Thirty Million Unemployed or Underemployed, Falling Real Wages and Global Financial and Economic Risk: Part II

 

Thirty Million Unemployed or Underemployed, Falling Real Wages and Global Financial and Economic Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Thirty Million Unemployed or Unemployed

IA Summary of the Employment Situation

IB Number of People in Job Stress

IC Long-term and Cyclical Comparison of Employment

ID Creation of Jobs

II Falling Real Wages

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 and Services PMI^™, The JPMorgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, was only marginally lower at 54.6 in Mar compared with 55.4 in Feb, indicating the second best reading in 13 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth at the seasonally-adjusted annual rate of 3.0 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, was marginally unchanged at 52.1 in Mar relative to 51.2 in Feb, for a fourth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). Higher oil and transportation prices were contributing to higher costs of inputs. David Hensley, Director of Global Economics Coordination at JPMorgan, finds that the global PMI^™ is at a low level consistently with mild growth in goods and expenditures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). The HSBC Brazil Services PMI^™ with Composite PMI data, compiled by Markit, fell marginally from 55.5 in Feb to 53.4 in Mar, suggesting strong activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI fell to 53.8 in Mar relative to 57.1 in Feb, but expansion of services in the Brazilian economist has continued during 32 consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). There is continuing strength in other indicators of the services sector. The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™)m fell slightly from 51.4 in Feb to 51.1 in Mar, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354). Andre Loes, Chief Economist, Brazil at HSBC, find improvement in output and new orders with subdued export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354).

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 Blog 03/18/12
Producer Price Index	Feb 12 months NSA ∆%: 3.3; ex food and energy ∆% 3.0 Feb month SA ∆% = 0.4; ex food and energy ∆%: 0.2 Blog 03/18/12
PCE Inflation	Feb 12 months NSA ∆%: headline 2.3; ex food and energy ∆% 1.9 Blog 04/01/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 30.5 million NSA Establishment Survey: Feb Nonfarm Jobs +227,000; Private +233,000 jobs created  Jan 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.1% Blog 03/11/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring Jan 2012 3.668 million lower by 1.157 million than 4.825 million in Feb 2006 Blog 03/18/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 04/01/12
Personal Income and Consumption	Jan month ∆% SA Real Real Disposable Personal Income (RDPI) Feb month SA ∆% minus 0.1 Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 0.3; RPCE ∆%: 1.8 Blog 04/01/2012
Quarterly Services Report	IVQ11/IIIQ11 SA ∆%: Information 0.6 Professional 1.7 Administrative -1.1 Hospitals 3.5 Blog 03/11/12
Employment Cost Index	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
Industrial Production	Feb month SA ∆%: 0.0 Feb 12 months SA ∆%: 4.0 Manufacturing Feb SA ∆% 0.3 Feb 12 months SA ∆% 5.1, NSA 5.2 Capacity Utilization: 78.7 Blog 03/18/12
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 New Orders: From Feb 9.73 to Mar 6.84 Blog 03/18/12
Philadelphia Fed Business Outlook Index	General Index from Feb 10.2 to Mar 12.5 New Orders from Feb 11.7 to Mar 3.3 Blog 03/18/12
Manufacturing Shipments and Orders	Feb New Orders SA ∆%: +1.3; ex transport ∆%: +0.9 Jan-Feb NSA ∆%: 10.9; ex transport ∆% 9.3 Blog 4/8/12
Durable Goods	Feb New Orders SA ∆%: minus 2.2; ex transport ∆%: 1.6 Jan-Feb 12/Jan-Feb 11 NSA New Orders ∆%: 13.5; ex transport ∆% : 10.3 Blog 04/01/12
Sales of New Motor Vehicles	Mar 2012 3,467,840; Mar 2011 3,059,805. Mar SAAR 15.10 million, Feb SAAR 15.10 million, Mar 2011 SAAR 13.07 million Blog 4/8/12
Sales of Merchant Wholesalers	Jan 2012/Jan 2010 ∆%: Total 11.3; Durable Goods: 14.1; Nondurable Goods 9.1 Blog 03/11/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Jan 12/Jan 11 NSA ∆%: Sales Total Business 8.6; Manufacturers 8.4 Retailers 5.8; Merchant Wholesalers 11.3 Blog 03/18/12
Sales for Retail and Food Services	Feb 2012/Feb 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 8.0 Blog 03/18/12
Value of Construction Put in Place	Feb SAAR month SA ∆%: minus 1.1 Feb 12-month NSA: 7.8 Blog 4/8/12
Case-Shiller Home Prices	Jan 2012/Jan 2011 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 3.8 ∆% Jan SA: 10 Cities minus 0.1 ; 20 Cities: 0.0 Blog 4/1/12
FHFA House Price Index Purchases Only	Feb SA ∆% 0.0; 12 month ∆%: minus 0.7 Blog 3/25/12
New House Sales	Feb 2012 month SAAR ∆%: minus 1.6 Feb 2012/Jan 2011 NSA ∆%: 9.3 Blog 03/25/12
Housing Starts and Permits	Feb Starts month SA ∆%: minus1.6; Permits ∆%: +5.1 Jan-Feb 2012/Jan-Feb 2011 NSA ∆% Starts 25.0; Permits  ∆% 34.3 Blog 3/25/12
Trade Balance	Balance Jan SA -$52,565 million versus Dec -$50,421 million Exports Jan SA ∆%: 1.4 Imports Dec SA ∆%: 2.1 Goods Exports Jan 2012/2011 NSA ∆%: 7.6 Goods Imports Jan 2011/2011 NSA ∆%: 8.4 Blog 03/11/12
Export and Import Prices	Feb 12 months NSA ∆%: Imports 4.5; Exports 1.5 Blog 03/18/12
Consumer Credit	Feb ∆% annual rate: 4.2 Blog 4/8/12
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 Major Holders of Treasury Securities: China $1159 billion; Japan $1079 billion  Blog 03/18/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 2.8; Outlays -2.4; Individual Income Taxes 0.6 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Feb $580,830 million Blog 03/18/12 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:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

