World Inflation Waves, United States Inflation, World Financial Turbulence and World Economic Slowdown: Part II

 

World Inflation Waves, United States Inflation, World Financial Turbulence and World Economic Slowdown

Remembrance Earl W. Thomas and Edlow Parker

I was fortunate to meet simultaneously Earl W. Thomas and Edlow Parker in Brazil. Professor Earl W. Thomas was a distinguished scholar whose books overlap generations (http://www.amazon.com/s/ref=sr_tc_2_0?rh=i%3Astripbooks%2Ck%3AEarl+W.+Thomas&keywords=Earl+W.+Thomas&ie=UTF8&qid=1329682942&sr=1-2-ent&field-contributor_id=B001KIABF0). Earl interacted with eminent scholars Alexander N. Marchant (http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Alexander%20N.%20Marchant) and Alexandrino Severino (http://www.hostpublications.com/books/homenagem.html). Edlow Parker was a prominent practitioner in the field of public administration. Edlow transferred this knowledge and international professionals to many countries with significant success.

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I World Inflation Waves

II United States Inflation

IIA Long-term US Inflation

IIB Current US Inflation

IIC Import Export Prices

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	Jan month SA ∆%: 0.0 Dec 12 months SA ∆%: 3.4 Capacity Utilization: 78.5 Blog 02/19/12
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 Jan 13.48 to Feb 19.53 New Orders: From Dec 13.70 to Jan 9.73 Blog 02/19/12
Philadelphia Fed Business Outlook Index	General Index from Jan 7.3 to Feb 10.2 New Orders from Jan 6.9 to Feb 11.7 Blog 02/19/12
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	Dec 11/Dec 10 NSA ∆%: Sales Total Business 7.2; Manufacturers 7.0 Retailers 5.6; Merchant Wholesalers 9.0 Blog 02/19/12
Sales for Retail and Food Services	Jan 2012/Jan 2011 ∆%: Retail and Food Services: 5.6; Retail ∆% 5/4 Blog 02/19/12
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	Jan Starts month SA ∆%: 1.5; Permits ∆%: 0.7 Jan 2011/Jan 2010 NSA ∆% Starts 14.2; Permits  ∆% -3.5 Blog 2/19/12
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: $17.9 billion Dec versus Nov $61.3 billion Major Holders of Treasury Securities: China $1101 billion; Japan $1042 billion  Blog 02/19/12
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:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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

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

Industrial production was flat in Jan and increased 3.4 percent in the 12 months ending in Jan, as shown in Table VA-1. In the six months ending in Jan, industrial production grew at the annual equivalent rate of 3.4 percent. Business equipment rose 1.8 percent in Jan and grew 10.9 percent in the 12 months ending in Jan and at the annual equivalent rate of 14.9 percent in the six months ending in Jan. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “The capacity utilization rate for total industry decreased to 78.5 percent, a rate 1.8 percentage points below its long-run (1972--2010) average..” Manufacturing contributed $1,229 billion to US national income of $12,643 billion without capital consumption adjustment in 2010, or 9 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). The increase of 0.7 percent of manufacturing in Jan was offset by declines in mining and utilities.

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

2011	Jan	Dec	Nov	Oct	Sep	Aug	Jan 12/ Jan 11
Total	0.0	1.0	-0.3	0.6	0.2	0.2	3.4
Market Groups
Final Products	0.4	0.9	-0.3	0.5	0.0	0.6	3.3
Consumer Goods	-0.1	0.8	-0.6	0.2	-0.2	0.4	0.6
Business Equipment	1.8	1.4	0.6	1.4	0.7	1.1	10.9
Non Industrial Supplies	0.2	1.4	-0.7	-0.3	0.4	0.3	3.0
Construction	-0.4	3.0	0.2	-0.4	0.1	-0.4	5.3
Materials	-0.4	1.0	0.4	0.6	0.2	-0.1	3.5
Industry Groups
Manufacturing	0.7	1.5	-0.2	0.5	0.4	0.3	4.5
Mining	-1.8	0.9	0.7	1.5	0.0	1.1	5.8
Utilities	-2.5	-2.4	0.1	-1.3	-1.3	-1.2	-7.5
Capacity	78.5	78.6	77.9	78.0	77.7	77.6	1.2

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

Manufacturing increased 0.7 percent in Jan and 4.3 percent in 12 months. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.

Table VA-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12 Months NSA ∆%
Jan 2012	0.7	4.3
Dec 2011	1.5	4.4
Nov	-0.2	4.1
Oct	0.5	4.4
Sep	0.4	4.2
Aug	0.3	3.7
Jul	0.8	3.8
Jun	0.1	3.6
May	0.2	3.6
Apr	-0.6	4.5
Mar	0.7	6.0
Feb	0.1	6.2
Jan	0.7	6.2
Dec 2010	1.0	6.2
Nov	0.2	5.3
Oct	0.2	6.2
Sep	0.2	5.9
Aug	0.1	6.6
Jul	0.8	7.6
Jun	-0.1	8.1
May	1.1	7.8
Apr	0.7	6.1
Mar	0.9	5.9
Feb	0.1	0.6
Jan	1.0	6.2
Dec 2009	0.2	-3.2
Nov	0.8	-5.9
Oct	-0.04	-8.9
Sep	0.8	-10.3
Aug	1.0	-13.3
Jul	1.3	-14.9
Jun	-0.3	-17.4
May	-1.2	-17.4
Apr	-0.8	-18.1
Mar	-2.0	-17.1
Feb	0.1	-16.0
Jan	-2.7	-16.5
Dec 2008	-3.1	-14.1
Nov	-2.4	-11.5
Oct	-0.6	-9.2
Sep	-3.4	-9.0
Aug	-1.4	-5.5
Jul	-1.1	-4.1
Jun	-0.6	-3.5
May	-0.6	-2.8
Apr	-1.2	-1.5
Mar	-0.4	-0.9
Feb	-0.5	0.6
Jan	-0.3	1.9
Dec 2007	0.3	1.8
Nov	0.3	3.2
Oct	-0.5	2.8
Sep	0.5	3.2
Aug	-0.5	2.9
Jul	0.3	3.8
Jun	0.3	3.3
May	-0.2	3.5
Apr	0.7	4.0
Mar	0.7	2.8
Feb	0.5	2.0
Jan	-0.3	1.8
Dec 2006		3.2
Dec 2005		1.4
Dec 2004		2.8
Dec 2003		1.7

Source: http://www.federalreserve.gov/releases/g17/current/table1.htm

Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart VA-1, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression. The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of computers and semiconductors has already surpassed the level before the global recession.

Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 5 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart VA-3, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

The index of general business conditions of the Federal Reserve Bank of New York Empire State Manufacturing Survey shows significant improvement from minus 8.82 in Sep to 0.61 in Nov and successive jumps to solid positive growth territory of 8.19 in Dec, 13.48 in Jan and 19.53 in Feb, as shown in Table VA-3. The index had been registering negative changes in the five months from Jun to Oct. The new orders segment fell from 0.16 in Oct to minus 2.07 in Nov but rebounded to 5.99 in Dec, 13.70 in Jan and 9.73 in Feb, returning to expansion territory. There is positive reading in shipments from minus 12.88 in Sep to positive 5.33 in Oct and even higher at 9.43 in Nov with a jump to 20.06 in Dec that was consolidated with 21.69 in Jan and 22.79 in Feb. The segment of number of employees fell back into contraction territory from 3.37 in Oct to minus 3.66 in Nov but returned to expansion at 2.33 in Dec, jumping to 12.09 in Jan but falling to 3.26 in Feb. Expectations for the next six months of the general business conditions index fell from 13.04 in Sep to 6.74 in Oct at levels well below the higher expectations of 22.45 in Jun of 22.45 and 32.22 in Jul but surged to 39.02 in Nov and 50.38 in Feb. Expectations of new orders fell from 13.04 in Sep to 12.36 in Oct but jumped to 35.37 in Nov and jumped to 54.65 in Dec, consolidating at 53.85 in Jan but falling to 44.71 in Feb. Expectations of new employees surged from 0.00 in Sep to 6.74 in Oct and jumped to 14.63 in Nov, 24.42 in Dec but fell to 18.82 in Feb. The average employee workweek rose from the contraction zone at minus 2.25 in Oct to the expansion zone at 8.54 in Nov and solid expansion at 22.09 in Dec with minor decline to 17.58 in Jan and 18.82 in Feb.

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

	Sep	Oct	Nov	Dec	Jan	Feb
Current Conditions
General Business Conditions	-8.82	-8.48	0.61	8.19	13.48	19.53
New Orders	-8.0	0.16	-2.07	5.99	13.70	9.73
Shipments	-12.88	5.33	9.43	20.06	21.69	22.79
Unfilled   Orders	-7.61	-4.49	-7.32	-15.12	-5.49	-7.06
Inventories	-11.96	-8.99	-12.2	-3.49	6.59	-7.61
# Employees	-5.43	3.37	-3.66	2.33	12.09	3.26
Average Employee Workweek	-2.17	-4.49	2.44	-2.33	6.59	-4.71
Expectations Six Months
General Business Conditions	13.04	6.74	39.02	45.61	54.87	50.38
New Orders	13.04	12.36	35.37	54.65	53.85	44.71
Shipments	13.04	17.98	36.59	51.16	52.75	49.41
Unfilled   Orders	-6.52	1.12	6.10	8.14	5.49	4.71
Inventories	-2.17	-15.73	2.44	9.30	10.99	10.59
# Employees	0.00	6.74	14.63	24.42	28.57	29.41
Average Employee Workweek	-6.52	-2.25	8.54	22.09	17.58	18.82

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct with the movement to 10.8 away from the contraction zone of minus 22.7 in Sep but fell to 3.1 in Nov and then rose to 6.8 in Dec followed by 7.3 in Jan and 10.2 in Feb. New orders were signaling increasing future activity, rising from minus 5.5 in Sep to 8.5 in Oct but declined to 3.5 in Nov to rise to 10.7 in Dec and then fall to 6.9 in Jan but recovering to 11.7 in Feb. Employment or number of workers is stronger with number of employees increasing from 5.0 in Oct to 10.6 in Nov and 11.5 in Dec, remaining at 11.6 in Jan but falling to 1.1 in Feb. The average employee workweek increased from minus 11.2 in Aug to 7.1 in Nov but fell to 2.8 in Dec and increased to 5.0 in Jan and 10.1 in Feb. Most indexes of expectations for the next six months are showing sharp increases but interruptions in Feb. The general index of expectations for the next six months rose from 28.8 in Oct to 37.7 in Nov, remaining at 40.0 in Dec but increasing to 49.0 in Jan but declining to 33.3 in Feb. Expectations of new orders rose from 28.1 in Oct to 36.9 in Nov, 44.1 in Dec and 49.7 in Jan but declined to 32.5 in Feb.

