Mediocre Economic Growth, Falling Real Disposable Income, World Inflation, Financial Repression and Global Financial and Economic Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Mediocre Economic Growth
II Falling Real Disposable Income
IIA Falling Real Disposable Income and Consumption Expenditures by Burning Savings
IIB Financial Repression
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 55.5 in Feb from 54.5 in Jan, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9282). 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 from Dec to Jan. New orders are expanding at a faster rate, increasing from 54.0 in Jan to 54.7 in Feb, suggesting further increase in business ahead. The HSBC Brazil Composite Output Index of the HSBC Brazil Services PMI™, compiled by Markit, rose from 53.8 in Jan to 55.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9279). Andre Loes, Chief Economist of HSBC in Brazil, finds that the increase of the services HSBC PMI for Brazil from 55.0 in Jan to 57.1 in Feb, which is the highest level since Jul 2007, indicate that the economy may be expanding at a faster rate than anticipated (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9279).
VA United States. Table USA provides the data table for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Feb 12 months NSA ∆%: 2.9; ex food and energy ∆%: 2.2 Jan month ∆%: 0.4; ex food and energy ∆%: 0.1 |
| Producer Price Index | Feb 12 months NSA ∆%: 3.3; ex food and energy ∆% 3.0 |
| PCE Inflation | Feb 12 months NSA ∆%: headline 2.3; ex food and energy ∆% 1.9 |
| Employment Situation | Household Survey: Jan Unemployment Rate SA 8.3% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 |
| Personal Income and Consumption | Jan month ∆% SA Real Real Disposable Personal Income (RDPI) Feb month SA ∆% minus 0.1 |
| Quarterly Services Report | IVQ11/IIIQ11 SA ∆%: |
| Employment Cost Index | IVQ2011 SA ∆%: 0.4 |
| Industrial Production | Feb month SA ∆%: 0.0 Manufacturing Feb SA ∆% 0.3 Feb 12 months SA ∆% 5.1, NSA 5.2 |
| Productivity and Costs | Nonfarm Business Productivity IVQ2011∆% SAAE 0.9; IVQ2011/IVQ2010 ∆% 0.3; Unit Labor Costs IVQ2011 ∆% 2.8; IVQ2011/IVQ2010 ∆%: 3.1 Blog 03/11/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Feb 19.53 to Mar 20.21 |
| Philadelphia Fed Business Outlook Index | General Index from Feb 10.2 to Mar 12.5 |
| Manufacturing Shipments and Orders | Jan New Orders SA ∆%: -1.0; ex transport ∆%: -0.3 |
| Durable Goods | Feb New Orders SA ∆%: minus 2.2; ex transport ∆%: 1.6 |
| Sales of New Motor Vehicles | Feb 2012 2,062,683; Feb 2011 1,813,182. Feb SAAR 15.10 million, Dec SAAR 13.56, Feb 2011 SAAR 13.29 million Blog 03/04/12 |
| Sales of Merchant Wholesalers | Jan 2012/Jan 2010 ∆%: Total 11.3; Durable Goods: 14.1; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Jan 12/Jan 11 NSA ∆%: Sales Total Business 8.6; Manufacturers 8.4 |
| Sales for Retail and Food Services | Feb 2012/Feb 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 8.0 |
| Value of Construction Put in Place | Jan SAAR month SA ∆%: minus 0.1 Jan 12-month NSA: 8.0 |
| Case-Shiller Home Prices | Jan 2012/Jan 2011 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 3.8 |
| FHFA House Price Index Purchases Only | Feb SA ∆% 0.0; |
| New House Sales | Feb 2012 month SAAR ∆%: |
| Housing Starts and Permits | Feb Starts month SA ∆%: minus1.6; Permits ∆%: +5.1 |
| Trade Balance | Balance Jan SA -$52,565 million versus Dec -$50,421 million |
| Export and Import Prices | Feb 12 months NSA ∆%: Imports 4.5; Exports 1.5 |
| Consumer Credit | Jan ∆% annual rate: 8.6 |
| Net Foreign Purchases of Long-term Treasury Securities | Nov Net Foreign Purchases of Long-term Treasury Securities: $101.0 billion Jan versus Dec $19.1 billion |
| Treasury Budget | Fiscal Year 2012/2011 ∆%: Receipts 2.8; Outlays -2.4; Individual Income Taxes 0.6 Deficit Fiscal Year 2012 Oct-Feb $580,830 million CBO Forecast 2012FY Deficit $1.079 trillion Blog 03/18/2012 |
| Flow of Funds | IVQ2011 ∆ since 2007 Assets -$7315B Real estate -$5183B Financial -$2507 Net Worth -$6743 Blog 03/11/12 |
| Current Account Balance of Payments | IVQ2011 -$124B %GDP 3.2 Blog 03/18/12 |
Links to blog comments in Table USA:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html
02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html
Manufacturers’ shipments of durable goods fell 0.4 percent in Feb after increasing revised 0.1 percent in Jan while new orders increased 2.2 in Feb after declining 3.6 percent in Jan and increasing 3.3 percent in Dec, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by increase of 6.0 percent of nondefense aircraft in Feb, decline of 17.2 percent in Jan and increase of 21.0 percent in Dec. New orders excluding transportation equipment increased 1.6 percent in Feb. Capital goods new orders, indicating investment, rebounded in Feb, increasing 2.3 percent, after decreasing 3.6 percent in Jan and increasing 5.2 percent in Dec. New orders of nondefense capital goods increased 1.5 percent in Feb after falling 5.2 percent in Feb and jumping 6.9 in Dec. Excluding more volatile aircraft, capital goods orders increased 1.2 in Feb after falling 3.7 percent in Jan and increasing 3.5 percent in Dec.
Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%
| Feb 2012 | Jan 2012 | Dec 2011 | |
| Total | |||
| S | -0.4 | 0.1 | 2.0 |
| NO | 2.2 | -3.6 | 3.3 |
| Excluding | |||
| S | 0.3 | -1.6 | 2.3 |
| NO | 1.6 | -3.0 | 2.3 |
| Excluding | |||
| S | 0.0 | 0.0 | 1.8 |
| NO | 1.7 | -4.1 | 3.9 |
| Machinery | |||
| S | 2.3 | -5.6 | 3.8 |
| NO | 5.7 | -9.1 | 6.5 |
| Computers & Electronic Products | |||
| S | 1.0 | -0.7 | -0.9 |
| NO | 2.7 | 2.1 | -0.2 |
| Computers | |||
| S | 3.6 | -5.2 | -2.4 |
| NO | 6.6 | -8.3 | -5.7 |
| Transport | |||
| S | -2.5 | 5.7 | 1.1 |
| NO | 3.9 | -5.3 | 6.3 |
| Motor Vehicles | |||
| S | 1.2 | 2.2 | 1.0 |
| NO | 1.6 | 1.3 | 1.0 |
| Nondefense | |||
| S | -6.5 | 16.2 | 1.0 |
| NO | 6.0 | -17.2 | 21.0 |
| Capital Goods | |||
| S | -0.3 | -1.1 | 3.2 |
| NO | 2.3 | -3.6 | 5.2 |
| Nondefense Capital Goods | |||
| S | 0.5 | -1.0 | 2.6 |
| NO | 1.5 | -5.2 | 6.9 |
| Capital Goods ex Aircraft | |||
| S | 1.4 | -3.0 | 2.8 |
| NO | 1.2 | -3.7 | 3.5 |
Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation
Source: US Census Bureau http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.
Chart VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr021.html
Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Feb 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Feb 2012 total $386.8 billion and new orders total $400.0 billion, growing respectively by 11.3 percent and 13.5 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 10.9 percent and new orders increased 10.3 percent. Excluding defense, shipments grew 12.3 percent and new orders grew 16.0 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $142.1 billion for shipments, growing 9.1 percent, and new orders $165.5 billion, growing 16.2 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $120.2 billion, growing by 9.2 percent, and new orders $128.2 billion, growing 10.0 percent. There is no suggestion in these data that the US economy is close to recession.
Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars
| Jan-Feb 2012 | Shipments | ∆% 2012/ 2011 | New Orders | ∆% 2012/ |
| Total | 386,764 | 11.3 | 400,045 | 13.5 |
| Excluding Transport | 294,369 | 10.9 | 293,308 | 10.3 |
| Excluding Defense | 369,702 | 12.3 | 381,574 | 16.0 |
| Machinery | 56,503 | 13.2 | 62,186 | 12.1 |
| Computers & Electronic Products | 55,564 | -0.9 | 43,914 | 0.3 |
| Computers & Related Products | 8,631 | -3.2 | 8,299 | -3.4 |
| Transport Equipment | 92,395 | 12.7 | 106,737 | 23.4 |
| Motor Vehicles | 60,455 | 14.3 | 60,624 | 13.9 |
| Nondefense Aircraft | 14,887 | 32.6 | 28,976 | 129.9 |
| Capital Goods | 142,081 | 9.1 | 165,451 | 16.2 |
| Nondefense Capital Goods | 129,004 | 11.5 | 151,446 | 23.2 |
| Capital Goods ex Aircraft | 120,213 | 9.2 | 128,183 | 10.0 |
Note: Transport: transportation
Source: US Census Bureau
http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
Table VA-3 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 93.4 percent in the 10-city composite of the Case-Shiller home price index and 76.4 percent in the 20-city composite between Jan 2000 and Jan 2005. Prices rose over 100 percent from Jan 2000 to Jan 2006, increasing 122.5 percent for the 10-city composite and 102.4 percent for the 20-city composite. House prices rose 35.3 percent between Jan 2003 and Jan 2005 for the 10-city composite and 30.1 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC). Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with resulting decrease in mortgage rates. Similarly, between Jan 2003 and Jan 2006 the 10-city index gained 55.7 percent and the 20-city index increased 49.2 percent. House prices have fallen from Jan 2006 to Jan 2012 by 33.3 for the 10-city composite and 33.1 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Jan 2012, house prices fell 3.9 percent in the 10-city composite and fell 3.8 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US. The final row in Table VA-10 shows that house prices increased 48.4 percent between Jan 2000 and Jan 2012 for the 10-city composite and increased 35.5 percent for the 20-city composite. Standard & Poor’s Case-Shiller estimates that both composite indices are lower by 34.4 percent relative to their peaks in 2006 (http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----).