Motor vehicle sales and production in the US have been in long-term structural change. Table VA-1 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Mar 2012, light vehicle sales accumulated to 3,467,496, which is higher by 13.3 percent relative to 3,059,805 a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 14.37 million in Mar 2012, lower than 15.10 million in Feb 2012 and higher than 13.07 million in Mar 2011 (http://www.motorintelligence.com/m_frameset.html).

Table VA-1, US, New Motor Vehicle Sales and Car Production, Thousand Units

	New Motor Vehicle Sales	New Car Sales and Leases	New Truck Sales and Leases	Domestic Car Production
1990	14,137	9,300	4,837	6,231
1991	12,725	8,589	4,136	5,454
1992	13,093	8,215	4,878	5,979
1993	14,172	8,518	5,654	5,979
1994	15,397	8,990	6,407	6,614
1995	15,106	8,536	6,470	6,340
1996	15,449	8,527	6,922	6,081
1997	15,490	8,273	7,218	5,934
1998	15,958	8,142	7,816	5,554
1999	17,401	8,697	8,704	5,638
2000	17,806	8,852	8,954	5,542
2001	17,468	8,422	9,046	4,878
2002	17,144	8,109	9,036	5,019
2003	16,968	7,611	9,357	4,510
2004	17,298	7,545	9,753	4,230
2005	17,445	7,720	9,725	4,321
2006	17,049	7,821	9,228	4,367
2007	16,460	7,618	8,683	3,924
2008	13,494	6,814	6.680	3,777
2009	10,601	5,456	5,154	2,247
2010	11,772	5,729	6,044	2,840

Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Manufacturers’ shipments increased 0.1 percent in Feb after increasing 0.6 percent in Jan while new orders increased 1.3 percent after falling 1.1 percent in Jan, as shown in Table VA-2. These data are very volatile. Volatility is illustrated by increase of 88.1 percent of nondefense aircraft in Nov and revised 21.0 percent in Dec followed by decline of 17.2 percent in Jan and increase by 6.0 percent in Feb. New orders excluding transportation equipment increased 0.9 percent in Feb. Capital goods new orders, indicating investment, increased 2.7 percent in Feb after declining 3.4 percent in Jan but increasing 5.2 percent in Dec. New orders of nondefense capital goods increased 1.9 percent in Feb after falling 5.0 percent in Jan but increasing 6.9 percent in Dec. Excluding more volatile aircraft, capital goods orders increased 1.7 percent in Feb after declining 3.4 percent in Jan but increasing 3.5 percent in Dec.