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

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Feb 12	10.2	11.7	15.0	1.1	10.1
Jan	7.3	6.9	5.7	11.6	5.0
Dec 11	6.8	10.7	9.1	11.5	2.8
Nov	3.1	3.5	6.0	10.6	7.1
Oct	10.8	8.5	13.6	5.0	4.2
Sep	-12.7	-5.5	-16.6	7.3	-6.2
Aug	-22.7	-22.2	-8.9	-0.9	-11.2
Jul	6.2	0.5	8.2	9.5	-3.9
Future
Feb 12	33.3	32.5	29.0	22.5	10.8
Jan	49.0	49.7	48.2	19.1	9.2
Dec 11	40.0	44.1	36.4	10.8	4.5
Nov	37.7	36.9	35.5	25.2	4.0
Oct	28.8	28.1	29.0	15.5	8.4
Sep	25.2	24.6	27.1	14.0	6.8
Aug	6.3	20.6	18.4	11.2	-0.7
Jul	25.8	31.2	26.1	12.9	6.6

Source: http://www.philadelphiafed.org/index.cfm

Chart VA-1 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jan 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now what hopefully could be renewed strength from late 2011 into Jan 2012 but marginal weakness in Feb.

Federal Reserve Bank of Philadelphia

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

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

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

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

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/charts/NOC.html

Growth rates and levels of sales in billions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-5. Total business sales rose 0.7 percent in Dec after 0.4 percent in Nov and were up by 7.2 percent in Dec 2011 relative to Dec 2010. Sales of manufacturers increased 0.7 percent in Dec after increasing 0.2 percent in Nov and rose 7.0 percent in the 12 months to Dec. Retailers’ sales were flat in Dec after increasing 0.3 percent in Nov and 5.6 percent in 12 months ending in Dec. Sales of merchant wholesalers rose 1.3 percent in Dec after 0.5 percent in Nov and grew 9.0 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.

Table VA-5, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Dec 2011 Billions of Dollars NSA	Dec 11/   Nov 11 ∆% SA	Nov 11/ Oct 11 ∆% SA	Dec 11/ Dec 10 ∆% NSA
Total Business	1,269.3	0.7	0.4	7.2
Manufacturers	445.5	0.7	0.2	7.0
Retailers	416.8	0.0	0.3	5.6
Merchant Wholesalers	407.0	1.3	0.5	9.0

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 0.2 percent in Dec to inventories and 0.4 percent in Nov with growth of 3.4 percent in 12 months, as shown in Table VA-6. Total business increased inventories by 0.4 percent in Dec, 0.4 percent in Nov and 7.6 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.26 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier

Table VA-6, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Dec 11 Billions of Dollars NSA	Dec 11/ Nov   11 ∆% SA	Nov 11/  Oct 11 ∆% SA	Dec 11/ Dec 10 ∆% NSA
Total Business	1,584.2	0.4	0.3	7.6
Manufacturers	609.2	0.1	0.4	9.2
Retailers	503.3	0.2	0.4	3.4
Merchant Wholesalers	471.6	1.0	0.0	9.8
Inventory/ Sales Ratio NSA	Dec 11 Billions of Dollars NSA	Dec 2011 SA	Nov 2011 SA	Dec 2010 SA
Total Business	1,584.2	1.26	1.27	1.28
Manufacturers	609.2	1.33	1.34	1.32
Retailers	503.3	1.32	1.32	1.35
Merchant Wholesalers	471.6	1.15	1.15	1.16

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference' in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart VA-1 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels.

Chart VA-3, Total Business Inventories/Sales Ratios 2002 to 2011

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif

Retail sales increased 0.4 percent in Jan after no growth in Dec and increased 5.6 percent in the 12 months ending in Jan, as shown in Table VA-7. Excluding motor vehicles and parts, retail sales increased 0.7 percent in Jan after falling 0.5 percent in Dec and growing 5.2 percent in the 12 months ending in Jan. Sales of motor vehicles and parts fell 1.1 percent in Jan after strong growth of 2.5 percent in Dec and growth of 8.0 percent in the 12 months ending in Jan. Gasoline station sales rose 1.4 percent in fluctuating prices of gasoline, declining 2.6 percent in Dec but increasing 7.3 percent in the 12 months ending in Jan.

Table VA-7, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	Jan/Dec ∆% SA	Dec/Nov ∆% SA	Jan 2012 Billion Dollars NSA	12 Months Jan 2012 from Jan 2010 ∆% NSA
Retail and Food Services	0.4	0.0	361.4	5.6
Excluding Motor Vehicles and Parts	0.7	-0.5	298.5	5.2
Motor Vehicles & Parts	-1.1	2.5	62.9	8.0
Retail	0.4	0.0	321.9	5.4
Building Materials	0.2	2.0	19.5	10.5
Food and Beverage	1.3	-0.6	50.3	3.0
Grocery	1.3	-0.6	45.8	2.9
Health & Personal Care Stores	-0.3	0.3	22.7	1.0
Clothing & Clothing Accessories Stores	0.0	0.5	14.1	3.4
Gasoline Stations	1.4	-2.6	40.9	7.3
General Merchandise Stores	2.0	-0.7	46.9	4.7
Food Services & Drinking Places	0.6	0.4	39.5	7.2

Source: http://www.census.gov/retail/marts/www/marts_current.pdf

Chart VA-4 of the US Bureau of the Census shows percentage change of retails and food services sales. Sep was strong in multiple categories but the strength did not continue in Oct, Nov and Dec. Jan was stronger even with weakness in auto sales.

Chart VA-4, US, Percentage Change of Retail and Food Services Sales

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif

Twelve-month rates of growth of US sales of retail and food services in Dec from 2000 to 2011 are shown in Table VA-8. Nominal sales have been dynamic in 2011 and 2010 after decline of 9.6 percent in 2008 and increase of only 1.9 percent in 2007. It is difficult to separate price and quantity effects in these nominal data.

Table VA-8, US, Percentage Change in 12-Month Sales for Retail and Food Services, ∆% NSA

Dec	12 Months ∆%
2011	5.9
2010	7.5
2009	4.5
2008	-9.6
2007	1.9
2006	3.1
2005	4.8
2004	8.3
2003	6.2
2002	3.2
2001	2.0
2000	0.7

Source: http://www.census.gov/retail/

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-9. Housing starts increased 1.5 percent in Jan after declining 1.9 percent in Dec and jumping 11.8 percent in Nov. The increase of 15 percent in Sep was revised to 10.4 percent. Housing permits, indicating future activity, increased 0.7 percent in Jan after falling 1.3 percent in Dec Monthly rates in starts and permits fluctuate significantly as shown in Table VA-9.

Table VA-9, US, Housing Starts and Permits SSAR Month ∆%

	Housing  Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Jan 2012	699	1.5	676	0.7
Dec 2011	689	-1.9	671	-1.3
Nov	702	11.8	680	5.6
Oct	628	-2.8	644	9.3
Sep	646	10.4	589	-5.8
Aug	585	-4.9	625	4.0
Jul	615	0.0	601	-2.6
Jun	615	11.2	617	1.3
May	553	0.7	609	8.2
Apr	549	-7.4	563	-1.9
Mar	593	14.5	574	7.5
Feb	518	-18.6	534	-6.0
Jan	636	20.9	568	-9.8
Dec 2010	526	-4.5	630	-9.8
Nov	551	2.3	564	1.6
Oct	539	-9.7	555	-1.2
Sep	597	-1.5	562	-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

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

Housing starts and permits in Jan not-seasonally adjusted are provided in Table VA-10. Housing starts increased 14.2 percent in Jan 2011 relative to Jan 2010 and in the same period new permits fell 3.5 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 70.0 percent in Jan 2011 relative to Jan 2006 and fell 67.8 percent relative to Jan 2005. Housing permits fell 48.6 in Jan 2006 to Jan 2011 and fell 44.6 percent from Jan 2005.

Table VA-10, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan 2012	45.9	76.6
Jan 2011	40.2	79.4
∆% Jan 2012/Jan 2011	14.2	-3.5
Jan 2006	153.0	149.1
∆%/Jan 2011	-70.0	-48.6
Jan 2005	142.9	138.2
∆%/ Jan 2012	-67.8	-44.6

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

http://www.census.gov/construction/nrc/pdf/newresconst_200701.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200601.pdf

Chart VA-5 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-5 shows a mild downward trend or stagnation from mid 2010 to the present.

Chart VA-5, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Census Bureau

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

A longer perspective on residential construction in the US is provided by Table VA-11 with annual data from 1960 to 2011. Housing starts fell 70.5 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.3 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 61.6 percent from 2000 to 2011 and 38.8 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-11, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2011	609.2	610.7
∆% 2011/2010	3.8	1.0
∆% 2011/2005	-70.5	-71.7
∆% 2011/2000	-61.2	-61.6
∆% 2011/1960	-51.3	-38.8
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,1637.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.7	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

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

Weakness in the housing sector is being considered as an important factor of the financial crisis, global recession and slow growth recession. Chairman Bernanke (2011Oct4JEC, 2-3) states:

“Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.”

The answer to these arguments can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

Risk aversion channeled funds toward US long-term and short-term securities as shown in Table VA-12. Net foreign purchases of US long-term securities (row C in Table VA-12) in Nov were quite high at $61.3 billion, much higher than $8.2 billion in Oct but fell to 17.9 billion in Dec. Foreign (residents) purchases less sales of US long-term securities (row A in Table VA-12) in Dec declined $21.0 billion after strong increase of $58.0 billion in Nov. Net US (residents) purchases of long-term foreign securities (row B in Table VA-12) in Dec were $38.9 billion, much higher than $3.3 billion in Nov. In Dec,

C = A + B = -$21.0 billion + $38.9 billion = $17.9 billion

There is weakening demand in Table VA-12 in Dec in A1 private purchases by residents overseas of US long-term securities of -$11.5 billion of which increases in A11 Treasury securities $3.7 billion and A12 $16.4 billion agency securities and decrease of corporate bonds by $19.3 billion and reduction of $12.3 billion in equities. Row D shows sharp decrease in Dec in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills fell $1.6 billion (row D11) with foreign official holdings decreasing $21.4 billion and the category other decreasing $16.6 billion. Risk aversion of losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.