Table VA-3, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| ∆% Jan 2000 to Jan 2003 | 42.9 | 35.6 |
| ∆% Jan 2000 to Jan 2005 | 93.4 | 76.4 |
| ∆% Jan 2003 to Jan 2005 | 35.3 | 30.1 |
| ∆% Jan 2000 to Jan 2006 | 122.5 | 102.4 |
| ∆% Jan 2003 to Jan 2006 | 55.7 | 49.2 |
| ∆% Jan 2005 to Jan 2012 | -23.2 | -23.2 |
| ∆% Jan 2006 to Jan 2012 | -33.3 | -33.1 |
| ∆% Jan 2009 to Jan 2012 | -6.1 | -7.4 |
| ∆% Jan 2010 to Jan 2012 | -6.0 | -6.8 |
| ∆% Jan 2011 to Jan 2012 | -3.9 | -3.8 |
| ∆% Jan 2000 to Jan 2012 | 48.4 | 35.5 |
With the exception of Apr, house prices seasonally-adjusted have declined in every month for both the 10-city and 20-city Case-Shiller composites from Sep 2011 to Jan 2012 with the exception of zero in Jan 2012, as shown in Table VA-4. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug but fell in every month from Sep to Jan. In Jan, house prices of the 10-city composite seasonally adjusted fell 0.1 percent and were unchanged for the 20-city composite. The not seasonally adjusted index registers declines in Jan of 0.8 percent for both the 10- and 20-city composites. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.
Table VA-4, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%
| 10-City Composite SA | 10-City Composite NSA | 20-City Composite SA | 20-City Composite NSA | |
| Jan 2012 | -0.1 | -0.8 | 0.0 | -0.8 |
| Dec 2011 | -0.6 | -1.2 | -0.5 | -1.1 |
| Nov | -0.8 | -1.4 | -0.7 | -1.3 |
| Oct | -0.7 | -1.3 | -0.7 | -1.4 |
| Sep | -0.6 | -0.6 | -0.7 | -0.7 |
| Aug | -0.3 | 0.1 | -0.5 | 0.0 |
| Jul | -0.1 | 0.9 | -0.02 | 1.0 |
| Jun | -0.2 | 1.0 | -0.1 | 1.2 |
| May | -0.1 | 1.0 | -0.1 | 1.0 |
| Apr | 0.5 | 0.6 | 0.5 | 0.6 |
| Mar | -0.6 | -1.0 | -0.8 | -1.0 |
| Feb | -0.3 | -1.3 | -0.3 | -1.2 |
| Jan | -0.4 | -1.1 | -0.3 | -1.1 |
| Dec 2010 | -0.3 | -0.9 | -0.3 | -0.9 |
VB. Japan. The Markit/JMMA Purchasing Managers’ Index™ (PMI™) was mostly unchanged from 51.1 in Jan to 51.2 in Feb but still suggesting only marginal growth in private sector economic activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9261). 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 continuing growth in manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9261). 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 |
| Corporate Goods Prices | Feb ∆% 0.2 |
| Consumer Price Index | Feb NSA ∆% 0.2 |
| Real GDP Growth | IVQ2011 ∆%: -0.2 on IIIQ2011; IVQ2011 SAAR minus 0.7% |
| Employment Report | Feb Unemployed 2.89 million Change in unemployed since last year: minus 140 thousand |
| All Industry Indices | Jan month SA ∆% minus 1.0 Blog 03/25/12 |
| Industrial Production | Feb SA month ∆%: minus 1.2 |
| Machine Orders | Total Jan ∆% 21.6 Private ∆%: 4.6 |
| Tertiary Index | Jan month SA ∆% minus 1.7 |
| Wholesale and Retail Sales | Feb 12 months: |
| Family Income and Expenditure Survey | Feb 12-month ∆% total nominal consumption 2.7, real 2.3 Blog 04/01/12 |
| Trade Balance | Exports Feb 12 months ∆%: minus 2.7 Imports Feb 12 months ∆% +9.2 Blog 03/25/12 |
Links to blog comments in Table JPY:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
In Feb 2012, industrial production in Japan declined 1.2 percent but increased 1.5 percent in the 12 months ending in Feb 2012, as shown in Table VB-1. Japan’s industrial production increased during two consecutive months by 3.8 percent in Dec 2011 and revised 1.9 percent in Jan 2012, reducing the percentage decline in 12 months from minus 4.3 percent in Dec to minus 1.2 percent in Jan 2012. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep but fell again in Nov by 2.7 percent. Industrial production was higher in 12 months for the first month in Aug by 0.4 percent and again in Oct by 0.1 percent but fell 4.2 percent in Nov and 4.3 percent in Dec 2011 relative to a year earlier. Industrial production fell 21.9 percent in 2009 after falling 3.4 percent in 2008 but recovered 16.4 percent in 2010. The annual average in calendar year 2011 fell 3.5 percent largely because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011.
Table VB-1, Japan, Industrial Production ∆%
| ∆% Month SA | ∆% 12 Months NSA | |
| Feb 2012 | -1.2 | 1.5 |
| Jan | 1.9 | -1.3 |
| Dec 2011 | 3.8 | -4.3 |
| Nov | -2.7 | -4.2 |
| Oct | 2.2 | 0.1 |
| Sep | -3.3 | -3.3 |
| Aug | 0.6 | 0.4 |
| Jul | 0.4 | -3.0 |
| Jun | 3.8 | -1.7 |
| May | 6.2 | -5.5 |
| Apr | 1.6 | -13.6 |
| Mar | -15.5 | -13.1 |
| Feb | 1.8 | 2.9 |
| Jan | 0.0 | 4.6 |
| Dec 2010 | 2.4 | 5.9 |
| Calendar Year | ||
| 2011 | -3.5 | |
| 2010 | 16.4 | |
| 2009 | -21.9 | |
| 2008 | -3.4 |
Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a1002j.pdf
The employment report for Japan in Dec 2011 is in Table VB-2. The rate of unemployment fell from 4.6 percent in Jul to 4.1 percent in Sep but increased to 4.6 percent in Jan, falling to 4.5 percent in Feb. The number unemployed has declined by 140 thousand, or 4.6 percent, relative to a year earlier.
Table VB-2, Japan, Employment Report Feb 2012
| Unemployed | 2.89 million |
| Change since last year | -140 thousand; ∆% –4.6 |
| Unemployment rate | 4.5% SA; -0.1 from prior month Dec; NSA 4.4%, -0.2 from earlier year |
| Population ≥ 15 years | 111.0 million |
| Change since last year | ∆% –0.1 |
| Labor Force | 65.2 million |
| Change since last year | ∆% –0.8 |
| Employed | 62.3 million |
| Change since last year | % -0.6 |
| Labor force participation rate | 58.7 |
| Change since last year | -0.3 |
| Employment rate | 56.1% |
| Change since last year | -0.2 |
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications http://www.stat.go.jp/english/data/roudou/154.htm
Chart VB-1 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2011. The sharp decline in Sep is the best reading in 2011 but the rate increased in the final quarter of the year, declining in Feb 2012.
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/roudou/154.htm
During the “lost decade” of the 1990s from 1991 to 2002 (Pelaez and Pelaez, The Global Recession Risk (2007), 82-3), Japan’s GDP grew at the average yearly rate of 1.0 percent, the CPI at 0.1 percent and the implicit deflator at minus 0.8 percent. Japan’s growth rate from the mid 1970s to 1992 was 4 percent (Ito 2004). Table VB-3 provides Japan’s rates of unemployment, participation in labor force and employment for 1968, 1975, 1980 and 1985 and yearly from 1990 to 2011. The rate of unemployment jumped from 2.1 percent in 1991 to 5.4 percent in 2002, which was a year of global economic weakness. The participation rate dropped from 63.8 percent in 1992 to 61.2 percent in 2002 and the employment rate fell from 62.4 percent in 1992 to 57.9 percent in 2002. The rate of unemployment rose from 3.9 percent in 2007 to 5.1 percent in 2010, falling to 4.5 percent in 2011, while the participation rate fell from 60.4 percent to 59.6 percent, falling to 59.3 percent in 2011, and the employment rate fell from 58.1 percent to 56.6 percent in both 2010 and 2011. The global recession adversely affected labor markets in advanced economies.