Table VA-2, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Feb 2012  ∆%	Jan 2012 ∆%	Dec 2011  ∆%
Total
S	0.1	0.6	0.0
NO	1.3	-1.1	1.4
Excluding Transport
S	0.4	0.0	0.7
NO	0.9	-0.5	0.7
Excluding Defense
S	0.3	0.6	0.7
NO	1.1	-1.3	1.6
Durable Goods
S	-0.4	0.1	2.0
NO	2.4	-3.5	3.3
Machinery
S	2.3	-5.4	3.8
NO	6.5	-8.8	6.5
Computers & Electronic Products
S	1.0	-0.5	-0.9
NO	2.8	2.4	-0.2
Computers
S	1.9	-7.0	-3.0
NO	6.4	-11.4	-7.6
Transport Equipment
S	-2.5	5.7	1.1
NO	3.9	-5.2	6.3
Automobiles
S	4.5	0.8	5.0
Motor Vehicles
S	-0.6	0.7	2.6
NO	0.2	-1.0	2.7
Nondefense Aircraft
S	-6.6	16.2	1.0
NO	6.0	-17.2	21.0
Capital Goods
S	-0.3	-0.9	3.2
NO	2.7	-3.4	5.2
Nondefense Capital Goods
S	0.5	-0.8	2.6
NO	1.9	-5.0	6.9
Capital Goods ex Aircraft
S	1.4	-2.8	2.8
NO	1.7	-3.4	3.5
Nondurable Goods
S	0.4	1.0	-0.2
NO	0.4	1.0	-0.2
Food Products
S/NO	-3.0	-0.2	0.1
Petroleum Refineries
S/NO	3.0	3.8	-1.3
Chemical Products
S/NO	0.4	0.8	-0.3

Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.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/esbr022.html

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-3. Values are cumulative millions of dollars in Jan-Feb 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Feb 2012 total $867.1 billion and new orders total $881.1 billion, growing respectively by 9.8 percent and 10.9 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 10.2 percent and new orders increased 11.8 percent. Excluding defense, shipments grew 10.2 percent and new orders grew 11.8 percent. Durable goods shipments reached $386.9 billion in Jan-Feb 2012, or 44.6 percent of the total, growing by 11.4 percent, and new orders $400.9 billion, or 45.5 percent of the total, growing by 13.8 percent. Important information in Table VA-3 is the large share of nondurable goods: with shipments of 480.1 billion in 2011 or 55.4 percent of the total, growing by 8.5 percent, and new orders also of 480.1 billion. Capital goods have relatively high value of $142.3 billion for shipments, growing 9.3 percent, and new orders $166.2 billion, growing 16.7 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $120.5 billion, growing by 9.5 percent, and new orders $128.9 billion, growing 10.7 percent. There is no suggestion in these data that the US economy is close to recession.

Table VA-3, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Feb 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/ 2011
Total	867,067	9.8	881,120	10.9
Excluding Transport	774,703	9.4	774,291	9.3
Excluding Defense	850,017	10.2	862,691	11.8
Durable Goods	386,945	11.4	400,998	13.8
Machinery	56,623	13.5	62,607	12.8
Computers & Electronic Products	55,791	-0.7	44,092	0.7
Computers & Related Products	6,142	-10.6	5,810	-11.3
Transport Equipment	92,364	12.6	106,829	23.5
Automobiles	11,486	25.4
Motor Vehicles	28,828	9.4	28,992	8.7
Nondefense Aircraft	14,486	32.6	8,100	-12.3
Capital Goods	142,343	9.3	166,154	16.7
Nondefense Capital Goods	129,278	11.8	152,191	23.8
Capital Goods ex Aircraft	120,487	9.5	128,928	10.7
Nondurable Goods	480,122	8.5	480,122	8.5
Food Products	120,159	6.2
Petroleum Refineries	128,863	14.9
Chemical Products	117,630	6.6

