.3	6.6	2.3	7.5
May	-1.7	-22.8	3.4	-14.6	2.2	3.4	6.3
Apr	-2.0	-16.5	1.9	-12.5	1.3	3.7	4.4
Mar	-0.8	-16.6	2.9	-11.4	1.3	0.3	8.6
Feb	1.2	-12.7	4.7	-8.7	0.8	0.5	10.6
Jan	3.1	-5.0	5.8	-4.6	4.3	-0.5	10.6
2010
Dec	3.3	-4.8	4.3	0.8	-4.6	3.1	8.0
Nov	2.7	-6.2	5.1	-3.1	-9.4	1.2	9.5
Oct	2.7	-6.2	5.3	-3.1	-9.5	4.2	7.3
Sep	3.7	2.9	5.2	1.2	-9.0	2.1	9.7
Aug	3.8	0.3	6.2	-1.1	0.2	3.5	12.7
Jul	1.6	-8.9	5.0	-7.1	-1.4	-0.9	12.7
Jun	1.2	-9.5	3.9	-6.6	-6.2	0.5	9.6
May	2.5	-1.0	3.5	-1.4	-2.6	-3.3	12.2
Apr	0.9	-5.9	2.1	-3.6	-3.7	-6.3	10.1
Mar	2.2	-1.4	3.2	-0.9	0.2	-1.7	9.2
Feb	-0.6	-8.4	1.0	-5.9	-1.5	-2.7	7.4
Jan	-1.6	-8.7	-0.4	-5.1	-3.5	-1.4	4.9
2011/ 2010	-1.3	-15.5	2.1	-11.3	0.7	1.0	6.4
2010/ 2009	1.9	-4.9	3.7	-3.1	-4.3	-0.2	9.4
2009/ 2008	-9.0	-9.0	-9.6	-6.2	-7.5	-0.8	-10.7
2008/ 2007	-2.8	-6.5	-2.6	-2.9	-5.6	-1.9	-3.0
2007/ 2006	0.5	-2.5	0.8	-1.2	1.0	-1.7	2.5
2006/ 2005	--	-7.6	1.7	-5.4	0.3	0.7	2.9

Notes: PROD IND: Production Industries; MNG: Mining; MFG: Manufacturing; ENGY: Energy; CON DUR: Consumer Durables; CONS NDUR: Consumer Nondurables; CAP: Capital Goods

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/december-2011/index.html

Percentage changes in the production industries and major components in the latest month relative to the prior month are shown in Table VH-2. Manufacturing fell in all months from Jun to Nov with the exception of no growth in Sep. In Dec, manufacturing grew 1.0 percent. Growth was stronger in the first five months to May with the exception of decline by 1.3 percent in Apr. Output of consumer durables has fallen sharply in Jul-Dec by cumulative 5.9 percent with growth only in Nov by 1.0 percent. Output of capital goods fell 0.8 percent in Jul and then another 0.2 percent in Aug but grew strongly by 2.0 percent in Sep but declined slightly by 1.0 percent in Oct, increasing 1.3 percent in Nov and 0.9 percent in Dec.

Table VH-2, UK, Output of the Production Industries, Chained Volume Indices of Gross Value Added, Latest Month on Previous Month ∆%

	PROD IND	MNG	MFG	ENGY	CON DUR	CON NDUR	CAP
2011
Dec	0.5	-2.1	1.0	-1.1	-1.0	1.2	0.9
Nov	-0.5	-1.8	-0.1	-1.4	1.0	-0.3	1.3
Oct	-1.1	0.0	-0.9	-1.8	-0.1	-0.6	-1.0
Sep	-0.2	-1.6	0.0	-1.2	-2.7	-2.1	2.0
Aug	0.2	2.7	-0.4	1.9	-1.9	0.3	-0.2
Jul	-0.4	-0.5	-0.2	-1.4	-2.2	-0.2	-0.8
Jun	0.2	1.0	-0.3	1.3	0.1	0.5	-0.1
May	0.8	-5.4	1.7	-1.3	0.9	0.6	2.8
Apr	-1.7	-1.1	-1.3	-2.3	-1.0	0.3	-3.3
Mar	0.2	-0.8	0.4	-0.5	0.5	1.3	0.9
Feb	-1.3	-8.2	0.1	-5.6	-1.4	0.2	1.4
Jan	0.1	2.4	0.9	-3.1	3.3	-1.1	2.0
2010
Dec	0.2	-2.5	-0.7	2.1	3.9	0.2	-0.6