Table VB-3, Japan, Rates of Unemployment, Participation in Labor Force and Employment, %
| Unemployment Rate | Participation | Employment Rate | |
| 1968 | 1.2 | 65.9 | 65.1 |
| 1975 | 1.9 | 63.0 | 61.9 |
| 1980 | 2.0 | 63.3 | 62.0 |
| 1985 | 2.6 | 63.0 | 61.4 |
| 1990 | 2.1 | 63.3 | 61.9 |
| 1991 | 2.1 | 63.8 | 62.4 |
| 1992 | 2.2 | 64.0 | 62.6 |
| 1993 | 2.5 | 63.8 | 62.2 |
| 1994 | 2.9 | 63.8 | 61.8 |
| 1995 | 3.2 | 63.4 | 61.4 |
| 1996 | 3.4 | 63.5 | 61.4 |
| 1997 | 3.4 | 63.7 | 61.5 |
| 1998 | 4.1 | 63.3 | 60.7 |
| 1999 | 4.7 | 62.9 | 59.9 |
| 2000 | 4.7 | 62.4 | 59.5 |
| 2001 | 5.0 | 62.0 | 58.9 |
| 2002 | 5.4 | 61.2 | 57.9 |
| 2003 | 5.3 | 60.8 | 57.6 |
| 2004 | 4.7 | 60.4 | 57.6 |
| 2005 | 4.4 | 60.4 | 57.7 |
| 2006 | 4.1 | 60.4 | 57.9 |
| 2007 | 3.9 | 60.4 | 58.1 |
| 2008 | 4.0 | 60.2 | 57.8 |
| 2009 | 5.1 | 59.9 | 56.9 |
| 2010 | 5.1 | 59.6 | 56.6 |
| 2011 | 4.5 | 59.3 | 56.6 |
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications http://www.stat.go.jp/english/data/roudou/154.htm
Japan is experiencing weak internal demand as in most advanced economies. Table VB-4 provides Japan’s wholesale and retail sales. Retail sales increased 3.5 percent in the 12 months ending in Feb while total sales fell 0.1 percent and wholesale sales fell 1.3 percent. Retail sales have not recovered yet from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but growth in the three quarters from Dec to Feb accumulated to 8.0 percent, which is equivalent to 36.0 if repeated in a year. Wholesale sales had been driving total sales but 12-month percentage changes began to contract in Nov and declined continued in Dec to Feb.
Table VB-4, Japan, Wholesale and Retail Sales 12 Month ∆%
| Total | Wholesale | Retail | |
| Feb 2012 | -0.1 | -1.3 | 3.5 |
| Jan | -2.0 | -3.5 | 1.8 |
| Dec 2011 | -0.8 | -2.0 | 2.5 |
| Nov | -2.3 | -2.4 | -2.2 |
| Oct | 1.1 | 0.8 | 1.9 |
| Sep | 0.3 | 0.8 | -1.1 |
| Aug | 3.1 | 5.2 | -2.6 |
| Jul | 2.3 | 3.0 | 0.6 |
| Jun | 3.1 | 3.8 | 1.2 |
| May | 1.3 | 2.3 | -1.3 |
| Apr | -2.6 | -1.7 | -4.8 |
| Mar | -1.3 | 1.2 | -8.3 |
| Feb | 5.3 | 7.2 | 0.1 |
| Jan | 3.3 | 4.6 | 0.1 |
| Dec 2010 | 3.5 | 5.7 | -2.1 |
| Calendar Year | |||
| 2011 | 1.0 | 1.8 | -1.2 |
| 2010 | 1.5 | 1.1 | 2.5 |
| 2009 | -20.5 | -25.6 | -2.3 |
| 2008 | 1.2 | 1.5 | 0.3 |
Source: http://www.meti.go.jp/english/statistics/tyo/syoudou/index.html
The survey of household income and consumption of Japan in Table VB-5 is showing noticeable improvement in recent months relative to earlier months, which can be appreciated in the chart in the link in parentheses but followed by decline in Nov, renewed strength in Dec, another decline in Jan 2012 and an increase in Feb 2012 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 2.7 percent in real terms in Feb and 2.3 percent in nominal terms. There is only one segment of decreasing real consumption: culture and recreation falling 3.7 percent in nominal terms and 1.8 percent in real terms. Real household income increased 2.5 percent; disposable income increased 1.8 percent; and consumption expenditures increased 2.8 percent.
Table VB-5, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier
| Feb 2012 | Nominal | Real |
| Households of Two or More Persons | ||
| Total Consumption | 2.7 | 2.3 |
| Excluding Housing, Vehicles & Remittance | 1.9 | |
| Food | 3.1 | 2.0 |
| Housing | 1.2 | 1.4 |
| Fuel, Light & Water Charges | 4.8 | 0.2 |
| Furniture & Household Utensils | 5.8 | 9.6 |
| Clothing & Footwear | 1.3 | 0.5 |
| Medical Care | 5.9 | 7.2 |
| Transport and Communications | 4.7 | 3.8 |
| Education | 11.7 | 11.5 |
| Culture & Recreation | -3.7 | -1.8 |
| Other Consumption Expenditures | 1.0 | -0.6* |
| Workers’ Households | ||
| Income | 2.9 | 2.5 |
| Disposable Income | 2.2 | 1.8 |
| Consumption Expenditures | 3.3 | 2.9 |
*Real: nominal deflated by CPI excluding imputed rent
Source: http://www.stat.go.jp/english/data/kakei/156.htm
Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VB-6. There was sharp decline in nominal consumption of 8.8 percent in Mar 2011 and 8.2 percent in real consumption because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Dec was the first month in 2011 with increases in 12 months in both nominal and real consumption expenditures followed by Feb 2012. Nominal consumption increased 2.7 percent in Feb 2012 and real consumption expenditures expenditures increased 2.3 percent. Nominal consumption expenditures fell 3.2 percent in 2010 and 3.3 percent in real terms. Both nominal and real consumption expenditures increased in 2009, 0.3 percent and 2.1 percent, respectively.
Table VB-6, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier
| Nominal Consumption Expenditures | Real Consumption Expenditures | |
| Feb 2012 | 2.7 | 2.3 |
| Jan | -2.1 | -2.3 |
| Dec 2011 | 0.3 | 0.5 |
| Nov | -3.8 | -3.2 |
| Oct | -0.6 | -0.4 |
| Sep | -1.9 | -1.9 |
| Aug | -3.9 | -4.1 |
| Jul | -1.8 | -2.1 |
| Jun | -3.9 | -3.5 |
| May | -1.6 | -1.2 |
| Apr | -2.5 | -2.0 |
| Mar | -8.8 | -8.2 |
| Feb | -0.1 | 0.5 |
| Jan | -0.9 | -0.3 |
| Dec 2010 | -3.2 | -3.3 |
| Dec 2009 | 0.3 | 2.1 |
Source: http://www.stat.go.jp/english/data/kakei/156.htm
VC. China. The HSBC Composite Output Index for China, compiled by Markit, registered an increase from 49.7 in Jan to 51.8 in Feb, suggesting improving private-sector business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9262). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that increases in new orders drove the increase in services but that the combination with manufacturing deceleration because of weak external orders can result in growth of only 8 percent in IQ2012 GDP until further easing permeates throughout the economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9262). The HSBC Flash China Manufacturing PMITM, compiled by Markit, fell from 49.6 in Feb to a four-month low at 48.1 in Mar, suggesting contraction at a higher pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9312). Hongbin Qu, Chief Economist, China and Co-head of Asian Economic Research at HSBC, finds growth restrained by sluggish new orders, which requires policy easing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9312). Table CNY provides the country table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Feb 12 months ∆%: 0.0 Feb month ∆%: 0.1 |
| Consumer Price Index | Feb month ∆%: -0.1 Feb 12 month ∆%: 3.2 |
| Value Added of Industry | Feb month ∆%: 0.98 Jan-Feb 2012/Jan-Feb 2011 ∆%: 11.4 |
| GDP Growth Rate | Year IVQ2011 ∆%: 8.9 |
| Investment in Fixed Assets | Total Jan-Feb 2012 ∆%: 21.5 Jan-Dec ∆% real estate development: 27.8 |
| Retail Sales | Jan month ∆%: 1.6 Jan-Feb ∆%: 14.7 |
| Trade Balance | Feb balance minus $31.48 billion Cumulative Feb: $4.2 billion |
Links to blog comments in Table CNY: 3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html
VC Euro Area. The Markit Eurozone PMI® Composite Output Index declined to 49.3 in Feb from 50.4 in Jan, which is the first reading above the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9242). The index suggests decline of business activity during four month, expansion in Jan and then contraction in Feb. Chris Williamson, Chief Economist at Markit, finds that economic activity could have contracted 0.1 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9242). The Markit Eurozone Flash PMI® Composite Output Index, combining manufacturing and services with high association with euro zone GDP, declined to 48.7 in Mar from 49.3 in Feb, for the lowest reading in three months, the second consecutive decline and the sixth decrease in seven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9310). Chris Williamson, Chief Economist at Markit, finds decline of output in the euro zone in IVQ2011 and IQ2012 but loss of output of only about 0.1 to 0.2 percent in IQ2012 with signs of improvement in an increase in business confidence (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9310). Table EUR provides the country economic indicators for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 03/11/12 |
| Unemployment | Jan 2012: 10.7% unemployment rate Jan 2012: 16.925 million unemployed Blog 03/04/12 |
| HICP | Feb month ∆%: 0.5 12 months Feb ∆%: 2.7 |
| Producer Prices | Euro Zone industrial producer prices Jan ∆%: 0.7 |
| Industrial Production | Jan month ∆%: 0.2 Jan 12 months ∆%: -1.2 |
| Industrial New Orders | Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 |
| Construction Output | Jan month ∆%: minus 0.8 |
| Retail Sales | Jan month ∆%: 0.3 |
| Confidence and Economic Sentiment Indicator | Sentiment 93.2 Mar 2012 Confidence minus 11.8 Mar 2012 Blog 04/01/12 |
| Trade | Jan-Dec 2011/2010 Exports ∆%: 12.7 Jan 2012 12-month Exports ∆% 10.9 Imports ∆% 3.6 |
| HICP, Rate of Unemployment and GDP | Historical from 1999 to 2011 Blog 3/18/12 |
Links to blog comments in Table EUR:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table VD-1 with the index falling from revised 106.8 in Mar 2011 to 93.2 in Mar 2012.