Note: Transport: transportation

Source: US Census Bureau

http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

Weakness of construction spending continued in the US with decline of 1.1 percent in Feb, as shown in Table VA-4. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $808.9 billion in Feb, which was lower by 1.1 percent than in the prior month of Jan. Residential investment was flat in Feb and nonresidential investment decreased 1.6 percent. Public construction fell 1.7 percent while private construction fell 0.8 percent. Data in Table VA-4 show that nonresidential construction at $555.4 billion is much higher in value than residential construction at $246.5 billion while total private construction at $527.3 billion is much higher than public construction at $281.6 billion, all in SAAR.

Table VA-4, US, Value of Construction Put in Place in the United States Seasonally Adjusted Annual Rate Billion Dollars and Month and 12-Month ∆%  

	Feb 2012   SAAR               $ Billions	Month ∆%	12-Month ∆%
Total	808.9	-1.1	5.8
Residential	253.5	0.0	4.6
Nonresidential	555.4	-1.6	6.4
Total Private	527.3	-0.8	10.2
Private Residential	246.5	0.0	5.6
New Single Family	111.5	-1.5	4.2
New Multi-Family	17.2	2.0	25.7
Private Nonresidential	280.8	-1.6	14.5
Total Public	281.6	-1.7	-1.4
Public Residential	7.0	-1.0	-21.9
Public Nonresidential	247.6	-1.7	-0.7

SAAR: seasonally adjusted annual rate; B: billions

Source: US Census Bureau http://www.census.gov/construction/c30/pdf/release.pdf

Further information on construction spending is provided in Table VA-5. The original monthly estimates not-seasonally adjusted (NSA) and their 12-month rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011. On a monthly basis, construction fell four consecutive months from Dec 2010 to Mar 2011, increasing in eight of the nine months from Apr to Dec, with sole decline of 3.3 percent in Jul. Improvement was interrupted in 2012 with decline of 0.8 percent in Jan and further decline of 1.1 percent in Feb. The 12 months rates of change improved from minus 6.9 percent in Apr to the first positive 12 months percentage change of 0.8 percent in Oct followed by 2.4 percent in Nov, 5.5 percent in Dec, 6.3 percent in Jan and 7.8 percent in Feb.

Table VA-5, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%

	Value NSA Month $ Millions	12-Month ∆% NSA	Value SAAR $ Millions	Month ∆% SA*
Feb 2012	55,457	7.8	808,860	-1.1
Jan	55,580	6.3	818,079	-0.8
Dec 2011	63,344	5.5	824,768	1.1
Nov	69,773	2.4	816,042	1.9
Oct	73,951	0.8	801,193	0.3
Sep	74,421	-0.3	798,972	1.1
Aug	75,838	-0.4	790,277	2.2
Jul	70,562	-3.8	773,296	-3.3
Jun	72,357	-1.5	799,568	1.5
May	67,296	-1.8	787,396	2.5
Apr	61,817	-6.9	768,226	0.7
Mar	56,731	-5.8	762,557	-0.2
Feb	51,412	-4.5	764,198	-1.0
Jan	52,278	-5.6	771,982	-1.4
Dec 2010	60,066	-6.3	782,880	-2.5

SAAR: Seasonally-adjusted Annual Rate

*Percentages are calculated with values without numbers and may differ from rounded numbers

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

The strong contraction of the value of construction in the US is revealed by Table VA-6. Construction spending in Jan-Feb 2012, not seasonally adjusted, reached $111.3 billion, which is higher by 7.4 percent than $103.7 billion in the same period in 2011. The depth of the contraction is shown by the decline of construction spending from $163.8 billion in Jan-Feb 2006 to only $111.3 billion in the same period in 2012, or decline by minus 32.0 percent. The comparable decline from Jan-Feb 2005 to Jan-Feb 2012 is minus 25.3 percent. Construction spending in Jan-Feb 2012 fell by 7.1 percent relative to the same period in 2003. Construction spending is lower by 1.4 percent in Jan-Feb 2012 relative to the same period in 2009. Construction has been weaker than the economy as a whole.