Table VA-12, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Dec 2010 12 Months	Dec 2011 12 Months	Nov 2011	Dec 2011
A Foreign Purchases less Sales of US LT Securities	908.3	439.2	58.0	-21.0
A1 Private	776.1	268.4	40.3	-11.5
A11 Treasury	531.6	234.1	30.3	3.7
A12 Agency	146.2	57.6	11.5	16.4
A13 Corporate Bonds	-14.0	-44.0	3.5	-19.3
A14 Equities	112.3	20.7	-5.1	-12.3
A2 Official	132.2	170.7	17.7	-9.5
A21 Treasury	172.1	144.2	23.7	-20.3
A22 Agency	-38.2	23.3	-5.3	10.8
A23 Corporate Bonds	0.8	-1.2	1.3	-1.4
A24 Equities	-2.5	4.5	-2.0	1.3
B Net US Purchases of LT Foreign Securities	-115.3	-123.9	3.3	38.9
B1 Foreign Bonds	-54.6	-52.7	2.0	28.1
B2 Foreign Equities	-60.6	-71.2	1.4	10.8
C Net Foreign Purchases of US LT Securities	793.0	315.3	61.3	17.9
D Increase in Foreign Holdings of Dollar Denominated Short-term	-55.3	-114.1	38.0	-18.3
D1 US Treasury Bills	-20.4	-81.8	26.1	-1.6
D11 Private	45.3	22.9	21.8	19.7
D12 Official	-65.8	-104.7	4.3	-21.4
D2 Other	-34.9	-32.3	11.9	-16.6

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

Sources: http://www.treasury.gov/press-center/press-releases/Pages/tg1420.aspx

Table VA-13 provides major foreign holders of US Treasury securities. China is the largest holder with $1100.7 billion in Dec 2011, decreasing 5.1 percent from $1160.1 billion in Dec 2010. Japan increased its holdings from $882.3 billion in Dec 2010 to $1042.4 billion in Dec. The United Kingdom increased its holdings to $414.8 billion in Dec 2011 relative to $270.4 billion in Dec 2010. Caribbean banking centers increased their holdings from $168.4 billion in Dec 2010 to $174.8 billion in Dec 2011. Total foreign holdings of Treasury securities rose from $4435.6 billion in Dec 2010 to $4732.1 billion in Dec 2011, or 6.7 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings.

Table VA-13, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Dec 2011	Nov 2011	Dec 2010
Total	4732.1	4750.3	4435.6
China	1100.7	1132.6	1160.1
Japan	1042.4	1038.9	882.3
United Kingdom	414.8	425.9	270.4
Oil Exporters	233.5	232.0	211.9
Brazil	206.9	206.4	186.1
Caribbean Banking Centers	174.8	185.3	168.4
Taiwan	149.2	149.6	155.1
Switzerland	116.2	113.9	106.8
Hong Kong	112.0	105.3	134.2
Canada	96.6	94.8	75.3
Russia	88.4	89.7	151.0

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

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

VB. Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) 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	IVQ2011 ∆%: -0.6 on IIIQ2011;  IVQ2011 SAAR minus 2.3% ∆% from quarter a year earlier: -1.0 % Blog 2/19/12
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	Dec month SA ∆% 0.6 Dec 12 months NSA ∆% 1.4 Blog 02/19/12
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:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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 GDP fell 0.6 percent in IVQ2011 relative to IIIQ2011, seasonally adjusted, as shown in Table VB-1 that incorporates the latest revisions. IIIQ2011 GDP growth was revised upward to 1.7 percent and IQ2011 was revised downward to minus 1.8 percent. The economy of Japan had already weakened in IVQ2010 when GDP fell revised minus 0.1 percent. As in other advanced economies, Japan’s recovery from the global recession has not been robust. GDP fell in IQ2011 by 1.8 percent and fell again 0.4 percent in IIQ2011 as a result of the disruption of the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Recovery was robust in the first two quarters of 2010. The deepest quarterly contractions in the recession were 3.2 percent in IVQ2008 and 3.9 percent in IQ2009.

Table VB-1, Japan, Real GDP ∆% Changes from the Previous Quarter Seasonally Adjusted ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-1.8	-0.4	1.7	-0.6
2010	1.5	1.3	0.6	-0.1
2009	-3.9	1.8	-0.2	1.8
2008	0.7	-1.1	-1.2	-3.2
2007	1.0	0.2	-0.4	0.9
2006	0.4	0.4	-0.1	1.3
2005	0.2	1.3	0.4	0.2
2004	1.1	-0.1	0.2	-0.3
2003	-0.5	1.2	0.4	1.1
2002	-0.2	1.0	0.7	0.4
2001	0.7	-0.2	-1.1	-0.1
2000	1.7	0.2	-0.3	0.7
1999	-0.8	0.4	-0.1	0.5

Source: http://www.cao.go.jp/index-e.html

Table VB-2 provides contributions to real GDP at seasonally-adjusted annual rates (SAAR). The SAAR of GDP in IVQ2011 was minus 0.6 percent: 0.9 percentage points from growth of personal consumption expenditures (PC) plus 0.4 percentage points from gross fixed capital formation (GFCF) plus 0.3 percentage points from government consumption (GOVC) less net trade (exports less imports) deduction of 2.6 percentage points less 1.1 deduction of private inventory change. The SAAR of GDP in IIIQ2011 was revised to a high 7.0 percent. Net trade deducted from GDP growth in three quarters of 2011. Growth in 2011 has been driven by personal consumption expenditures.

Table VB-2, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %

	GDP	PC	GFCF	Trade	PINV	GOVC
2011
I	-6.8	-2.6	-0.5	-0.8	-3.4	0.4
II	-1.5	0.8	0.8	-4.1	0.4	0.6
III	7.0	2.5	0.2	3.1	0.9	0.2
IV	-2.3	0.7	0.4	-2.6	-1.1	0.3
2010
I	6.1	1.9	0.3	2.3	1.8	-0.3
II	5.2	0.6	1.2	0.4	1.9	1.2
III	2.3	0.8	0.4	-0.1	1.1	0.2
IV	-0.6	0.3	-1.0	-0.4	0.2	0.3
2009
I	-14.8	-1.9	-2.0	-4.3	-7.5	0.9
II	7.3	4.0	-2.9	7.5	-1.8	0.5
III	-0.7	0.0	-1.6	1.7	-1.8	0.9
IV	7.4	3.3	0.2	2.8	0.6	0.4
2008
I	2.7	1.4	0.4	1.2	-0.4	0.0
II	-4.4	-3.3	-2.2	0.7	1.3	-0.9
III	-4.6	-0.3	-1.0	-0.4	-2.9	-0.1
IV	-12.3	-2.9	-4.5	-11.3	5.8	0.4
2007
I	4.0	0.9	0.5	1.1	1.2	0.4
II	0.7	0.5	-1.5	0.8	0.2	0.5
III	-1.7	-0.8	-1.7	1.8	-0.8	-0.2
IV	3.6	0.2	0.2	1.5	1.0	0.6

Note: PC: Private Consumption; GFCF: Gross Fixed Capital Formation; PINV: Private Inventory; Trade: Net Exports; GOVC: Government Consumption

Source: http://www.cao.go.jp/index-e.html

Japan’s quarterly growth of GDP not seasonally-adjusted relative to the same quarter a year earlier is shown in Table VB-3. Contraction of GDP extended over seven quarters from IIQ2008 through IVQ2009. It was strongest in IQ2009 with output declining 9.3 percent relative to a year earlier. Yearly quarterly rates of growth of Japan were relatively high for a mature economy through the decade with the exception of the contractions in 2001 and after 2007. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 caused decline of GDP in IQ2011 of 0.3 percent relative to the same quarter a year earlier and decline of 1.7 percent in IIQ2011. GDP fell 0.5 percent in IIIQ2011 relative to a year earlier and fell 1.0 percent in IVQ2011 relative to a year earlier. Japan faces the challenge of recovery from the devastation of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in an environment of declining world trade and bouts of risk aversion that cause appreciation of the Japanese yen that erode the country’s competitiveness in world markets.

Table VB-3, Japan, Real GDP ∆% Changes from Same Quarter Year Earlier, NSA ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-0.3	-1.7	-0.5	-1.0
2010	4.8	4.4	5.4	3.1
2009	-9.3	-6.6	-5.6	-0.5
2008	1.4	-0.1	-0.6	-4.7
2007	2.8	2.3	2.0	1.6
2006	2.6	1.3	0.9	2.0
2005	0.4	1.4	1.5	1.9
2004	4.0	2.6	2.2	0.7
2003	1.7	1.8	1.5	1.8
2002	-1.6	-0.2	1.4	1.6
2001	1.6	0.9	0.0	-1.0
2000	2.7	2.4	2.2	1.8
1999	-0.3	0.1	-0.1	-0.5

Source: http://www.cao.go.jp/index-e.html

The tertiary activity index of Japan increased 1.4 percent in Dec and also 0.6 percent in the 12 months ending in Dec, as shown in Table VB-4. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.9 percent in Mar and 3.1 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep was weak: decline of 0.2 percent in Jul, increase of 0.1 percent in Aug and decline of 0.4 percent in Sep, after increasing 1.9 percent in Jun. The index has gained 6.7 percent in the seven nine months from Apr to Dec, erasing the loss in Mar of 5.9 percent or at the annual equivalent rate of 9.1 percent. Most of the growth occurred in the quarter from Apr to Jun with gain of 5.6 percent or at annual equivalent rate of 24.3 percent.

Table VB-4, Japan, Tertiary Activity Index, ∆%

	Month ∆% SA	12 Months ∆% NSA
Dec 2011	1.4	0.6
Nov	-0.6	-0.5
Oct	0.8	0.7
Sep	-0.4	0.0
Aug	0.1	0.6
Jul	-0.2	-0.2
Jun	1.9	0.9
May	0.9	-0.2
Apr	2.7	-2.3
Mar	-5.9	-3.1
Feb	0.8	2.0
Jan	-0.1	1.1
Dec 2010	-0.2	1.8
Nov	0.6	2.5
Oct	0.2	0.5
Sep	-0.4	1.3
Aug	0.1	2.3
Jul	0.7	1.6
Jun	0.1	1.0
May	-0.3	1.2
Dec 2009		-2.7
Dec 2008		-3.3
Dec 2007		-0.3
Dec 2006		0.6
Dec 2005		2.6
Dec 2004		1.6

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/main_1e.pdf

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

Month and 12-month rates of growth of the tertiary activity index of Japan and components in Dec are provided in Table VB-5. Electricity, gas, heat supply and water increased 4.1 percent in Dec but fell 0.6 percent in the 12 months ending in Dec. Wholesale and retail trade increased 4.3 percent in the month of Dec and fell 0.2 percent in 12 months. Information and communications fell 0.5 percent in Dec and was flat in 12 months.