Table VD-1, Euro Area, Indicators of Confidence and Economic Sentiment SA
| ESI | IND | SERV | CON | RET | CONS | |
| Historical Average | 100.0 | -7.0 | 10.2 | -11.8 | -6.6 | -18.7 |
| Mar 2012 | 93.2 | -7.1 | -3.6 | -19.3 | -11.4 | -29.2 |
| Feb | 94.0 | -5.3 | -4.4 | -20.1 | -11.9 | -28.6 |
| Jan | 92.8 | -7.2 | -3.2 | -20.8 | -14.0 | -30.6 |
| Dec 2011 | 91.6 | -7.7 | -6.1 | -22.1 | -11.3 | -31.9 |
| Nov | 92.6 | -7.6 | -4.9 | -20.9 | -13.4 | -28.5 |
| Oct | 93.6 | -6.7 | -2.7 | -20.5 | -12.0 | -29.3 |
| Sep | 93.6 | -5.8 | -4.0 | -19.3 | -12.8 | -31.2 |
| Aug | 97.1 | -2.6 | -1.0 | -17.0 | -10.7 | -28.4 |
| Jul | 101.9 | -0.2 | 6.1 | -12.6 | -4.8 | -27.5 |
| Jun | 104.1 | 2.5 | 6.5 | -11.2 | -2.4 | -29.1 |
| May | 104.9 | 3.1 | 7.5 | -11.0 | -2.6 | -27.7 |
| Apr | 104.7 | 4.9 | 7.2 | -14.1 | -3.4 | -28.6 |
| Mar | 106.8 | 6.1 | 10.1 | -13.0 | 0.3 | -30.5 |
ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction
Source: European Commission Services
http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm
VE Germany. The Markit Flash Germany Composite PMI® Output Index fell from 53.2 in Feb to 51.4 in Mar, for a three-month low, suggesting only marginal expansion of output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9307). Tim Moore, Senior Economist at Markit, finds that activity in the private sector is indicating expansion of GPD in Germany of 0.2 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9307). 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% GDP ∆% 1992-2011 Blog 02/26/12 |
| Consumer Price Index | Feb month SA ∆%: +0.7 |
| Producer Price Index | Feb month ∆%: 0.4 |
| Industrial Production | Mfg Jan month SA ∆%: 1.5 |
| Machine Orders | Jan month ∆%: -2.7 |
| Retail Sales | Feb Month ∆% 1.7 12-Month ∆% minus 1.6 Blog 04/01/12 |
| Employment Report | Unemployment Rate Feb 5.9% |
| Trade Balance | Exports Jan 12 months NSA ∆%: 9.3 Blog 03/11/12 |
Links to blog comments in Table DE:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
Germany’s labor market continues to show strength not found in most of the advanced economies, as shown in Table VE-1. The number unemployed, not seasonally adjusted, fell from 2.76 million in Feb 2011 to 2.49 million in Feb 2012, or 9.8 percent, while the unemployment rate fell from 6.6 percent in Feb 2011 to 5.9 percent in Feb 2012. The number of persons in employment, not seasonally adjusted, increased from 39.24 million in Feb 2011 to 39.90 million in Feb 2012, or 1.7 percent, while the employment rate increased from 61.7 percent in Feb 2011 to 62.8 percent in Feb 2012. The number unemployed, seasonally adjusted, increased from 2.40 million in Jan 2012 to 2.42 million in Feb 2012, or 0.8 percent, while the unemployment rate remained at 5.7 percent. The number of persons in employment, not seasonally adjusted, fell from 39.93 million in Jan 2012 to 39.90 million in Feb 2012, or 0.1 percent.
Table VE-1, Germany, Unemployment Labor Force Survey
| Feb 2012 | Jan 2012 | Feb 2011 | |
| NSA | |||
| Number | 2.49 ∆% Feb 2012/Jan 2012: -6.4 ∆% Feb 2012/Feb 2011: –9.8 | 2.66 | 2.76 |
| % Rate Unemployed | 5.9 | 6.3 | 6.6 |
| Persons in Employment Millions | 39.90 ∆% Feb 2012/Jan 2012: -0.1 ∆% Feb 2012/Nov 2011: 1.7 | 39.93 | 39.24 |
| Employment Rate | 62.8 | 62.5 | 61.7 |
| SA | |||
| Number | 2.42 ∆% Feb 2012/Jan 2012: 0.8 ∆% Feb 2012/Feb 2011: –8.7 | 2.40 | 2.65 |
| % Rate Unemployed | 5.7 | 5.7 | 6.3 |
| Persons in Employment Millions | 39.90 ∆% Feb 2012/Jan 2012: –0.1 ∆% Feb 2012/Feb 2011: 1.7 | 39.93 | 39.24 |
NSA: not seasonally adjusted; SA: seasonally adjusted
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/03/PE12_115_132.html
Retail sales in Germany adjusted for inflation are provided in Table VE-2. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales increased 1.7 percent in Feb and declined 1.1 percent in 12 months.
Table VE-2, Retail Sales in Germany Adjusted for Inflation
| 12-Month ∆% NSA | Month ∆% SA and Calendar Adjusted | |
| Feb 2012 | -1.1 | 1.7 |
| Jan | 1.6 | -1.6 |
| Dec 2011 | 0.3 | 0.1 |
| Nov | 1.3 | -0.3 |
| Oct | -0.3 | -0.2 |
| Sep | 1.5 | 0.6 |
| Aug | 3.5 | -0.5 |
| Jul | -2.0 | 0.2 |
| Jun | -2.3 | 2.8 |
| May | 4.7 | -1.9 |
| Apr | 5.0 | 0.5 |
| Mar | -2.6 | -1.2 |
| Feb | 2.5 | 0.0 |
| Jan | 2.9 | 0.6 |
| Dec 2010 | 0.6 | 0.7 |
| Dec 2009 | -2.2 | |
| Dec 2008 | 3.3 | |
| Dec 2007 | -6.2 | |
| Dec 2006 | 1.3 |
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/EN/PressServices/Press/pr/2012/03/PE12_118_45212.html
VF France. The Markit France Services Activity Index of the Markit France Services PMI® fell from 52.3 in Jan to 50.0 in Feb such that the Markit France Composite Output Index fell from 51.2 in Jan to 50.2 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9277). Higher activity in manufacturing was mostly compensated by flat activity in services. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI®, finds encouragement in increasing orders for services even with stagnating output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9277). Table FR provides the country data table for France. The Markit Flash France Composite PMI® Output Index fell from 50.2 in Feb to 49.0 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9306). Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI® finds that the data suggest slight decline in IQ2012 GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9306). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Feb month ∆% 0.4 |
| PPI | Feb month ∆%: 0.8 Blog 04/01/12 |
| GDP Growth | IVQ2011/IIIQ2011 ∆%: 0.2 |
| Industrial Production | Jan/Dec SA ∆%: |
| Industrial New Orders | Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 03/25/12 |
| Consumer Spending | Feb Manufactured Goods |
| Employment | IVQ2011 Unemployed 2.678 million |
| Trade Balance | Jan Exports ∆%: month 1.5, 12 months 7.3 Jan Imports ∆%: month 1.9, 12 months 3.4 Blog 03/11/12 |
| Confidence Indicators | Historical averages 100 Mar: France 95 Mfg Business Climate 96 Retail Trade 94 Services 93 Building 98 Household 82 Blog 03/25/12 |
Links to blog comments in Table FR:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/25 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.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 confirmed at 0.2 percent. The French economy was flat in IIQ2011 but grew 0.3 percent in IIIQ2011. Growth in the eight quarters of expansion from IIQ2009 to IQ2011 was at the annual equivalent rate of 1.7 percent while growth from the second to the fourth quarter of 2011 has been at the annual equivalent rate of 0.7 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 | 0.0 | 0.3 | 0.2 |
| 2010 | 0.1 | 0.5 | 0.4 | 0.4 |
| 2009 | -1.6 | 0.1 | 0.3 | 0.6 |
| 2008 | 0.3 | -0.7 | -0.3 | -1.4 |
| 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=28&date=20120328
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, 2.6 percent in IIIQ2009 and 0.6 percent in IVQ2009. Growth in IVQ2011 relative to IVQ2010 was 1.3 percent.