Notes: PROD IND: Production Industries; MNG: Mining; MFG: Manufacturing; ENGY: Electricity, Gas and Water Supply; CON DUR: Consumer Durables; CONS NDUR: Consumer Nondurables; CAP: Capital Goods

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/december-2011/index.html

The weights of components of the production index and contributions by components to the monthly and 12-month percentage changes of volume are provided in Table VH-3. The 12-month rate of output of the production industries of minus 3.3 percent was driven by negative contribution of 2.08 percentage points of the general component of mining with the subcomponent of oil and gas contributing negative 2.05 percentage points. Manufacturing contributed 0.53 percentage points to growth of the production industries index. The contribution of manufacturing is anemic because of its share of 66.6 percent in the production index but growth of only 0.8 percent in 12 months. The contributions do not add exactly because of rounding. Manufacturing fell 0.2 percent in Nov contributing minus 0.11 percentage points and electricity increased 1.0 percent in Dec, contributing 0.73 percentage points. Growth of mining by minus 2.1 percent contributed minus 0.27 percentage points.

Table VH-3, UK, Weights of Components, Volume 12-Month and Month ∆% and Percentage Point Contributions of Production Industries by Components

	Weight %	Volume 12-Month ∆% Ending in Dec 2011	% Point Contrib.	Volume Month ∆% Dec 2011	% Point Contrib.
PROD IND	100.0	-3.3	-3.34	0.5	0.49
MNG	16.4	-14.6	-2.08	-2.1	-0.27
MNG 06	14.1	-17.2	-2.05	-2.7	-0.28
MFG	66.6	0.8	0.53	1.0	0.73
ELEC	9.3	-15.5	-1.63	0.4	0.04
WATER & SEW	7.7	-2.0	-0.15	-0.1	-0.01

Notes: Contrib: Contribution; PROD IND: Index of Production; MNG: Mining and Quarrying (of which 14.4 percent of the total weight in oil and gas extraction); MNG 06: Subdivision of Mining including oil and gas extraction; MFG: Manufacturing; ELEC: Electricity, gas, steam and air conditioning; WATER & SEW: water supply, sewerage and waste management

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/december-2011/index.html

Table VH-4 provides the breakdown of manufacturing 12-month and monthly growth and percentage contributions. Food products, beverage and tobacco (CA), chemical and chemical products (CE), computer, rubber and plastic products and nonmetallic mineral products (CG), machinery and equipment (CK), transport equipment (CL) and other manufacturing and repair (CM) provided the impulse to the 12-month rates of growth with all other segments subtracting with negative contributions. Manufacture of good products, beverage and tobacco (CA) contributed 0.18 percentage points to the monthly rate in Dec, wood and paper products and printing (CC) contributed 0.10 percentage points, chemical and chemical products (CE) contributed 0.15 percentage points and transport equipment (CL) contributed 0.25 percentage points.

Table VH-4, UK, Growth Rates of Manufacturing and Percentage Point Contributions to the Index of Production, Nov 2011

Sub-sector	% of production	Year on year growth (%)	Contribution to production (% points)	Month on month growth (%)	Contribution to production (% points)
CA	11.2	1.8	0.23	1.3	0.18
CB	2.1	-0.1	0.00	1.1	0.03
CC	5.9	-2.3	-0.13	1.7	0.10
CD	0.4	-2.7	-0.01	-1.3	-0.01
CE	5.5	6.0	0.28	3.0	0.15
CF	4.9	-9.7	-0.46	0.3	0.01
CG	5.0	2.7	0.12	-2.5	-0.12
CH	9.3	-3.4	-0.30	1.4	0.12
CI	4.9	-3.6	-0.16	-1.9	-0.09
CJ	2.2	-9.8	-0.21	-0.5	-0.01
CK	4.4	4.7	0.23	-0.4	0.02
CL	5.8	9.4	0.69	3.0	0.25
CM	4.9	4.9	0.25	1.7	0.09

Notes:

CA Manufacture of food products, beverages and tobacco; CB Textiles, wearing apparel and leather products; CC Wood and paper products and printing; CD Coke and refined petroleum products; CE Chemicals and chemical products; CF Basic pharmaceutical products and preparations; CG Rubber and plastic products and nonmetallic mineral products; CH Basic metals and metal products; CI Computer, electronic and optical products; CJ Electrical equipment; CK Machinery and equipment not elsewhere classified; CL Transport equipment; CM Other manufacturing and repair.