Table VB-5, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%

Dec 2011	Weight	12 Months ∆% NSA	Month ∆% SA
Tertiary Index	10,000.0	0.6	1.4
Electricity, Gas, Heat Supply & Water	372.9	-0.6	4.1
Information & Communications	951.2	0.0	-0.5
Wholesale & Retail Trade	2,641.2	-0.2	4.3
Finance & Insurance	971.1	-0.3	0.0
Real Estate & Goods Rental & Leasing	903.4	-0.5	0.6
Scientific Research, Professional & Technical Services	551.3	2.3	3.5
Accommodations, Eating, Drinking	496.0	3.2	1.2
Living-Related, Personal, Amusement Services	552.7	2.4	1.4
Learning Support	116.9	0.0	-0.1
Medical, Health Care, Welfare	921,1	2.3	1.6
Miscellaneous ex Government	626.7	3.1	-0.1

Source:

http://www.esri.cao.go.jp/en/sna/sokuhou/qe/main_1e.pdf

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

VC. China. The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing 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:

02/12/11 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.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

Table EUR, Euro Area Economic Indicators

GDP	IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 02/019/12
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	Dec month ∆%: -1.1 Nov 12 months ∆%: -2.0 Blog 02/19/12
Industrial New Orders	Oct month ∆%: minus 1.8 Oct 12 months ∆%: 1.6 Blog 01/08/12
Construction Output	Dec month ∆%: 0.3 Dec 12 months ∆%: 7.8 Blog 02/19/12
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-Dec 2011/2010 Exports ∆%: 12.7 Imports ∆%: 12.2 Blog 02/19/12
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

Table VD-1 provides the yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.3 percent in 2006 and 3.0 percent in 2007. The global recession has strong impact with growth of only 0.4 percent in 2008 and decline of 4.3 percent in 2009. Recovery was at lower growth rates of 1.9 percent in 2010 and 1.5 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of 0.5 percent in 2012.

Table VD-1, Euro Area, Real GDP Growth Rate

Year	∆%
2013 EUROSTAT Forecast	1.3
2012 EUROSTAT Forecast	0.5
2011	1.5
2010	1.9
2009	-4.3
2008	0.4
2007	3.0
2006	3.3
2005	1.7
2004	2.2
2003	0.7
2002	0.9
2001	2.0
2000	3.8
1999	2.9
1998	2.8
1997	2.6
1996	1.5

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsieb020

Table VD-2 provides GDP growth in IVQ2011 and relative to the same quarter a year earlier for the euro zone, European Union, Japan and the US. Both the euro zone and the European Union experienced decline of GDP of 0.3 percent in IVQ2011 and meager growth of 0.7 percent and 0.9 percent, respectively, relative to IVQ2010. Growth in IVQ2011 was weak worldwide with somewhat stronger performance by the US but still insufficient to reduce unemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html).

Table VD-2, Euro Zone, European Union, Japan and USA, Real GDP Growth

	∆% IVQ2011/ IIIQ2011	∆% IVQ2011/ IVQ2010
Euro Zone	-0.3	0.7
European Union	-0.3	0.9
Germany	-0.2	2.0
France	0.2	1.4
Netherlands	-0.7	0.7
Finland	0.0	1.2
Belgium	-0.2	0.9
Portugal	-1.3	-2.7
Ireland	NA	NA
Italy	-0.7	-0.5
Greece		-7.0
Spain	-0.3	0.3
United Kingdom	-0.2	0.8
Japan	-0.6	-1.0
USA	0.7	1.6

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15022012-AP/EN/2-15022012-AP-EN.PDF

Chart VD-3 of EUROSTAT provides growth rates for the euro zone and European Union. There are significant differences in growth experience. Countries in need of fiscal adjustment are growing slowly or contracting.

Chart VD-3, Euro Zone, European Union, Real GDP Growth ∆% on Previous Year

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&pcode=tsieb020&language=en&toolbox=type

Table VD-3 provides quarterly growth of real GDP in the euro area and European Union. The upper panel provides growth in the quarter relative to the prior quarter. Growth started strong in IQ2011 with 0.8 percent for the euro area and 0.7 percent for the European Union. Performance deteriorated during the year with decline of 0.3 percent in IVQ2011 for both the euro area and the European Union. The lower panel provides growth in a quarter relative to the same quarter a year earlier. Growth was quite strong in IQ2011 with 2.4 percent for both the euro area and European Union. Growth in IVQ2011 relative to IVQ2011 was meager with 0.7 percent for the euro area and 0.9 percent for the European Union with marginal decline of 0.3 percent in the quarter.

Table VD-3, Euro Area and European Union, Growth of Real GDP

	IQ2011	IIQ2011	IIIQ2011	IVQ2011
∆% from Prior Quarter
EA 17	0.8	0.2	0.1	-0.3
EU 27	0.7	0.2	0.3	-0.3
∆% from Same Quarter Year Earlier
EA 17	2.4	1.6	1.3	0.7
EA 27	2.4	1.7	1.4	0.9

Notes: EA: Euro Area; EU: European Union

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15022012-AP/EN/2-15022012-AP-EN.PDF

The decline of industrial production by 2.0 percent in Sep interrupted growth of industrial production in the euro zone of 0.8 percent in Jul and 1.1 percent in Aug, as shown in Table VD-4. Production fell cumulatively 3.5 percent in Sep-Dec or at the annual equivalent rate of decline of 10.0 percent. All segments of industrial production fell in Oct with exception of rebound of durable goods by 0.2 percent after four consecutive months of decline and flat growth of nondurable goods also after multiple months of decline. Industrial production is highly volatile in larger economies in the euro zone.

Table VD-4, Euro Zone, Industrial Production Month ∆%

2011	Total	INT	ENE	CG	DUR	NDUR
Dec	-1.1	-0.7	-2.0	-0.8	0.2	0.0
Nov	0.0	0.5	-0.2	0.2	-0.5	-0.8
Oct	-0.3	-0.9	-0.6	0.8	-1.1	0.4
Sep	-2.1	-2.2	-1.8	-4.0	-3.5	-1.3
Aug	1.1	1.4	1.0	2.2	-0.2	1.5
Jul	0.8	0.5	0.2	2.9	3.4	-0.7
Jun	-0.7	-0.8	1.1	-1.5	-2.6	-0.7
May	0.1	-0.2	0.2	1.1	-0.6	-0.1
Apr	0.3	0.0	-3.7	0.7	1.0	0.4
Mar	0.0	0.0	-0.3	-0.6	0.0	0.4
Feb	0.5	0.5	-1.3	2.2	0.9	0.9
Jan	0.1	2.3	-4.7	-1.8	1.1	-0.1

Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14022012-AP/EN/4-14022012-AP-EN.PDF

Table VD-5 provides 12-month percentage changes of industrial production and major industrial categories in the euro zone. Industrial production decreased 2.2 percent in the 12 months ending in Dec. There is only positive 12-month growth of 0.8 percent for capital goods.

Table VD-5, Euro Zone, Industrial Production 12-Month ∆%

2011	Dec Month ∆%	Dec 12-Month ∆%
Total	-1.1	-2.0
Intermediate Goods	-0.7	-0.5
Energy	-2.0	-11.9
Capital Goods	-0.8	0.8
Durable Consumer Goods	0.2	-3.9
Nondurable Consumer Goods	0.0	-0.8

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14022012-AP/EN/4-14022012-AP-EN.PDF

There has been significant decline in percentage changes of industrial production and major categories in 12-month rates throughout 2011 as shown in Table VD-6. The 12-month rate of growth in Feb of 7.8 percent has fallen to minus 2.0 percent in Dec. Trend is difficult to identify because of significant volatility. Capital goods were growing at 15.1 percent in the 12 months ending in Feb and only at 0.8 percent in the 12 months ending in Dec.

Table VD-6, Euro Zone, Industrial Production 12-Month ∆%

2011	Total	INT	ENE	CG	DUR	NDUR
Dec	-2.0	-0.5	-11.9	0.8	-3.9	-0.8
Nov	0.1	-0.2	-6.4	4.8	-3.1	-1.3
Oct	1.0	0.4	-5.0	4.9	-3.1	0.8
Sep	2.2	2.2	-3.4	6.0	-1.0	0.4
Aug	6.0	5.4	-2.1	13.1	3.0	2.8
Jul	4.3	4.2	-4.1	11.8	4.2	-0.7
Jun	2.8	3.1	-3.7	7.0	-2.7	0.9
May	4.3	4.5	-7.2	10.7	1.2	2.7
Apr	5.4	5.5	-5.3	10.5	4.8	3.7
Mar	5.7	7.5	-2.1	11.5	2.5	0.7
Feb	7.8	10.0	-2.8	15.1	3.5	2.6
Jan	6.2	9.5	-1.9	13.0	2.0	0.5

Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14022012-AP/EN/4-14022012-AP-EN.PDF

Blanchard (2011WEOSep) analyzes the difficulty of fiscal consolidation efforts during periods of weak economic growth. Table VD-7 provides percentage changes of euro zone industrial production in the months of Dec and Nov and in the 12 months ending in Dec and Nov for members of the euro zone and the UK that is a member of the European Union but not of the common currency and central bank under the European Monetary Union (EMU). Industrial production in the 12 months ending in Dec grew in a few economies: 0.9 percent in Germany, 1.1 percent in France and 3.8 percent in Belgium. Industrial production is contracting in 12 months in Dec in the GIIPS (Greece, Ireland, Italy, Portugal and Spain) countries that are attempting to improve expectations in their fiscal affairs—Greece -8.3 percent, Italy -4.1 percent, Portugal -3.2 percent, Spain -7.0 percent and Ireland -7.3 percent.