Table VF-2, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%
| IQ | IIQ | IIIQ | IVQ | |
| 2011 | 2.3 | 1.7 | 1.6 | 1.3 |
| 2010 | 1.1 | 1.4 | 1.6 | 1.4 |
| 2009 | -3.9 | -3.2 | -2.6 | -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 | 1.8 | 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=28&date=20120328
Percentage changes and contributions of segments of GDP in France are provided in Table VF-3. Internal demand contributed 0.4 percentage points to GDP growth in IVQ2011 after contributing 0.3 percentage points in IIIQ2011 and minus 0.4 percentage points in IIQ2011. Net foreign trade contributed 0.6 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 | IVQ | 2010 | 2011 |
| GDP | 0.9 | 0.0 | 0.3 | 0.2 | 1.4 | 1.7 |
| Imports | 2.7 | -1.0 | 0.6 | -1.0 | 8.3 | 4.8 |
| Household Consump. | 0.1 | -1.0 | 0.3 | 0.2 | 1.3 | 0.3 |
| Govt. | 0.4 | 0.1 | 0.2 | 0.3 | 1.2 | 0.9 |
| GFCF | 1.1 | 0.6 | 0.2 | 1.1 | -1.4 | 2.9 |
| Exports | 1.1 | 1.0 | 1.2 | 1.2 | 9.3 | 5.0 |
| % Point | ||||||
| Internal Demand ex Inventory Changes | 0.4 | -0.4 | 0.3 | 0.4 | 0.8 | 1.0 |
| Inventory Changes | 1.0 | -0.2 | -0.1 | -0.8 | 0.5 | 0.8 |
| Net Foreign Trade | -0.5 | 0.5 | 0.1 | 0.6 | 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=28&date=20120328
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=28&date=20120328
The Feb monthly report of household expenditures in consumption goods for France is in Table VF-4. Total consumption increased 3.0 percent in Feb 2012, driven by energy expenditures increasing 11.7 percent during bitter cold weather (http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120330), and consumption of manufactured products increased 1.5 percent. Total consumption increased 0.5 percent in Feb 2012 relative to Feb 2011 and consumption of manufactured goods fell 1.3 percent in Feb 2012 relative to Feb 2011. Internal demand is weak throughout most advanced economies.
Table VF-4, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading-Days SA
| Total | Food | Eng. Goods | Energy | Mfg | |
| Feb 2012 | 3.0 | 1.3 | 0.9 | 11.7 | 1.5 |
| Feb 2012/ Feb 2011 | 0.5 | 1.0 | -3.2 | 9.0 | -1.3 |
| Jan | -0.4 | 1.6 | -2.9 | 2.3 | -0.8 |
| Dec 2011 | -0.4 | -1.0 | 0.9 | -2.6 | -0.3 |
| Nov | 0.1 | 0.0 | 0.5 | -0.9 | 0.2 |
| Oct | 0.3 | -0.2 | 1.0 | -0.8 | 0.4 |
| Sep | 0.0 | 0.6 | 0.4 | -3.5 | 0.1 |
| Aug | 0.4 | 0.3 | -0.3 | 2.4 | 0.3 |
| Jul | -0.4 | -0.4 | -0.8 | 0.5 | -0.7 |
| Jun | 0.8 | -0.3 | 1.8 | 1.0 | 1.0 |
| May | -0.2 | -1.4 | -0.9 | 5.0 | -1.0 |
| Apr | -1.7 | 1.6 | -2.8 | -5.8 | -1.1 |
| Mar | -0.8 | -0.8 | -0.9 | -0.7 | -0.8 |
| Feb | 0.2 | 0.3 | 0.8 | -1.6 | 0.4 |
| Jan | -0.7 | -0.2 | 0.0 | -3.7 | -0.3 |
| Dec 2010 | 0.6 | 0.7 | 0.2 | 1.4 | 0.3 |
Eng. Goods: Engineered Goods
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120330
Chart VF-1 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth. Two-thirds of the increase of consumption in Feb 2012 is attributed to higher consumption of energy during bitter cold weather.
Chart VF-2, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120330
VG Italy. The Markit/ADACI Purchasing Managers’ Index® (PMI®) rose from 46.8 in Jan to 47.8 in Feb, which is the highest level in five months for the seventh consecutive month of deterioration in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9224). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI® find slower rates of decline of new export orders and employment (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9224). The Markit/ADACI Business Activity Index experienced the fastest contraction since Oct, declining to 44.1 in Feb from 44.8 in Jan for the ninth consecutive monthly decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9266). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that low expectations on the future reflect impediments to growth such as cost pressures and unavailability of credit. Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Mar month ∆%: 0.5 |
| Producer Price Index | Feb month ∆%: 0.4 Blog 04/01/12 |
| GDP Growth | IVQ2011/IVQ2010 SA ∆%: minus 0.4 |
| Labor Report | Jan 2012 Participation rate 62.7% Employment ratio 57.0% Unemployment rate 9.2% Blog 03/04/12 |
| Industrial Production | Jan month ∆%: -2.5 |
| Retail Sales | Jan month ∆%: 0.7 Jan 12-month ∆%: minus 0.8 Blog 03/25/12 |
| Business Confidence | Mfg Mar 92.1, Nov 94.1 Construction Feb 81.8, Nov 87.5 Blog 04/01/12 |
| Consumer Confidence | Consumer Confidence Mar 96.8, Feb 94.4 Economy Mar 87.4, Feb 86.8 Blog 04/01/12 |
| Trade Balance | Balance Jan SA -€199 million versus Dec €466 |
Links to blog comments in Table IT:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
Italy’s index of business confidence in manufacturing and construction is provided in Table VG-1. There has been deterioration of manufacturing confidence below the historical average of 100 since 98.5 in Aug with reading of 91.7 in Feb, increasing to 92.1 in Mar. Order books have fallen from minus 22 in Aug to minus 36 in Feb and minus 37 in Mar. There is mild improvement in construction with an increase of the index from 77.3 in Aug to 82.6 in Feb, declining slightly to 81.8 in Mar.
VG-1, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100
| Mar | Feb | Jan | Dec | Nov | |
| Mfg Confidence | 92.1 | 91.7 | 92.3 | 92.6 | 94.1 |
| Order Books | -37 | -36 | -32 | -33 | -32 |
| Stocks Finished Products | 1 | 2 | 1 | 2 | 1 |
| Production | 2 | 0 | -2 | 1 | 2 |
| Construction Confidence | 81.8 | 82.6 | 82.4 | 80.4 | 87.5 |
| Order Books | -50 | -50 | -47 | -50 | -42 |
| Employment | -13 | -12 | -15 | -15 | -11 |
Mfg: manufacturing
http://www.istat.it/it/archivio/57992
Italy’s index of consumer confidence is in Table VIG-2. Overall confidence increased from 91.9 in Dec 2011 to 96.8 in Mar 2012. There is improvement in all categories from Feb to Mar. Confidence on the economy jumped from 76.0 in Jan to 87.4 in Mar while confidence on the future jumped from78.2 in Jan to 86.3 in Mar.
Table VIG-2, Italy, Index of Consumer Confidence SA 2005=100
| 2011 | Mar | Feb | Jan 12 | Dec 11 | Nov |
| Confidence | 96.8 | 94.4 | 92.0 | 91.9 | 96.4 |
| Economy | 87.4 | 86.8 | 76.0 | 77.7 | 83.5 |
| Personal | 100.1 | 97.5 | 97.9 | 97.3 | 101.6 |
| Current | 102.6 | 100.3 | 102.3 | 98.4 | 102.2 |
| Future | 86.3 | 85.9 | 78.2 | 81.4 | 87.7 |
Source: http://www.istat.it/it/archivio/57793
VH United Kingdom. The Markit/CIPS UK Services PMI® from from 56.0 in Dec to 53.8 in Feb because of inability to drive sales by discounting (http://www.supplymanagement.com/resources/pmi-reports/uk-services-activity-grows-but-rate-slows/). Chris Williamson, Chief Economist at Markit, finds that IQ2012 activity is the best since the spring of 2010, indicating that the UK economy will avoid another recession (http://www.supplymanagement.com/resources/pmi-reports/uk-services-activity-grows-but-rate-slows/). Table UK provides the country data table for the UK.
Table UK, UK Economic Indicators
| CPI | Feb month ∆%: 0.6 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IVQ2011 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: 0.5 |
| Industrial Production | Jan 2011/Dec 2010 NSA ∆%: Production Industries minus 3.8; Manufacturing 0.3 |
| Retail Sales | Feb month SA ∆%: -0.8 |
| Labor Market | Nov-Jan Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.4% |
| Trade Balance | Balance Jan minus ₤1762 million |
Links to blog comments in Table UK:
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
Revised annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of revised 4.6 percent in 2009 after dropping revised 0.9 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.6 percent in 2011.
Table VH-1, UK, Gross Value Added at Chained Volume Measures Basic Prices, ∆%
| ∆% on Prior Year | |
| 1998 | 4.1 |
| 1999 | 3.8 |
| 2000 | 4.6 |
| 2001 | 2.9 |
| 2002 | 2.4 |
| 2003 | 3.6 |
| 2004 | 2.8 |
| 2005 | 2.3 |
| 2006 | 2.5 |
| 2007 | 3.5 |
| 2008 | -0.9 |
| 2009 | -4.6 |
| 2010 | 2.1 |
| 2011 | 0.6 |
Source: UK Office for National Statistics
The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 2000. Growth in IIQ2011 was reduced to minus 0.1 percent. The third estimate for IIIQ2011 is lower at 0.6 percent. The third estimate for IVQ2011 is contraction of 0.3 percent, which is higher than contraction of 0.2 percent in the second estimate. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.