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/december-2011/index.html

The UK trade account is shown in Table VH-5. In Dec 2011, the UK ran a deficit in trade of goods and services (total trade) of ₤1109 million. The deficit in trade of goods was ₤7111 million and ₤6525 million in goods excluding oil. A surplus in services of ₤6002 million contributed to the smaller overall deficit in goods and services (-₤7111 million plus ₤6002 equal to -₤1109). Services have contributed to lower trade account deficits and also softened the impact of the global recession on the UK economy. Exports of goods and services increased 0.5 percent in Dec 2011 and rose 7.8 percent in the quarter Oct-Dec 2011 relative to the same quarter a year earlier with imports decreasing 3.4 percent in Dec and rising 4.1 percent in Oct-Dec relative to the quarter a year earlier. Excluding oil, UK exports of goods fell 1.7 percent in Dec and increased 9.4 percent in Oct-Dec relative to a year earlier while imports fell 4.4 percent and increased 1.0 percent in Oct-Dec relative to a year earlier. The great advantage of the UK similar to the US is the substantial surplus in services. Services exports fell 0.1 percent in Dec and rose 4.5 percent in Oct-Dec relative to a year earlier and imports increased 0.6 percent in Dec and increased 2.5 percent in Oct-Dec relative to a year earlier.

Table VH-5, Value of UK Trade in Goods and Services, Balance of Payments Basis, ₤ Million  and ∆%

	₤ Million SA Dec 2011	Month ∆%   Dec 2011	Oct to Dec 2011 ∆% Oct to Dec 2010
Total Trade
Exports	41,497	0.5	7.8
Imports	42,606	-3.4	4.1
Balance	-1,109
Trade in Goods
Exports	25,567	0.9	10.0
Imports	32,678	-4.6	4.6
Balance	-7,111
Trade in Goods Excluding Oil
Exports	21,899	-1.7	9.4
Imports	28,424	-4.4	1.0
Balance	-6,525
Trade in Services
Exports	15,930	-0.1	4.5
Imports	9,928	0.6	2.5
Balance	6,002

Source: http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/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 VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar of 10.7 percent by Fri Feb 10, 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	02/10 /2012
Rate	1.1423	1.5914	1.192	1.319
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/10/ 2012
Rate	8.2798	8.2765	6.8211	6.2944
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 VIII-4 below, the dollar has devalued again to USD 1.319/EUR or by 10.7 percent {[(1.319/1.192)-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 6.2944/USD on Fri Feb 3, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 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. Financial markets were closed in China during the week of Jan 27. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. In the week of Feb 10 China revalued by an additional 0.1 percent. 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	02/10 /2012
Rate	1.1423	1.5914	1.192	1.319
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/10/2012
Rate	8.2798	8.2765	6.8211	6.2944
Weekly Rates	01/13/2012	01/27/2012	02/03/2012	02/010/2012
CNY/USD	6.3068	6.334	6.303	6.2944
∆% from Earlier Week*	0.04	-0.4	0.5	0.1

*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 02/10/12,” 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 weeks of Jan 20, Jan 27 and Feb 3 followed by weakness in the week of Feb 10, there is now only one financial value with negative change in valuation in column “∆% Trough to 02/10/12:” Shanghai Composite minus 1.3 percent. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 32.2 percent and S&P 500 31.3 percent, driven by stronger earnings and economy in the US than in other advanced economies. 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 02/10/12” had double digit gains relative to the trough around Jul 2, 2010 but now only three valuations show increases of less than 10 percent: NYSE Financial is 7.6 percent above the trough; STOXX 50 Europe is 7.5 percent above the trough; and Japan’s Nikkei Average is 1.4 percent above the trough. DJ UBS Commodities is 16.9 percent above the trough; Dow Global is 15.4 percent above the trough; and DAX is 18.0 percent above the trough. Japan’s Nikkei Average is 1.4 percent above the trough on Aug 31, 2010 and 22.5 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8947.17

on Fri Feb 10, 2012, which is 12.7 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 10.7 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 02/10/12” in Table VI-4 shows strong performance of risk financial assets in the week of Feb 10, 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 02/10/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Feb 10, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 02/10/12” but also relative to the peak in column “∆% Peak to 02/10/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 14.2 percent, S&P 500 10.3 percent and Dax 5.7 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 14.8 percent, Nikkei Average by 21.5 percent, Shanghai Composite by 25.7 percent, STOXX 50 by 8.9 percent, Dow Global by 5.9 percent and Dow Asia Pacific by 2.1 percent. DJ UBS Commodities Index is now 0.1 percent below the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.

Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 02/10 /12	∆% Week 02/10/ 12	∆% Trough to 02/10 12
DJIA	4/26/ 10	7/2/10	-13.6	14.2	-0.5	32.2
S&P 500	4/23/ 10	7/20/ 10	-16.0	10.3	-0.2	31.3
NYSE Finance	4/15/ 10	7/2/10	-20.3	-14.8	-1.4	7.0
Dow Global	4/15/ 10	7/2/10	-18.4	-5.9	-0.6	15.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.1	0.5	11.8
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-21.5	1.3	1.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-25.7	0.9	-1.3
STOXX 50	4/15/10	7/2/10	-15.3	-8.9	-1.3	7.5
DAX	4/26/ 10	5/25/ 10	-10.5	5.7	-1.1	18.0
Dollar Euro	11/25 2009	6/7 2010	21.2	12.8	-0.2	-10.7
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-0.1	-0.4	16.9
10-Year T Note	4/5/ 10	4/6/10	3.986	1.974

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 Feb 10, 2012, shows that the S&P 500 is now 10.8 percent above the Apr 26, 2010 level and the DJIA is 14.2 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
Jan 27	-0.5	13.0	0.1	8.6
Feb 3	1.6	14.8	2.2	11.0
Feb 10	-0.5	14.2	-0.2	10.8

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 6.9 percent to ZAR 7.743/USD on Feb 10, 2012, which is still 33.1 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 6.5 percent stronger at SGD 1.261/USD on Feb 10 relative to the trough of depreciation but still stronger by 18.8 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 appreciation of 0.6 percent relative to the trough to BRL 1.727/USD on Feb 10, 2012 but still stronger by 28.9 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	Feb 10, 2012	∆T Feb 10, 2012	∆P Feb 10, 2012
EUR USD	7/15 2008	6/7 2010		02/10 2012
Rate	1.59	1.192		1.319
∆%			-33.4		9.6	-20.6
JPY USD	8/18 2008	9/15 2010		02/10 2012
Rate	110.19	83.07		77.595
∆%			24.6		6.6	29.6
CHF USD	11/21 2008	12/8 2009		02/10 2012
Rate	1.225	1.025		0.9174
∆%			16.3		10.5	25.1
USD GBP	7/15 2008	1/2/ 2009		02/10 2012
Rate	2.006	1.388		1.575
∆%			-44.5		11.9	-27.4
USD AUD	7/15 2008	10/27 2008		02/10 2012
Rate	1.0215	1.6639		1.067
∆%			-62.9		43.7	8.2
ZAR USD	10/22 2008	8/15 2010		02/10 2012
Rate	11.578	7.238		7.743
∆%			37.5		-6.9	33.1
SGD USD	3/3 2009	8/9 2010		02/10 2012
Rate	1.553	1.348		1.261
∆%			13.2		6.5	18.8
HKD USD	8/15 2008	12/14 2009		02/10 2012
Rate	7.813	7.752		7.755
∆%			0.8		0.0	0.7
BRL USD	12/5 2008	4/30 2010		02/10 2012
Rate	2.43	1.737		1.727
∆%			28.5		0.6	28.9
CZK USD	2/13 2009	8/6 2010		02/10 2012
Rate	22.19	18.693		19.056
∆%			15.7		-1.9	14.1
SEK USD	3/4 2009	8/9 2010		02/10 2012
Rate	9.313	7.108		6.658
∆%			23.7		6.3	28.5
CNY USD	7/20 2005	7/15 2008		02/10 2012
Rate	8.2765	6.8211		6.2944
∆%			17.6		7.7	23.9

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

Chart VI-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar

Source: Board of Governors of the Federal Reserve System

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 1.974 percent at the close of market on Fri Feb 10, 2012 would be equivalent to price of 105.8815 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.6 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html 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 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On Jan 4, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2911 billion, or $2.9 trillion, with portfolio of long-term securities of $2570 billion, or $2.6 trillion, consisting of $1566 billion Treasury nominal notes and bonds, $67 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $836 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1632 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
01/27/12	1.893	106.6404	5.3
02/03/12	1.923	106.3586	5.0
02/10/12	1.974	105.8815	4.6