Table VD-7, Euro Zone, Industrial Production, Month and 12-Month ∆%

2011	Month ∆% Dec	Month ∆% Nov	12 Months ∆% Dec	12 Months ∆% Nov
Euro Zone	-1.1	0.0	-2.0	0.1
Germany	-2.7	-0.3	-2.6	0.9
France	-1.3	1.1	-2.2	1.1
Netherlands	-1.3	-1.5	-6.6	-5.3
Finland	2.6	1.0	1.5	-2.3
Belgium	NA	1.9	NA	3.8
Portugal	-1.6	-2.3	-8.9	-3.2
Ireland	2.5	-12.7	-5.2	-7.3
Italy	1.4	0.3	-1.7	-4.1
Greece	-2.4	1.0	-12.4	-8.3
Spain	0.9	-1.0	-3.7	-7.0
UK	0.5	-0.5	-2.7	-3.7

Source: Eurostat

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14022012-AP/EN/4-14022012-AP-EN.PDF

Euro zone trade growth continues to be strong as shown in Table VD-8. Exports grew at 12.7 percent and imports at 12.2 percent in Jan-Dec 2011 relative to Jan-Dec 2010. The 12-month rates of growth of exports were 9.3 percent in Dec and 10.1 percent in Nov, which are higher than 0.8 percent for imports in Dec and 3.9 percent in Nov. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.

Table VD-8, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA

	Exports	Imports
Jan-Dec 2011	1733.1	1740.8
Jan-Dec 2010	1537.3	1552.0
∆%	12.7	12.2
Dec 2011	147.4	137.7
Dec 2010	134.9	136.6
∆%	9.3	0.8
Nov 2011	155.4	149.1
Nov 2010	141.2	143.5
∆%	10.1	3.9
Trade Balance	Jan-Dec 2011	Jan-Dec 2010
€ Billions	-7.7	-14.7

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-15022012-BP/EN/6-15022012-BP-EN.PDF

The structure of trade of the euro zone in Jan-Nov 2011 is provided in Table VD-9. Data are still not available for trade structure for Dec. Manufactured exports grew 11.6 percent in Jan-Nov 2011 relative to Jan-Nov 2010 while imports grew 8.1 percent. The trade surplus in manufactured products was lower than the trade deficit in primary products in both Jan-Nov 2011 and Jan-Nov 2010.

Table VD-9, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, ∆%

	Primary	Manufactured	Other	Total
Exports
Jan-Nov 2011 € B	239.0	1302.0	44.6	1585.7
Jan-Nov 2010 € B	195.3	1166.3	40.8	1402.4
∆%	22.4	11.6	9.3	13.1
Imports
Jan-Nov 2011 € B	564.2	1011.9	27.1	1603.1
Jan-Nov 2010  € B	453.1	935.8	26.5	1415.4
∆%	24.5	8.1	2.3	13.3
Trade Balance € B
Jan-Nov 2011	-325.1	290.2	17.5	-17.4
Jan-Nov  2010	-257.7	230.4	14.3	-13.0

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-15022012-BP/EN/6-15022012-BP-EN.PDF

Construction is weak throughout most advanced economies. Growth of euro zone construction output in Table VD-10 has fluctuated with alternation of negative change. Jul is the only strong month with monthly percentage increase of 1.2 percent and 2.5 percent in 12 months. Percentage changes were negative from Jul to Oct. In Oct, construction output fell 1.4 percent and fell 2.5 percent in 12 months. Construction rebounded in Nov with increase of 0.2 percent in the month and 0.4 percent in 12 months. In Dec, construction output increased again by 0.3 percent and was higher by 7.8 percent relative to a year earlier

Table VD-10, Euro Zone, Construction Output ∆%

	Month ∆%	12-Month ∆%
Dec 2011	0.3	7.8
Nov	0.2	0.4
Oct	-1.1	-2.5
Sep	-1.4	0.5
Aug	-0.1	2.2
Jul	1.2	2.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-17022012-AP/EN/4-17022012-AP-EN.PDF

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	IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% Blog 02/19/12 GDP ∆% 1992-2011 Blog 02/19/12
Consumer Price Index	Jan month SA ∆%: -0.4 Jan 12 months ∆%: 2.1 Blog 02/12/12
Producer Price Index	Jan month ∆%: 0.6 12-month NSA ∆%: 3.4 Blog 02/19/12
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:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

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

Table VE-1 provides GDP growth in Germany in a quarter relative to the prior quarter. There were four consecutive quarters of decline from IIQ2008 to IVQ2009. The two worst declines were 2.2 percent in IVQ2008 and 4.0 percent in IQ2009. Recovery was strong in 2010, with growth of 1.9 percent in IIQ2010, and in IQ2011 with growth of 1.3 percent. Performance was weak throughout 2011 with decline of 0.2 percent in IVQ2011

Table VE-1, Germany, Real GDP ∆% Quarter Relative to Prior Quarter

	IQ	IIQ	IIIQ	IV
2011	1.3	0.3	0.6	-0.2
2010	0.5	1.9	0.8	0.5
2009	-4.0	0.3	0.8	0.7
2008	1.1	-0.4	-0.4	-2.2
2007	0.7	0.6	0.9	0.3

Seasonal and calendar adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__053__811,templateId=renderPrint.psml

Table VE-2 provides additional perspective with GDP growth in Germany in a quarter relative to the same quarter a year earlier. There were five consecutive quarters of sharp decline in GDP relative to the same quarter a year earlier. The sharpest declines were 6.5 percent in IQ2009, 7.4 percent in IIQ2009 and 5.0 percent in IIIQ2009. Growth was robust throughout 2010. The highest rate of growth relative to a quarter a year earlier was 5.0 percent in IVQ2011. Growth then stalled with only 1.5 percent in IVQ2011 and marginal decline of 0.2 percent.

Table VE-2, Germany, GDP ∆% Quarter Relative to Same Quarter a Year Earlier, Price Adjusted NSA 

	IQ	IIQ	IIIQ	IV
2011	5.0	3.0	2.6	1.5
2010	2.6	4.4	4.0	3.8
2009	-6.5	-7.4	-5.0	-1.6
2008	2.1	3.1	1.1	-1.9
2007	4.3	3.4	3.3	2.2

Calendar and price adjusted NSA

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__053__811,templateId=renderPrint.psml

Table VE-3 provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.2 percent in IIQ2011 and 0.5 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):

“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”

Table VE-3, Germany, GDP Year ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.0
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistiche Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/02/PE12__053__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2012/01/PE12__010__811,templateId=renderPrint.psml

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Fachveroeffentlichungen/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/NationalAccountsQuarterlyResults6480120113225,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	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.4 Blog 02/19/12
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:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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

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

Growth of GDP in a quarter relative to the prior quarter is provided for France in Table VF-1. GDP growth in IVQ2011 was 0.2 percent. The French economy contracted 0.1 percent in IIQ2011 but grew revised 0.3 percent in IIIQ2011. Growth in the first five quarters of expansion from IQ2010 to IQ2011 was at the annual equivalent rate of 1.9 percent while growth from the second to the fourth quarter of 2011 has been at the annual equivalent rate of 0.5 percent. Recovery has been much weaker than the cumulative 2.7 percent in the four quarters of 2006. Weak recoveries in advanced economies have prevented full utilization of labor, capital and productive resources.

Table VF-1, France, Quarterly Real GDP Growth, Quarter on Prior Quarter ∆%

	IQ	IIQ	IIIQ	IVQ
2011	0.9	-0.1	0.3	0.2
2010	0.1	0.5	0.4	0.4
2009	-1.6	0.1	0.3	0.6
2008	0.4	-0.7	-0.3	-1.5
2007	0.6	0.5	0.4	0.2
2006	0.6	1.1	0.2	0.8
2005	0.1	0.4	0.6	0.7
2004	0.5	0.7	0.5	0.7

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20120215

Growth rates of France’s real GDP in a quarter relative to the same quarter a year earlier are shown in Table VF-2. France has not recovered the rates of growth in excess of 2 percent prior to the global recession. GDP fell 3.9 percent in IQ2009, 3.2 percent in IIQ2009, 2.7 percent in IIIQ2009 and 0.6 percent in IVQ2009. Growth in IVQ2011 relative to IVQ2010 was 1.4 percent.

Table VF-2, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	2.2	1.6	1.5	1.4
2010	1.0	1.5	1.6	1.4
2009	-3.9	-3.2	-2.7	-0.6
2008	1.5	0.3	-0.5	-2.1
2007	2.7	2.1	2.4	1.8
2006	2.3	3.0	2.6	2.7
2005	2.0	1.7	1.9	1.8
2004	1.9	2.7	2.4	2.5

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20120215

Percentage changes and contributions of segments of GDP in France are provided in Table VF-3. Internal demand contributed 0.3 percentage points to GDP growth in IVQ2011 after contributing 0.2 percentage points in IIIQ2011 and minus 0.4 percentage points in IIQ2011. Net foreign trade contributed 0.7 percentage points to GDP growth in IVQ201 after contributing 0.1 percentage points in IIIQ2011 and 0.5 percentage points in IIQ2011.

Table VF-3, France, Contributions to GDP Growth, Calendar and Seasonally Adjusted, %

∆% from Prior Period	IQ 2011	IIQ 2011	IIIQ 2011	IVQ 2011	2010	2011
GDP	0.9	-0.1	0.3	0.2	1.4	1.7
Imports	2.8	-1.0	0.7	-1.2	8.3	5.0
Household Consump.	0.2	-1.0	0.3	0.2	1.3	0.3
Govt. Consump.	0.4	0.1	0.2	0.2	1.2	0.9
GFCF	1.1	0.6	0.2	0.9	-1.4	2.9
Exports	1.4	0.7	1.2	1.2	9.3	5.0
% Point Contribs.
Internal Demand ex Inventory Changes	0.4	-0.4	0.2	0.3	0.8	1.0
Inventory Changes	1.0	-0.1	0.0	-0.8	0.5	0.9
Net Foreign Trade	-0.5	0.5	0.1	0.7	0.1	-0.1

Notes: Consump.: Consumption; Gvt.: Government; GFCF: Gross Fixed Capital Formation; Contribus.: Contributions

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20120215

Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques provides percentage point contributions to GDP growth. GDP grew sharply into IQ2011 and then stalled in IIQ2011. Final consumption was the key negative contributor to GDP growth in IIQ2011. GDP growth strengthened in IIIQ2011 with the impulse originating in final consumption. Net trade, gross fixed capital formation (GFCF) and final consumption drove GDP growth in IVQ2011.