Table VH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2011 | 0.2 | -0.1 | 0.6 | -0.3 |
| 2010 | 0.4 | 1.1 | 0.7 | -0.5 |
| 2009 | -1.6 | -0.2 | 0.2 | 0.7 |
| 2008 | 0.0 | -1.3 | -2.0 | -2.3 |
| 2007 | 1.1 | 1.2 | 1.2 | 0.6 |
| 2006 | 0.8 | 0.4 | 0.2 | 0.7 |
| 2005 | 0.3 | 0.8 | 0.8 | 0.8 |
| 2004 | 0.8 | 0.4 | 0.1 | 0.5 |
| 2003 | 0.7 | 1.2 | 1.0 | 1.2 |
| 2002 | 0.8 | 0.7 | 0.8 | 0.7 |
| 2001 | 1.4 | 0.4 | 0.7 | 0.4 |
| 2000 | 1.4 | 1.1 | 0.4 | 0.7 |
| 1999 | 0.6 | 0.6 | 1.4 | 1.2 |
| 1998 | 0.9 | 0.8 | 1.0 | 1.2 |
Source: UK Office for National Statistics
There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009, 5.9 percent in IIQ2009 and 3.8 percent in IIIQ2009. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 3.0 percent in IIIQ2010 and 1.7 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.7 percent in IVQ2010 to 1.5 percent in IQ2011, 0.4 percent in IIQ2011, 0.3 percent in IIIQ2011 and 0.5 percent in IVQ2011 but contraction of 0.3 percent in IVQ2011 relative to IIIQ2011. Fiscal consolidation in an environment of weakening economic growth is much more challenging.
Table VH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2011 | 1.5 | 0.4 | 0.3 | 0.5 |
| 2010 | 1.2 | 2.5 | 3.0 | 1.7 |
| 2009 | -6.9 | -5.9 | -3.8 | -0.8 |
| 2008 | 3.1 | 0.6 | -2.6 | -5.4 |
| 2007 | 2.4 | 3.2 | 4.2 | 4.1 |
| 2006 | 3.3 | 2.9 | 2.2 | 2.1 |
| 2005 | 1.3 | 1.7 | 2.5 | 2.8 |
| 2004 | 4.3 | 3.4 | 2.5 | 1.7 |
| 2003 | 2.9 | 3.4 | 3.6 | 4.2 |
| 2002 | 2.3 | 2.6 | 2.7 | 3.0 |
| 2001 | 3.6 | 2.9 | 3.2 | 2.9 |
| 2000 | 4.7 | 5.2 | 4.2 | 3.7 |
| 1999 | 3.6 | 3.4 | 3.8 | 3.8 |
| 1998 | 3.8 | 3.7 | 3.9 | 4.0 |
Source: UK Office for National Statistics
Growth rates of GDP and components in a quarter from the preceding quarter are provided in Table VH-4. The first raw of the table provides the weights of components. Contraction of GDP of 0.3 percent in IVQ2011 resulted from sharp contraction of 1.3 percent in total production, with manufacturing declining 0.7 percent. Even services fell by 0.1 percent in IVQ2011. Growth of 0.5 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components with exception of 0.5 percent of construction. Growth in 2011 has mostly originated in services. GDP contracted 0.4 percent in IVQ2010, 0.2 percent in IIQ2011 and 0.3 percent in IIIQ2011. All contributions are negative in IV2011 and services fell 0.1 percent.
Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter
| GDP | Total | Mfg | CONS | Services | |
| Weights* | 1000 | 154 | 102 | 76 | 763 |
| IVQ11 | -0.3 | -1.3 | -0.7 | -0.2 | -0.1 |
| IIIQ11 | 0.5 | 0.1 | -0.1 | 0.5 | 0.8 |
| IIQ11 | -0.2 | -1.5 | 0.0 | 2.3 | 0.1 |
| IQ11 | 0.2 | -0.3 | 0.7 | -1.5 | 0.9 |
| IVQ10 | -0.4 | 0.2 | 0.7 | -1.4 | -0.3 |
| IIIQ10 | 0.7 | 0.2 | 1.3 | 3.1 | 0.6 |
| IIQ10 | 1.2 | 1.2 | 1.6 | 8.1 | 0.5 |
| IQ10 | 0.4 | 1.3 | 1.2 | 0.9 | 0.0 |
| IV09 | 0.7 | 0.3 | 1.2 | 0.3 | 0.8 |
| III09 | 0.2 | -1.3 | -0.9 | 0.6 | 0.4 |
| II09 | -0.4 | -0.3 | -0.2 | -2.5 | -0.2 |
| I09 | -1.8 | -3.9 | -4.5 | -6.4 | -0.8 |
| IV08 | -2.2 | -4.7 | -5.0 | -5.1 | -1.5 |
| III08 | -1.7 | -1.4 | -1.6 | -3.7 | -1.6 |
| II08 | -1.0 | -1.4 | -1.9 | -2.0 | -0.9 |
| I08 | -0.2 | -0.1 | 0.7 | 1.7 | -0.5 |
Note: CONS: construction; * Weights may not add to total because of rounding
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html
Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 1.3 percent IVQ2011 with manufacturing declining 0.7 percent. Services fell 0.1 percent in IVQ2011, reducing the support of economic activity in prior quarters. Business services & finance increased fell 0.1 percent.
Table VH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 |
| Agriculture | 8.0 | -0.8 | -0.5 | -1.5 |
| Total Production | -0.3 | -1.5 | 0.1 | -1.3 |
| Manufacturing | 0.7 | 0.0 | -0.1 | -0.7 |
| Extraction | -4.5 | -8.0 | -0.4 | -2.6 |
| Electricity, gas and air | -5.6 | -2.0 | 1.6 | -5.3 |
| Water & sewerage | 5.8 | -2.2 | 0.1 | 1.4 |
| Construction | -1.5 | 2.3 | 0.5 | -0.2 |
| Total Services | 0.9 | 0.1 | 0.8 | -0.1 |
| Distn, hotels & catering | 0.9 | 0.2 | 0.4 | -0.4 |
| Transport, storage & communications | -0.2 | 0.4 | 1.1 | -0.5 |
| Business services & finance | 1.0 | 0.1 | 1.3 | -0.1 |
| Government & other | 1.3 | 0.1 | 0.4 | 0.4 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html
Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government. In IVQ2011, there were no contributions to growth by business services and finance while government and other contributed 0.1 percentage points.
Table VH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 |
| Agriculture | 0.0 | 0.0 | 0.0 | 0.0 |
| Total Production | 0.0 | -0.2 | 0.0 | -0.2 |
| Manufacturing | 0.1 | 0.0 | 0.0 | -0.1 |
| Extraction | -0.1 | -0.2 | 0.0 | 0.0 |
| Electricity, gas and air | -0.1 | 0.0 | 0.0 | -0.1 |
| Water & sewerage | 0.1 | 0.0 | 0.0 | 0.0 |
| Construction | -0.1 | 0.2 | 0.0 | 0.0 |
| Total Services | 0.7 | 0.1 | 0.6 | 0.0 |
| Distn, hotels & catering | 0.1 | 0.0 | 0.1 | -0.1 |
| Transport, storage & communications | 0.0 | 0.0 | 0.1 | -0.1 |
| Business services & finance | 0.3 | 0.0 | 0.4 | 0.0 |
| Government & other | 0.3 | 0.0 | 0.1 | 0.1 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html
Table VH-7 provides UK year-on-year growth of value added by components. There was significant deceleration in growth of total production from 1.9 percent in 2010 to minus 1.2 percent in 2011. Manufacturing growth fell from 3.7 percent in 2010 to 2.0 percent in 2011. Construction growth fell from 8.2 percent in 2010 to 2.8 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.4 percent in 2007 to decline 0.5 percent in 2008 and 2.6 percent in 2009. Growth in 2010 and 2011 has been more moderate at 1.4 percent and 1.6 percent, respectively.
Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year
| Component | 2010 | 2011 |
| Agriculture | -1.5 | -2.0 |
| Total Production | 1.9 | -1.2 |
| Manufacturing | 3.7 | 2.0 |
| Extraction | -4.9 | -15.2 |
| Electricity, gas and air | 3.5 | -5.6 |
| Water & sewerage | -1.6 | 4.6 |
| Construction | 8.2 | 2.8 |
| Total Services | 1.4 | 1.6 |
| Distn, hotels & catering | 1.5 | 0.7 |
| Transport, storage & communications | 3.0 | 1.3 |
| Business services & finance | 1.3 | 2.1 |
| Government & other | 0.7 | 1.5 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html
Total production subtracted 0.2 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-8. Total services added 1.0 percentage points in 2010 and 1.3 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.3 percent in the final quarter of 2011.