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 fell to 14,376 thousand barrels per day on average in the four weeks ending on Feb 3, 2012 from 14,511 thousand barrels per day in the four weeks ending on Jan 7, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 82.6 percent on Feb 3, 2012, which is lower than 83.5 percent on Feb 4, 2011, and 83.3 percent on Jan 27, 2012. Imports of crude oil fell 4.2 percent from 8,940 thousand barrels per day on average in the four weeks ending on Jan 27 to 8,566 thousand barrels per day in the week of Feb 3. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 8.4 million barrels per day last week [Feb 3]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries but with declining imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 0.3 million barrels from 338.9 million barrels on Jan 27 to 339.2 million barrels on Feb 3. Motor gasoline production decreased 0.3 percent from 8,657 thousand barrels per day in the week of Jan 27 to 8,629 thousand barrels per day on average in the week of Feb 3. Gasoline stocks decreased 1.7 million barrels and stocks of fuel oil decreased 1.2 million barrels. Supply of gasoline fell from 8,620 thousand barrels per day on Feb 4, 2011, to 8,038 thousand barrels per day on Feb 4, 2011, or by 6.8 percent, while fuel oil supply fell 6.8 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 11.3 percent from Feb 4, 2011 to Feb 3, 2012. Gasoline prices rose 11.2 percent from Feb 7, 2011 to Feb 6, 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	02/03/12	01/27/12	02/04/11
Crude Oil Refineries Input	14,376 Week       ∆%: -0.9	14,511	14,278
Refinery Capacity Utilization %	82.6	83.3	83.5
Motor Gasoline Production	8,629 Week      ∆%: –0.3	8,657	8,896
Distillate Fuel Oil Production	4,467 Week     ∆%: –1.5	4,534	4,267
Crude Oil Imports	8,566 Week        ∆%: -4.2	8,940	9,040
Motor Gasoline Supplied	8,038 ∆% 2011/2010= -6.8%	8,073	8,620
Distillate Fuel Oil Supplied	3,673 ∆% 2011/2010 = –1.4%	3,634	3,724
	02/03/12	1/27/12	02/04/11
Crude Oil Stocks Million B	339.2         ∆= +0.3 MB	338.9	345.1
Motor Gasoline Million B	231.8    ∆= +1.7 MB	230.1	240.9
Distillate Fuel Oil Million B	146.6 ∆= +1.2 MB	145.4	164.4
WTI Crude Oil Price $/B	97.80 ∆% 2011/2010 11.3	99.47	87.87
	02/06/12	1/30/12	2/07/11
Regular Motor Gasoline $/G	3.482 ∆% 2011/2010 11.2	3.439	3.132

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.

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, moderating with the increase by 3.6 million barrels in the week of Jan 20 and an extra 4.1 million barrels in the week of Jan 27 and 0.3 million barrels in the week of Feb 3.

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.

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 15,000 from 373,000 on Jan 28, 2012 to 358,000 on Feb 4. Claims not adjusted for seasonality decreased 24,477 from 422,287 on Jan 28 to 397,810 on Feb 4. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Feb 4, 12	358,000	397,810	366,250
Jan 28, 12	373,000	422,287	377,250
Change	-15,000	-24,477	-11,000
Jan 21, 11	379,000	416,880	377,750
Prior Year	391,000	440,706	418,250

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 are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 682,176 on Jan 31, 2009 to 440,706 on Feb 5, 2011, and now to 397,810 on Feb 4, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (Section I Hiring Collapse in this comment and http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Feb 3, 2001	424,696	376,000
Feb 2, 2002	445,552	404,000
Feb 1, 2003	449,286	413,000
Jan 31, 2004	406,298	376,000
Feb 5, 2005	347,391	307,000
Feb 4, 2006	321,527	289,000
Feb 10, 2007	363,018	337,000
Feb 2, 2008	380,234	351,000
Jan 31, 2009	682,176	638,000
Feb 6, 2010	512,643	452,000
Feb 5, 2011	440,706	391,000
Feb 4, 2012	397,810	391,000

Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp

IX 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 IX-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 0.08 percent for three months, 0.11 percent for six months, 0.15 percent for 12 months, 0.27 percent for two years, 0.38 percent for three years, 0.83 percent for five years, 1.39 percent for seven years, 2.0 percent for ten years and 3.15 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 IX-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 IX-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

XI Conclusion. The US economy is in growth standstill at an annual equivalent rate in the four quarters of 2011 of 1.6 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 30 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

©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