Chart VF-1, France, Percentage Point Contributions to GDP Growth

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20120215

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	IVQ2011/IVQ2010 SA ∆%: minus 0.5 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 02/19/12
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 Dec SA €613 million versus Nov -€948 Exports Dec month SA ∆%: +4.2; Imports Dec month SA ∆%: -0.8 Exports 12 months NSA ∆%: +5.7 Imports 12 months NSA ∆%: -8.4 Blog 0/19/12

Links to blog comments in Table IT:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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

Table VG-1 provides percentage changes of GDP in Italy of quarter on prior quarter and quarter on same quarter a year earlier. Italy’s GDP fell 0.7 in IVQ2011 and 0.5 percent relative to IVQ2010. GDP had been growing during six consecutive quarters but at very low rates. Growth in IVQ2010 has been revised to zero and growth in IIIQ2011 is estimated at minus 0.2 percent. The yearly rate has fallen from 1.6 percent in IIQ2010 to minus 0.5 percent in IVQ2011. The fiscal adjustment of Italy is significantly more difficult with the economy not growing especially on the prospects of increasing government revenue.

Table VG-1, Italy, GDP ∆%

	Quarter ∆% Relative to Preceding Quarter	Quarter ∆% Relative to Same Quarter Year Earlier
IVQ2011	-0.7	-0.5
IIIQ2011	-0.2	0.3
IIQ2011	0.3	0.8
IQ2011	0.1	1.0
IVQ2010	0.0	1.6
IIIQ2010	0.3	1.5
IIQ2010	0.4	1.6
IQ2010	0.8	1.0
IVQ2009	-0.2	-3.0
IIIQ2009	0.5	-4.6
IIQ2009	-0.1	-6.1
IQ2009	-3.2	-6.5
IVQ2008	-1.9	-3.1
IIIQ2008	-1.1	-1.7
IIQ2008	-0.5	-0.3
IQ2008	0.4	0.4
IV2007	-0.4	0.1
IIIQ2007	0.3	1.7
IIQ2007	0.2	2.0
IQ2007	0.0	2.4

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/53282

Chart VG-1 of the Italian National Institute of Statistics (ISTAT) provides growth of GDP of Italy at market prices. The year on year rate of growth pulled strongly out of the contraction. There is what appears to be the beginning of a trend of deceleration toward stagnation in 2011 much the same as in many advanced economies with negative growth in the past two consecutive quarters. 

Chart VG-1, Italy, GDP at Market Prices, ∆%

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Exports and imports of Italy and monthly growth rates SA are provided in Table VG-2. There have been significant fluctuations. Seasonally-adjusted exports increased 4.2 percent in Dec while imports fell 0.8 percent. The SA trade deficit fell from €1631 million in Oct to surplus of €631 million in Dec.

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

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Dec 2011	33,117	4.2	32,486	-0.8	631
Nov	31,796	2.4	32,744	0.2	-948
Oct	31,050	-3.0	32,681	-1.5	-1,631
Sep	32,017	2.4	33,179	-0.6	-1,162
Aug	31,253	-0.4	33,385	-0.1	-2,132
Jul	31,365	1.5	33,432	2.1	-2,067
Jun	30,911	-0.8	32,757	-4.2	-1,846
May	31,148	-0.1	34,187	-0.4	-3,039
Apr	31,190	0.7	34,327	-1.2	-3,137
Mar	30,958	1.9	34,745	4.3	-3,787
Feb	30,369	-1.5	33,301	-0.8	-2,932
Jan	30,832	4.3	33,559	1.2	-2,727
Average∆% Jan-Dec		0.9		-0.2
Dec 2010	29,575	-0.7	33,162	0.7	-3,587

AE: annual equivalent

Source: http://www.istat.it/it/archivio/53289

Italy’s trade not seasonally adjusted is provided in Table VG-3. Values are different because the data are original and not adjusted. Exports grew 5.7 percent in the 12 months ending in Dec while imports fell 8.4 percent. Twelve-month rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.4 percent. In Nov, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. The actual or not seasonally adjusted trade balance fell from €2905 million in Aug to surplus of €1447 million in Dec. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table VG-3, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Dec 2011	31,420	5.7	29,973	-8.4	1,447
Nov	32,428	6.5	34,011	0.5	-1,583
Oct	32,131	4.5	33,186	-0.4	-1,055
Sep	32,997	10.2	34,878	3.6	-1,881
Aug	24,177	14.9	27,082	12.1	-2,905
Jul	35,264	5.8	33,743	6.1	1,521
Jun	32,605	7.9	34,309	1.6	-1,704
May	33,491	19.8	35,722	18.4	-2,231
Apr	31,045	12.5	33,869	18.0	-2,824
Mar	34,418	14.0	38,203	19.8	-3,785
Feb	29,595	17.7	32,621	16.2	-3,026
Jan	26,146	24.6	32,455	28.4	-6,309
Dec 2010	29,714	20.2	32,732	31.7	-3,018
Year
2011	375,719	11.4	400,052	8.9	-24,333
2010	337,346	15.6	367,390	23.4	-30,044
2009	291,733	-20.9	297,609	-22.1	-5,876
2008	369,016	1.2	382,050	2.3	-13,034

Source: http://www.istat.it/it/archivio/53289

Growth rates of Italy’s trade and major products are provided in Table VG-4 for the period Jan-Dec 2011 relative to Jan-Dec 2010. Growth rates are high for the total and all segments with the exception of decline of durable goods imports of 6.0 percent. Capital goods exports increased 10.7 percent relative to a year earlier and intermediate exports by 13.9 percent.

Table VG-4, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Dec 2011/ Jan-Dec 2010	Imports Share %	Imports ∆% Jan-Dec 2011/ Jan-Dec 2010
Consumer Goods	29.5	9.1	25.3	7.8
Durable	6.3	4.2	3.5	-6.0
Non Durable	23.2	10.4	21.8	6.2
Capital Goods	32.4	10.7	22.4	0.8
Inter- mediate Goods	33.5	13.9	33.9	10.8
Energy	4.6	12.8	18.4	16.8
Total ex Energy	95.4	11.3	81.6	7.1
Total	100.0	11.4	100.0	8.9

Source: http://www.istat.it/it/archivio/53289

Table VG-4 provides Italy’s trade balance by product categories in Dec and Jan-Dec 2011. Italy’s trade balance excluding energy is a surplus of €37,060 million in Jan-Dec 2011 but the energy trade balance is a deficit of €61,394 million. Italy has significant competitiveness in contrast with some other countries with debt difficulties.

Table VG-5, Italy, Trade Balance by Product Categories, € Millions

	Dec 2011	Jan-Dec 2011
Consumer Goods	935	8,305
Durable	950	10,205
Nondurable	-15	-1,900
Capital Goods	4,358	37,927
Intermediate Goods	1,255	-9,172
Energy	-5,102	-61,394
Total ex Energy	6,549	37,060
Total	1,447	-24,333

Source: http://www.istat.it/it/archivio/53289

Italy’s structure of regional trade in Jan-Dec 2011 and growth rates are in Table VG-6. Exports to members of the European Union are 57.3 percent of the total. Exports to the euro zone or European Monetary Union (EMU) are 43.6 percent. Imports from members of the European Union account for 54.8 percent of the total and imports from members of EMU are 44.6 percent of the total. After years of integration, members of EMU are dependent on each other such that the end of the common currency could be disruptive. The resolution of the sovereign debt crisis requires growth of Italy with devaluation to promote exports, which is difficult within the common currency.

Table VG-6, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

	Exports % Share	∆% Jan-Dec 2011/ Jan-Dec 2010	Imports % Share	Imports ∆% Jan-Dec 2011/ Jan-Dec 2010
EU	57.3	8.8	54.8	5.8
EMU 17	43.6	8.7	44.6	5.4
France	11.6	11.2	8.8	3.7
Germany	13.0	12.4	16.1	5.7
Spain	5.8	1.4	4.6	6.0
UK	5.2	-0.2	2.7	6.8
Non EU	42.7	14.9	45.2	12.6
Europe non EU	12.0	23.3	10.3	18.0
USA	6.0	12.4	3.0	17.0
China	2.6	16.2	7.8	1.8
OPEC	5.3	-1.1	9.5	-1.4
Total	100.0	11.4	100.0	8.9

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

Source: http://www.istat.it/it/archivio/53289

Table VG-7 provides Italy’s trade balance by regions and countries. Italy has a trade deficit of €12,461 million with the 17 countries of the euro zone (EMU 17). Depreciation to parity, as proposed by Caballero and Giavazzi (2012Jan15), could permit greater competitiveness in improving the trade surpluses of €5505 million with Europe non European Union and of €9823 million with the US. There is significant rigidity in the trade deficits of €19,302 million with China and €16,701 million with oil exporting countries (OPEC).

Table VG-7, Italy, Trade Balance by Regions and Countries, Millions of Euro 

Regions and Countries	Trade Balance Dec 2011 Millions of Euro	Trade Balance Jan-Dec 2011 Millions of Euro
EU	-577	-2,747
EMU 17	-1,565	-12,461
France	703	10,284
Germany	-1,451	-12,999
Spain	145	2,130
UK	703	6,848
Non EU	2,024	-21,586
Europe non EU	1,042	5,505
USA	1,082	9,823
China	-853	-19,302
OPEC	-1,014	-16,701
Total	1,447	-24,333

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

Source: http://www.istat.it/it/archivio/53289

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	Jan month ∆%: -0.5 Dec 12-month ∆%: 3.6 Blog 02/19/12
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	Jan month SA ∆%: +0.9 Dec 12 months ∆%: +2.0 Blog 02/19/12
Labor Market	Oct-Dec Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 2.0% Blog 02/12/19
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:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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

Labor market statistics of the UK for the quarter Oct-Dec 2011 are provided in Table VH-1. The unemployment rate rose to 8.4 percent and the number unemployed increased 48,000 in Oct-Dec, reaching 2.671 million. There are 860,000 unemployed over one year, down 8,000 on the quarter relative to Jul-Sep, and 423,000 unemployed over two years, down 1,000 on the quarter. The employment rate is 70.3 percent. Earnings growth including bonuses was 2.0 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 5.0 percent, unchanged in the quarter.  There are 7.87 million people working part time in Oct-Dec. The number of employees and self-employed part-time because they could not find full-time employment increased 83,000 to 1.35 million, which is the highest since 1992 when records begin. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992 but other data show higher numbers in the mid 1980s.