VH-8, UK, Contribution to Growth on Prior Year of Value Added by Components, %
| Component | 2010 | 2011 |
| Agriculture | 0.0 | 0.0 |
| Total Production | 0.3 | -0.2 |
| Manufacturing | 0.4 | 0.2 |
| Extraction | -0.1 | -0.3 |
| Electricity, gas and air | 0.0 | -0.1 |
| Water & sewerage | 0.0 | 0.1 |
| Construction | 0.6 | 0.2 |
| Total Services | 1.0 | 1.3 |
| Distn, hotels & catering | 0.2 | 0.1 |
| Transport, storage & communications | 0.3 | 0.1 |
| Business services & finance | 0.4 | 0.6 |
| Government & other | 0.2 | 0.3 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 11.9 percent by Fri Mar 30, 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 | 03/30/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3343 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 03/30/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2976 |
| 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
Table VI-2 extracts four rows of Table VI-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VI-4 below, the dollar has devalued again to USD 1.3343/EUR or by 11.9 percent {[(1.3343/1.192)-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 6.2976/USD on Fri Mar 30, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 percent. The CNY revalued by 0.3 percent in the week of Mar 23 and by 0.1 percent in the week of Mar 30. 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. The rate remained virtually unchanged at CNY 6.2986 in the week of Feb 24. There was virtually no change to the rate of 6.2992 on Mar 2. The rate of CNY 6.3105/USD fixed on Mar 9 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. The rate of CNY 6.3226/USD on Mar 16, 2012 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. In two weeks, the CNY depreciated by 0.4 percent. In the week of Mar 30, China resumed revaluation of 0.1 percent to CNY 6.2976/USD. The rate of CNY 6.2976/USD on Mar 30, 2012 is equivalent to revaluation of 7.7 percent from CNY 6.8211 on Jul 15, 2008 {[(6.2976/6.8211) – 1]100} and cumulative 23.9 percent from CNY 8.2765 on Jul 21, 2005 {[(6.2976/8.2765) -1]100}. 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 | 03/30 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3343 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 03/30/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2976 |
| Weekly Rates | 03/09/2012 | 03/16/ 2012 | 03/23/ 2012 | 03/30/ 2012 |
| CNY/USD | 6.3105 | 6.3226 | 6.3008 | 6.2976 |
| ∆% from Earlier Week* | -0.2 | -0.2 | 0.3 | 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 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| US | 15065 | -7.9 | -3.1 | 72.6 | -3.1 | -2.2 | 86.7 |
| Japan | 5855 | -8.9 | 2.5 | 130.5 | -8.4 | 2.4 | 160.0 |
| UK | 2481 | -5.7 | -2.7 | 72.9 | 0.4 | -0.9 | 75.2 |
| Euro | 13355 | -1.5 | 0.1 | 68.6 | 1.5 | 0.5 | 69.3 |
| Ger | 3629 | 0.4 | 5.0 | 56.9 | 2.1 | 4.7 | 55.3 |
| France | 2808 | -3.4 | -2.7 | 80.9 | -2.5 | 0.6 | 83.9 |
| Italy | 2246 | 0.5 | -3.5 | 100.4 | 4.5 | -2.0 | 96.7 |
| Can | 1759 | -3.7 | -3.3 | 34.9 | 0.3 | -2.6 | 35.1 |
| China | 6988 | -1.6 | 5.2 | 22.2 | 0.1 | 7.0 | 12.9 |
| Brazil | 2518 | 3.2 | -2.3 | 38.6 | 2.9 | -3.2 | 34.1 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
FD is primary except total for China; Debt is net except gross for China
Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx
The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (http://www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm) and of fiscal affairs with the Fiscal Monitor (http://www.imf.org/external/pubs/ft/fm/2012/update/01/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks, which are analyzed in the comments of this blog.
Economic risks include the following:
1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. There is also ongoing political development in China during a decennial political reorganization
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.6 percent in 2011 (Section I in this comment and earlier http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening.html). (ii) The labor market continues fractured with 30.5 million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or.html ). There are over 10 million fewer full-time jobs and hiring has collapsed (http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html). (iii) There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012. The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases
3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier. The euro zone’s GDP fell 0.3 percent in IVQ2011; Germany’s GDP fell 0.2 percent in IVQ2011; and the UK’s GDP fell 0.3 percent in IVQ2011. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html)
A list of financial uncertainties includes:
1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk. Adjustment programs consist of immediate adoption of economic reforms that would increase future growth permitting fiscal consolidation, which would reduce risk spreads on sovereign debt. Fiscal consolidation is challenging in an environment of weak economic growth as analyzed by Blanchard (2011WEOSep). Adjustment of countries such as Italy requires depreciation of the currency to parity, as proposed by Caballero and Giavazzi (2012Jan15), but it is not workable within the common currency and zero interest rates in the US. Bailouts of euro area member countries with temporary liquidity challenges cannot be permanently provided by the stronger members at the risk of impairing their own sovereign debt credibility
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation. After deep global recession, regulation, trade and devaluation wars were to be expected (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars”
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 36.4 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 37.7 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent for the best quarter since 1991
4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Mar 13, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014” (http://www.federalreserve.gov/newsevents/press/monetary/20120313a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see 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 and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.
The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see 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).
It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. 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 now complicated by political developments, 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. 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 03/23/12,” 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. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: 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 weeks of Feb 17 and 24 followed by uncertainty on financial counterparty risk in the weeks of Mar 2 and Mar 9. All financial values show positive change in valuation in column “∆% Trough to 03/30/12” after surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 36.4 percent and S&P 500 37.7 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached in intraday trading 13,331.77 on Mar 16, which is the highest level 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 03/30/12” had double digit gains relative to the trough around Jul 2, 2010 but now only two valuation show increase of less than 10 percent: China’s Shanghai Composite is 5.0 percent below the trough; and STOXX 50 of Europe is 7.1 percent above the trough. DJ UBS Commodities is 14.4 percent above the trough; Dow Global is 17.4 percent above the trough; and DAX is 22.5 percent above the trough. Japan’s Nikkei Average is 14.3 percent above the trough on Aug 31, 2010 and 11.5 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 10,083.56 on Fri Mar 30, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 1.7 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 11.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 03/30/12” in Table VI-4 shows declines of all valuations of risk financial assets in the week of Mar 30, 2012 because of the new issues of world economic and financial risks. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 03/30/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Mar 30, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 03/30/12” but also relative to the peak in column “∆% Peak to 03/30/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 17.9 percent, S&P 500 15.7 percent and Dax 9.7 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 10.1 percent, Nikkei Average by 11.5 percent, Shanghai Composite by 28.5 percent, STOXX 50 by 9.3 percent and Dow Global by 4.2 percent. DJ UBS Commodities Index is now 1.5 percent below the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 03/30 /12 | ∆% Week 03/30/ 12 | ∆% Trough to 03/30 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 17.9 | 1.0 | 36.4 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 15.7 | 0.8 | 37.7 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -10.1 | -0.3 | 12.8 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -4.2 | -0.1 | 17.4 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -1.0 | 0.2 | 13.1 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -11.5 | 0.7 | 14.3 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -28.5 | -3.7 | -5.0 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -9.3 | -1.2 | 7.1 |
| DAX | 4/26/ | 5/25/ | -10.5 | 9.7 | -0.7 | 22.5 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 12.3 | -0.7 | -11.9 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -2.2 | -1.5 | 14.4 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 2.214 |
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 Mar 30, 2012, shows that the S&P 500 is now 16.2 percent above the Apr 26, 2010 level and the DJIA is 17.9 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. 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 | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 1 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 8 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16 | -2.6 | 5.9 | -2.8 | 0.6 |
| 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 |
| Feb 24 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
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 6.0 percent to ZAR 7.6709/USD on Mar 30, 2012, which is still 33.7 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 Mar 30 relative to the trough of depreciation but still stronger by 19.0 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 5.2 percent relative to the trough to BRL 1.8276/USD on Mar 30, 2012 but still stronger by 24.8 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the fourth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3440&IDPAI=NEWS):
“Copom reduces the Selic rate to 9.75 percent
07/03/2012 7:00:00 PM
Brasília - Continuing the process of adjustment of monetary conditions, the Copom decided to reduce the Selic rate to 9.75 percent, without bias, with five votes for the monetary policy action and two votes in favor of reducing the Selic rate by 50 basis points.”
Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. 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 | Mar 23, 2012 | ∆T Mar 30, 2012 | ∆P Mar 30, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 03/30 2012 | |||
| Rate | 1.59 | 1.192 | 1.3343 | |||
| ∆% | -33.4 | 10.7 | -19.2 | |||
| JPY USD | 8/18 | 9/15 | 03/30 2012 | |||
| Rate | 110.19 | 83.07 | 82.82 | |||
| ∆% | 24.6 | 0.3 | 24.8 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 03/30 2012 | |||
| Rate | 1.225 | 1.025 | 0.9027 | |||
| ∆% | 16.3 | 11.9 | 26.3 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 03/30 2012 | |||
| Rate | 2.006 | 1.388 | 1.6012 | |||
| ∆% | -44.5 | 13.3 | -25.3 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 03/30 | |||
| Rate | 1.0215 | 1.6639 | 1.0353 | |||
| ∆% | -62.9 | 41.9 | 5.4 | |||
| ZAR USD | 10/22 2008 | 8/15 | 03/30 2012 | |||
| Rate | 11.578 | 7.238 | 7.6709 | |||
| ∆% | 37.5 | -6.0 | 33.7 | |||
| SGD USD | 3/3 | 8/9 | 03/30 | |||
| Rate | 1.553 | 1.348 | 1.258 | |||
| ∆% | 13.2 | 6.7 | 19.0 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 03/30 | |||
| Rate | 7.813 | 7.752 | 7.766 | |||
| ∆% | 0.8 | 0.2 | 0.6 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 03/30 2012 | |||
| Rate | 2.43 | 1.737 | 1.8276 | |||
| ∆% | 28.5 | -5.2 | 24.8 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 03/30 | |||
| Rate | 22.19 | 18.693 | 18.589 | |||
| ∆% | 15.7 | 0.6 | 16.2 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 03/30 2012 | |||
| Rate | 9.313 | 7.108 | 6.6151 | |||
| ∆% | 23.7 | 6.9 | 29.0 | |||
| CNY USD | 7/20 2005 | 7/15 | 03/30 | |||
| Rate | 8.2765 | 6.8211 | 6.2976 | |||
| ∆% | 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 2012. 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
Chart VI-2 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.