Table VH-1, UK, Labor Market Statistics

	Quarter Oct/Dec 2011
Unemployment Rate	8.4% +0.1 % points on quarter and +0.5 from year earlier, highest since Sep-Nov 1995
Number Unemployed	(1) +48,000 from Sep-Nov +179,000 from year earlier to reach 2.671 million, highest unemployed number since 1995            (2) Unemployment rate 16 to 24 years of age +0.3 % points from Jul-Sep to 22.2% of that age group; number unemployed 16 to 24 years up 22,000 from Jul-Aug to 1.038 million; unemployment rate and number for 16-24 years highest since 1992 when records begin but other data show higher unemployment ages 16 to 24 in mid 1980s (3) Unemployed 16 to 24 years excluding those in full-time education 731,000, up 1,000 from Jul-Sep; unemployment rate 20.7%, up 0.1 % points from Jul-Sep
Number Unemployed > one and two years	(1) Number unemployed over one year: 860,000 Oct-Dec, down 8,000 on quarter Jul-Sep   (2) Number unemployed over two years: 423,000 Oct-Dec, +1,000 on Jul-Sep
Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks)	(1) 23.1%, down 0.2 % points on quarter Oct-Dec and from year earlier              (2) Economically inactive 16-64 years down 78,000 on quarter and 71,000 on year to 9.286 million
Employment Rate	70.3% Oct-Dec, up 0.1 % points on quarter, down 0.2 % points on year earlier
Number Employed	(1) Up 60,000 on quarter, up 7,000 on year to 29.129 million                               (2) Number of employees down 109,000 on quarter to 24.79 million, fastest decline since 1992 (when records begin)                                      (3) Self-employed +101,000 on quarter to 4.12 million, largest number since 1992            (5) Number in other job categories +26,000 to 210,000
Earnings Growth Rates Year on Year	(1) Total +2.0% (including bonuses) over year earlier, unchanged on Sep-Nov; private sector rose 2.3 on year earlier, public sector rose 1.7% on year earlier, lowest since 2001 when comparable records begin                                   (2) Regular private +2.2% (excluding bonuses) over year earlier; regular public 1.7% on year earlier
Full-time and Part-time	(1) Number full-time 21.26 million, down 10,000 on quarter                                (2) Number part-time 7.87 million in Oct-Dec, up 71,000 on quarter Jul-Sep (3) Number employees and self-employed working part-time because they could not find full-time employment up 83,000 to 1.35 million, highest since 1992 when records begin
	Dec 2011
Claimant Count (Jobseeker’s Allowance, JSA)	(1) Latest estimate: 1.605 million in Jan 2012; +6,900 on Dec and +146,300 on year earlier                                 (2) Number claiming JSA for up to six month 928,200 down 16,500 Nov to Dec 129,000 from prior year (rate: 5.0%, highest since 5.1% in Aug 1997, unchanged in quarter but +0.5 percentage points from year earlier)
Labor Productivity	(1) Output per worker rose 1.2% from IIQ2011 to IIIQ2011 (2) Unit labor costs increased 0.5% from IIQ2011 to IIIQ2011

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

Table VH-2 UK provides indicators of the labor force survey of the UK for Oct-Dec 2011 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.7 percent in Jan-Mar 2011 to 8.4 percent in Oct-Dec 2011.

Table VH-2, UK, Labor Force Survey Indicators

	LFHP	EMP	PART	UNE	RATE
Oct-Dec 2011	40,184	29,129	70.3	2,671	8.4
Jul-Sep 2011	40,180	29,069	70.2	2,622	8.3
Apr-Jun 11	40,161	29,265	70.7	2,494	7.9
Jan-Mar 11	40,118	29,240	70.7	2,455	7.7
Oct-Dec 10	40,074	29,122	70.5	2,492	7.9
Oct-Dec 09	39,871	28,903	70.6	2,449	7.8

Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 to 64 in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed in thousands ; Rate: Number Unemployed as % of Employed plus Unemployed

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

The volume of retail sales in the UK increased 0.9 percent in Jan and rose 2.0 percent in the 12 months ending in Jan, as shown in Table VH-3. There has been significant volatility in monthly retail sales in the UK.

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

	Month SA ∆%	12 Months ∆%
Jan 2012	0.9	2.0
Dec 2011	0.6	2.5
Nov	-0.1	0.4
Oct	0.7	0.7
Sep	0.7	0.5
Aug	-0.5	-1.1
Jul	0.1	-0.6
Jun	0.5	-0.4
May	-1.6	-0.5
Apr	1.2	2.1
Mar	0.4	0.4
Feb	-0.8	0.3
Jan	1.4	3.8
Dec 2010	-1.5	-1.9

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/january-2012/index.html

Retail sales in the UK struggle with relatively high inflation. Table VH-4 provides the 12 month percentage change of the implied deflator of UK retail sales. The implied deflator of all retail sales rose 2.2 percent in the 12 months ending in Jan while that of sales excluding auto fuel rose 1.8 percent. The implied deflator of auto fuel sales rose to 17.0 in Sep, which is the highest 12 month increase in 2011, but then declined to 14.8 percent in Oct, 12.6 percent in Nov, 9.1 percent in Dec and 5.3 percent in Jan. The percentage change of the implied deflator of sales of food stores at 3.5 percent in Dec is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 as shown in Table VH-4. UK inflation is particularly sensitive to increases in commodity prices.

Table VH-4, UK, Implied Deflator of Retail Sales, 12-Month Percentage Changes, ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jan 2012	2.2	1.8	3.5	0.6	5.3
Dec 2011	2.5	1.8	4.2	0.4	9.1
Nov	3.6	2.5	4.6	1.2	12.6
Oct	4.5	3.2	5.0	1.8	14.8
Sep	4.9	3.4	6.0	1.2	17.0
Aug	5.2	3.8	5.9	2.1	16.3
Jul	4.9	3.7	5.9	1.9	14.5
Jun	4.4	3.1	6.0	0.8	14.5
May	4.4	3.2	5.5	1.5	13.2
Apr	4.1	3.1	4.7	1.7	12.3
Mar	4.1	2.7	4.2	1.5	15.0
Feb	4.7	3.4	5.4	1.6	15.1
Jan	3.8	2.6	5.3	0.8	14.5
Dec 2010	3.1	2.4	5.1	0.6	12.4
Dec 2009	3.4	2.0	2.1	1.4	17.0
Dec 2008	-0.5	0.2	6.9	-4.4	-9.7
Dec 2007	1.7	0.4	3.9	-2.0	15.4
Dec 2006	1.0	0.8	3.3	-1.1	1.1
Dec 2005	-0.4	-1.0	1.3	-2.6	6.6

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/january-2012/index.html

UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Growth of total volume of sales was strong in Jan with 0.9 percent and in Dec with 0.6 percent. There were increases in all major categories in Jan and Dec with exception of decline of 1.7 percent of auto fuel in Jan.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jan 2012	0.9	1.2	-0.3	2.2	-1.7
Dec 2011	0.6	0.6	0.6	1.3	0.7
Nov	-0.1	-0.5	-0.7	-0.7	2.7
Oct	0.7	0.6	0.7	0.7	1.3
Sep	0.7	0.8	0.0	1.7	0.0
Aug	-0.5	-0.4	0.0	-0.9	-0.9
Jul	0.1	0.1	0.9	-0.3	0.8
Jun	0.5	0.7	0.4	0.4	-1.1
May	-1.6	-1.8	-3.8	-0.6	0.7
Apr	1.2	1.3	2.6	0.1	0.0
Mar	0.4	0.5	1.2	-0.1	-0.5
Feb	-0.8	-1.0	-0.7	-1.5	0.8
Jan	1.4	0.7	0.2	1.2	7.9
Dec 2010	-1.5	-0.9	-1.9	-1.0	-6.4

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/january-2012/index.html

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales grew 2.0 percent in the 12 months ending in Jan with increase of 1.9 percent in sales excluding auto fuel. There has been significant improvement since Aug.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jan 2012	2.0	1.9	0.9	1.5	2.8
Dec 2011	2.5	1.4	1.4	0.6	12.8
Nov	0.4	0.0	-1.2	-1.0	4.8
Oct	0.7	0.5	0.5	-0.5	2.3
Sep	0.5	0.2	-0.2	-0.9	3.6
Aug	-1.1	-1.4	-0.6	-3.4	1.4
Jul	-0.6	-1.0	-1.0	-2.5	2.3
Jun	-0.4	-0.8	-4.0	-0.3	3.1
May	-0.5	-0.8	-3.2	-0.4	2.3
Apr	2.1	1.9	1.7	0.7	3.8
Mar	0.4	0.0	-1.0	-0.3	4.0
Feb	0.3	-0.2	-2.2	0.1	4.8
Jan	3.8	3.4	-2.4	7.3	7.4
Dec 2010	-1.9	-1.2	-3.8	0.1	-8.4
Dec 2009	1.3	2.0	2.5	1.0	-4.2
Dec 2008	1.3	2.6	-1.1	4.3	-9.0

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/january-2012/index.html

Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to the 12 months percentage changes of value and volume of retail sales in the UK. (1) The volume of retail sales increased 2.0 percent in the 12 months ending in Jan. Sales of predominantly food stores with weight of 41.7 increased 0.9 percent in the 12 months ending in Jan, contributing 0.4 percentage points. Mostly nonfood stores with weight of 43.2 percent increased 1.5 percent and contributed 0.6 percentage points. Positive contributions to 12-month percentage changes of volume were made by non-store retailing with weight of 4.9 percent, growth of 13.3 percent and positive contribution of 0.7 percentage points and automotive fuel with weight of 10.2 percent, growth of 2.8 percent and positive contribution of 0.3 percentage points. The value of retail sales increased 4.4 percent in the 12 months ending in Jan. There were positive contributions to all general categories of retails sales: 1.9 percentage points for predominantly food stores, 1.0 percentage points for predominantly nonfood stores, 0.6 percentage points for non-store retailing and 0.9 percentage points for automotive fuel.