Chart VI-2, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.214 percent at the close of market on Fri Mar 30, 2012 would be equivalent to price of 103.6687 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 2.4 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 first to the last row of Table VI-7. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. 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 Mar 28, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2861 billion, or $2.9 trillion, with portfolio of long-term securities of $2571 billion, or $2.6 trillion, consisting of $1569 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $96 billion Federal agency debt securities and $837 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1563 billion or $1.5 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 |
| 02/24/12 | 1.977 | 105.8535 | 4.5 |
| 03/02/12 | 1.977 | 105.8535 | 4.5 |
| 03/09/12 | 2.031 | 105.3512 | 4.0 |
| 03/16/12 | 2.294 | 102.9428 | 1.7 |
| 03/23/12 | 2.234 | 103.4867 | 2.2 |
| 03/30/12 | 2.214 | 103.6687 | 2.4 |
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 decreased 0.3 percent to 14,467 thousand barrels per day on average in the four weeks ending on Mar 23, 2012 from 14,506 thousand barrels per day in the four weeks ending on Mar 16, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 83.3 percent on Mar 23, 2012, which is slightly lower than 83.4 percent on Mar 25, 2011 and slightly higher than 83.1 percent on Mar 16, 2012. Imports of crude oil increased 0.2 percent from 8,673 thousand barrels per day on average in the four weeks ending on Mar 16 to 8,693 thousand barrels per day in the week of Mar 23. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 9.3 million barrels per day last week, down up by 1.0 million barrels per day from the previous week [Mar 23]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries with increasing imports at the margin in the prior week resulted in sharp increase of commercial crude oil stocks by 7.1 million barrels from 346.3 million barrels on Mar 16 to 353.4 million barrels on Mar 23. Motor gasoline production decreased 0.3 percent to 8,732 thousand barrels per day in the week of Mar 23 from 8,756 thousand barrels per day on average in the week of Mar 16. Gasoline stocks decreased 3.5 million barrels and stocks of fuel oil decreased 0.7 million barrels. Supply of gasoline fell from 8,991 thousand barrels per day on Mar 25, 2011, to 8,442 thousand barrels per day on Mar 23, 2012, or by 6.1 percent, while fuel oil supply fell 7.1 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 1.5 percent from Mar 25, 2011 to Mar 23, 2012. Gasoline prices rose 8.9 percent from Mar 28, 2011 to Mar 26, 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. Gasoline prices are increasing to the highest levels at this time of the year.
Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 3/23/12 | 3/16/12 | 3/25/11 |
| Crude Oil Refineries Input | 14,467 Week ∆%: -0.3 | 14,506 | 14,202 |
| Refinery Capacity Utilization % | 83.3 | 83.1 | 83.4 |
| Motor Gasoline Production | 8,732 Week ∆%: -0.3 | 8,756 | 8,873 |
| Distillate Fuel Oil Production | 4,226 Week ∆%: 0.0 | 4,225 | 4,184 |
| Crude Oil Imports | 8,693 Week ∆%: +0.2 | 8,673 | 8,740 |
| Motor Gasoline Supplied | 8,442 ∆% 2012/2011= -6.1% | 8,355 | 8,991 |
| Distillate Fuel Oil Supplied | 3,548 ∆% 2012/2011 = -8.6% | 3,567 | 3,881 |
| 3/23/12 | 3/16/12 | 3/25/11 | |
| Crude Oil Stocks | 353.4 ∆= +7.1 MB | 346.3 | 355.7 |
| Motor Gasoline Million B | 223.4 ∆= -3.5 MB | 226.9 | 217.0 |
| Distillate Fuel Oil Million B | 135.9 | 136.6 | 153.3 |
| WTI Crude Oil Price $/B | 106.43 ∆% 2012/2011 1.5 | 107.03 | 104.89 |
| 3/26/12 | 3/19/12 | 3/28/11 | |
| Regular Motor Gasoline $/G | 3.918 ∆% 2012/2011 | 3.867 | 3.596 |
B: barrels; G: gallon
Chart VII-1 of the US Energy Information Administration shows 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 distillate oil stocks since Jun 2010. Distillate fuel 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. Distillate fuel oil stocks have been in a clear downward trend for some weeks with slight reversal in the past weeks.
Chart VII-2, US, Distillate Fuel Oil Stocks
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices 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 fell 5,000 from 364,000 on Mar 17 to 359,000 on Mar 24. Claims not adjusted for seasonality fell only 33 from 319,382 on Mar 17 to 319,349 on Mar 24. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Mar 24, 12 | 359,000 | 319,349 | 365,000 |
| Mar 17, 12 | 364,000 | 319,382 | 368,500 |
| Change | -5,000 | -33 | -3,500 |
| Mar 10, 12 | 363,000 | 340,102 | 368,000 |
| Prior Year | 401,000 | 357,457 | 406,000 |
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 590,067 on Mar 21, 2009 to 357,457 on Mar 26, 2011, and now to 319,349 on Mar 24, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Hiring Collapse at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Mar 24, 2001 | 334,747 | 378,000 |
| Mar 23, 2002 | 366,372 | 415,000 |
| Mar 22, 2003 | 361,492 | 411,000 |
| Mar 20, 2004 | 304,462 | 346,000 |
| Mar 26, 2005 | 291,378 | 342,000 |
| Mar 25, 2006 | 265,370 | 295,000 |
| Mar 24, 2007 | 273,432 | 303,000 |
| Mar 22, 2008 | 316,208 | 369,000 |
| Mar 21, 2009 | 590,067 | 662,000 |
| Mar 27, 2010 | 412,710 | 460,000 |
| Mar 26, 2011 | 357,457 | 401,000 |
| Mar 24, 2012 | 319,349 | 359,000 |
Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp
VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the quarter Dec 2011 to Feb 2012, CPI inflation for all items seasonally adjusted was 2.4 percent in annual equivalent, that is, compounding inflation in Dec-Feb and assuming it would be repeated for a full year. In the 12 months ending in Feb, CPI inflation of all items not seasonally adjusted was 2.9 percent. Inflation in Feb 2012 not seasonally adjusted was 0.4 percent relative to Jan 2011 (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 1.6 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.07 percent for three months, 0.13 percent for six months, 0.17 percent for 12 months, 0.33 percent for two years, 0.50 percent for three years, 1.04 percent for five years, 1.61 percent for seven years, 2.21 percent for ten years and 3.34 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.
Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| ∆% 12 Months Feb 2012/Feb | ∆% Annual Equivalent Dec 2011-Feb 2012 SA | |
| CPI All Items | 2.9 | 2.4 |
| CPI ex Food and Energy | 2.2 | 1.6 |
Source: http://www.bls.gov/cpi/
IX 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 stagnates in 12 months and declines at the margin. 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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Appendix I. The Great Inflation
Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”
The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:
“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”
Chart I1, Brazil, Phillips Circuit 1963-1987
©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4.5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.
Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994
| 1994 | FF | 30Y | 30P | 10Y | 10P | MOR | CPI |
| Jan | 3.00 | 6.29 | 100 | 5.75 | 100 | 7.06 | 2.52 |
| Feb | 3.25 | 6.49 | 97.37 | 5.97 | 98.36 | 7.15 | 2.51 |
| Mar | 3.50 | 6.91 | 92.19 | 6.48 | 94.69 | 7.68 | 2.51 |
| Apr | 3.75 | 7.27 | 88.10 | 6.97 | 91.32 | 8.32 | 2.36 |
| May | 4.25 | 7.41 | 86.59 | 7.18 | 88.93 | 8.60 | 2.29 |
| Jun | 4.25 | 7.40 | 86.69 | 7.10 | 90.45 | 8.40 | 2.49 |
| Jul | 4.25 | 7.58 | 84.81 | 7.30 | 89.14 | 8.61 | 2.77 |
| Aug | 4.75 | 7.49 | 85.74 | 7.24 | 89.53 | 8.51 | 2.69 |
| Sep | 4.75 | 7.71 | 83.49 | 7.46 | 88.10 | 8.64 | 2.96 |
| Oct | 4.75 | 7.94 | 81.23 | 7.74 | 86.33 | 8.93 | 2.61 |
| Nov | 5.50 | 8.08 | 79.90 | 7.96 | 84.96 | 9.17 | 2.67 |
| Dec | 6.00 | 7.87 | 81.91 | 7.81 | 85.89 | 9.20 | 2.67 |
Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months
Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t
© Carlos M. Pelaez, 2010, 2011, 2012
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