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

Nov 2011	Weight % of All Retailing	Volume SA 12 Months ∆%	PP Cont. % points	Value SA 12 Months ∆%	PP Cont. % points
All Retailing	100.0	2.0		4.4
Mostly Food Stores	41.7	0.9	0.4	4.3	1.9
Mostly Nonfood Stores
Total	43.2	1.5	0.6	2.3	1.0
Non- specialized	7.8	0.3	0.0	-0.3	0.0
Textile, Clothing & Footwear	12.2	0.5	0.1	3.6	0.4
Household Goods Stores	9.7	1.3	0.1	1.2	0.1
Other	13.5	3.4	0.4	3.3	0.5
Non-store Retailing	4.9	13.3	0.7	13.0	0.6
Automotive Fuel	10.2	2.8	0.3	8.5	0.9

Cont.: Contribution

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/january-2012/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 10.2 percent by Fri Feb 17, 2012. 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	02/17 /2012
Rate	1.1423	1.5914	1.192	1.314
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/17/ 2012
Rate	8.2798	8.2765	6.8211	6.2982
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 1.314/EUR or by 10.2 percent {[(1.314/1.192)-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 10, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 percent. The rate of CNY 6.2982 on Feb 17 corresponds to the same revaluation of 7.7 percent and cumulative 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. There was marginal devaluation of 0.1 percent in the week of Feb 17. 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	02/17 /2012
Rate	1.1423	1.5914	1.192	1.314
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/17/ 2012
Rate	8.2798	8.2765	6.8211	6.2982
Weekly Rates	01/27/ 2012	02/03/  2012	02/10/  2012	02/17/  2012
CNY/USD	6.334	6.303	6.2944	6.2982
∆% from Earlier Week*	-0.4	0.5	0.1	-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 02/17/12,” 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 but strength in the week of Feb 17, there is now only one financial value with negative change in valuation in column “∆% Trough to 02/17/12:” Shanghai Composite minus 1.1 percent. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 33.7 percent and S&P 500 33.1 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached 13,006.41 in intraday trading on Feb 17, which is the highest in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). 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 02/17/12” had double digit gains relative to the trough around Jul 2, 2010 but now only four valuations show increases of less than 10 percent: NYSE Financial is 8.9 percent above the trough; STOXX 50 Europe is 9.0 percent above the trough; and Japan’s Nikkei Average is 6.3 percent above the trough. DJ UBS Commodities is 16.9 percent above the trough; Dow Global is 16.8 percent above the trough; and DAX is 20.8 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 9384.17 on Fri Feb 17, 2012, which is 8.5 percent lower than 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 10.2 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 02/17/12” in Table VI-4 shows strong performance of risk financial assets in the week of Feb 17, 2012. There are still high uncertainties on European sovereign risks, US and world growth slowdown 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 02/17/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Feb 17, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 02/17/12” but also relative to the peak in column “∆% Peak to 02/17/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 15.6 percent, S&P 500 11.9 percent and Dax 8.1 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 13.3 percent, Nikkei Average by 17.6 percent, Shanghai Composite by 25.5 percent, STOXX 50 by 7.7 percent, Dow Global by 4.7 percent and Dow Asia Pacific by 0.7 percent. DJ UBS Commodities Index is now 0.6 percent above 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 02/17 /12	∆% Week 02/17/ 12	∆% Trough to 02/17 12
DJIA	4/26/ 10	7/2/10	-13.6	15.6	1.2	33.7
S&P 500	4/23/ 10	7/20/ 10	-16.0	11.8	1.4	33.1
NYSE Finance	4/15/ 10	7/2/10	-20.3	-13.3	1.8	8.9
Dow Global	4/15/ 10	7/2/10	-18.4	-4.7	1.3	16.8
Asia Pacific	4/15/ 10	7/2/10	-12.5	-0.7	1.5	13.4
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-17.6	4.9	6.3
China Shang.	4/15/ 10	7/02 /10	-24.7	-25.5	0.2	-1.1
STOXX 50	4/15/10	7/2/10	-15.3	-7.7	1.5	9.0
DAX	4/26/ 10	5/25/ 10	-10.5	8.1	2.3	20.8
Dollar Euro	11/25 2009	6/7 2010	21.2	13.2	0.4	-10.2
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	0.5	0.6	17.6
10-Year T Note	4/5/ 10	4/6/10	3.986	2.000

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 12.3 percent above the Apr 26, 2010 level and the DJIA is 15.6 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
Feb 17	1.2	15.6	1.4	12.3

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

Table VI-6, updated with every blog comment, 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 6.8 percent to ZAR 7.727/USD on Feb 17, 2012, which is still 33.3 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 6.7 percent stronger at SGD 1.258/USD on Feb 17 relative to the trough of depreciation but still stronger by 18.9 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing appreciation of 1.3 percent relative to the trough to BRL 1.714/USD on Feb 17, 2012 but still stronger by 29.5 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 17, 2012	∆T Feb 17, 2012	∆P Feb 17, 2012
EUR USD	7/15 2008	6/7 2010		02/17 2012
Rate	1.59	1.192		1.314
∆%			-33.4		9.3	-21.0
JPY USD	8/18 2008	9/15 2010		02/17 2012
Rate	110.19	83.07		79.52
∆%			24.6		4.3	27.8
CHF USD	11/21 2008	12/8 2009		02/17 2012
Rate	1.225	1.025		0.9118
∆%			16.3		10.4	25.1
USD GBP	7/15 2008	1/2/ 2009		02/17 2012
Rate	2.006	1.388		1.583
∆%			-44.5		12.3	-26.7
USD AUD	7/15 2008	10/27 2008		02/17 2012
Rate	1.0215	1.6639		1.071
∆%			-62.9		43.9	8.6
ZAR USD	10/22 2008	8/15 2010		02/17 2012
Rate	11.578	7.238		7.727
∆%			37.5		-6.8	33.3
SGD USD	3/3 2009	8/9 2010		02/17 2012
Rate	1.553	1.348		1.258
∆%			13.2		6.7	18.9
HKD USD	8/15 2008	12/14 2009		02/17 2012
Rate	7.813	7.752		7.754
∆%			0.8		0.0	0.8
BRL USD	12/5 2008	4/30 2010		02/17 2012
Rate	2.43	1.737		1.714
∆%			28.5		1.3	29.5
CZK USD	2/13 2009	8/6 2010		02/17 2012
Rate	22.19	18.693		19.01
∆%			15.7		-1.7	14.3
SEK USD	3/4 2009	8/9 2010		02/17 2012
Rate	9.313	7.108		6.725
∆%			23.7		5.4	27.8
CNY USD	7/20 2005	7/15 2008		02/17 2012
Rate	8.2765	6.8211		6.2982
∆%			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 2.000 percent at the close of market on Fri Feb 17, 2012 would be equivalent to price of 105.6392 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.3 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 Feb 15, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2920 billion, or $2.9 trillion, with portfolio of long-term securities of $2589 billion, or $2.6 trillion, consisting of $1571 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $848 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1672 billion or $1.7 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
02/17/12	2.000	105.6392	4.3

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 increased 0.2 percent to 14,410 thousand barrels per day on average in the four weeks ending on Feb 10, 2012 from 14,376 thousand barrels per day in the four weeks ending on Feb 3, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 82.7 percent on Feb 10, 2012, which is lower than 83.1 percent on Feb 11, 2011 and almost equal to 82.6 percent on Feb 3, 2012. Imports of crude oil increased 1.4 percent from 8,566 thousand barrels per day on average in the four weeks ending on Feb 3 to 8,689 thousand barrels per day in the week of Feb 10. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 8.8 million barrels per day last week [Feb 10]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight increase in utilization in refineries with increasing imports at the margin in the prior week resulted in marginal decrease of commercial crude oil stocks by 0.1 million barrels from 339.2 million barrels on Feb 3 to 339.1 million barrels on Feb 10. Motor gasoline production was flat at 8,269 thousand barrels per day in the week of Feb 3 and 8,629 thousand barrels per day on average in the week of Feb 10. Gasoline stocks increased 0.4 million barrels and stocks of fuel oil decreased 2.9 million barrels. Supply of gasoline fell from 8,629 thousand barrels per day on Feb 11, 2011, to 8,081 thousand barrels per day on Feb 10, 2012, or by 6.4 percent, while fuel oil supply fell 2.6 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 16.9 percent from Feb 11, 2011 to Feb 10, 2012. Gasoline prices rose 12.2 percent from Feb 11, 2011 to Feb 13, 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	02/10/12	02/03/12	02/11/11
Crude Oil Refineries Input	14,410 Week       ∆%: 0.2	14,376	14,159
Refinery Capacity Utilization %	82.7	82.6	83.1
Motor Gasoline Production	8,629 Week      ∆%: 0.0	8,629	8,972
Distillate Fuel Oil Production	4,447 Week     ∆%: -0.4	4,467	4,182
Crude Oil Imports	8,689 Week        ∆%: 1.4	8,566	8,861
Motor Gasoline Supplied	8,081 ∆% 2011/2010= -6.4%	8,038	8,629
Distillate Fuel Oil Supplied	3,717 ∆% 2011/2010 = -2.6%	3,673	3,816
	02/10/12	02/03/12	02/11/11
Crude Oil Stocks Million B	339.1         ∆= -0.1 MB	339.2	345.9
Motor Gasoline Million B	232.2    ∆= +0.4 MB	231.8	241.1
Distillate Fuel Oil Million B	143.7 ∆= -2.9 MB	146.6	161.3
WTI Crude Oil Price $/B	98.68 ∆% 2011/2010 16.9	97.80	84.39
	02/13/12	2/06/12	2/14/11
Regular Motor Gasoline $/G	3.523 ∆% 2011/2010 12.2	3.482	3.140

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. Stocks declined marginally in the week of Feb 10.

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 13,000 from 361,000 on Feb 4, 2012 to 348,000 on Feb 11. Claims not adjusted for seasonality decreased 39,328 from 401,256 on Feb 4 to 361,928 on Feb 11. 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 11, 12	348,000	361,928	365,250
Feb 4, 12	361,000	401,256	367,000
Change	-13,000	-39,328	-1,750
Jan 28, 11	373,000	422,287	377,250
Prior Year	420,000	424,400	419,500

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 710,152 on Feb 7, 2009 to 424,400 on Feb 12, 2011, and now to 361,928 on Feb 11, 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 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html 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 10, 2001	396,151	365,000
Feb 9, 2002	438,611	397,000
Feb 8, 2003	439,250	390,000
Feb 7, 2004	433,234	380,000
Feb 12, 2005	309,290	308,000
Feb 11, 2006	310,078	298,000
Feb 17, 2007	305,945	320,000
Feb 9, 2008	377,595	341,000
Feb 7, 2009	710,152	625,000
Feb 13, 2010	482,078	487,000
Feb 12, 2011	424,400	420,000
Feb 11, 2012	361,928	348,000

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

Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Dec 2011/Dec 2010 NSA	∆% Annual Equivalent Nov 2011-Jan 2012 SA
CPI All Items	2.9	1.2
CPI ex Food and Energy	2.3	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