Table VA-6, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan-Feb 2012 $ B	111,327
Jan-Feb 2011 $ B	103,691
∆% to 2012	7.4
Jan-Feb 2010	112,925
∆% to 2012	-1.4
Jan-Feb 2009	135,692
∆% to 2012	-17.9
Jan-Feb 2006 $ B	163,757
∆% to 2012	-32.0
Jan-Feb 2005 $ B	148,950
∆% to 2012	-25.3
Jan-Feb 2003	119,820
∆% to 2012	-7.1

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Monthly construction spending in the US in the quarter Jan-Mar not seasonally adjusted is shown in Table VA-7 for the years between 2002 and 2011. The values of $55.4 billion in Feb 2012 and $51.4 billion in Feb 2011 are lower than $58.6 billion in Feb 2002. Construction in Feb 2012 fell by 31.9 percent from the peak of $81.5 in Jan 2006 to $55.4 billion in Feb 2012. The data are not adjusted for inflation or changes in quality.

Table VA-7, US, Value of Construction Spending NSA Millions of Dollars

Year	Jan	Feb	Mar
2002	59,516	58,588	63,782
2003	59,877	58,526	64,506
2004	64,934	64,138	73,238
2005	71,474	72,048	81,345
2006	81,058	81,478	92,855
2007	79,406	79,177	88,905
2008	77,349	77,227	82,779
2009	66,944	66,296	71,624
2010	55,368	53,853	60,246
2011	52,278	51,412	56,731
2012	55,880	55,447	NA

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Chart VA-2 of the US Bureau of the Census shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages defaulted with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession. Chart V-2 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained.

Chart VA-2, US, Construction Expenditures SAAR 1993-2011

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr050.html

Construction spending at SAARs in the quarter Jan to Mar is shown in Table VA-8 for the years between 2002 and 2011. There is a peak in 2005 to 2006 with subsequent collapse of SAARs.

Table VA-8, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars

Year	Jan	Feb	Mar
2002	858,654	862,338	844,551
2003	863,855	859,225	851,132
2004	938,826	938,656	960,946
2005	1,036,187	1,056,492	1,065,262
2006	1,183,861	1,199,767	1,213,270
2007	1,149,899	1,156,008	1,167,402
2008	1,106,047	1,092,331	1,094,910
2009	962,704	959,907	954,984
2010	813,408	795,224	806,681
2011	771,982	764,198	762,557
2012	818,079	808,860	NA

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Annual available data for the value of construction put in place in the US between 1993 and 2011 are provided in Table VIIA-17. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 62.7 percent between 1993 and 2011 but most of the growth, 65.3 percent, concentrated in 1993 to 2000 with decline of 1.6 percent between 2000 and 2011. Total value of construction fell 6.9 percent between 2002 and 2011 with value of nonresidential construction increasing 22.1 percent while value of residential construction fell 38.9 percent. Value of total construction fell 30.7 percent between 2005 and 2011, with value of residential construction declining 60.2 percent while value of nonresidential construction rose 11.8 percent. Value of total construction fell 32.3 percent between 2006 and 2011, with value of nonresidential construction decreasing 0.6 percent while value of residential construction fell 60.4 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2011, the share of nonresidential construction in total value rose to 68.9 percent while that of residential construction fell to 31.1 percent.

Table VA-9, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars and ∆% 

	Total	Private Nonresidential	Private Residential
1993	485,548	150,006	208,180
1994	531,892	160,438	241,033
1995	548,666	180,534	228,121
1996	599,693	195,523	257,495
1997	631,853	213,720	264,696
1998	688,515	237,394	296,343
1999	744,551	249,167	326,302
2000	802,756	275,293	346,138
2001	840,249	273,922	364,414
	Total	Total Nonresidential	Total Private Residential
2002	847,874	445,914	401,960
2003	891,497	440,246	451,251
2004	991,356	452,948	538,408
2005	1,140,136	486,629	617,507
2006	1,167,222	547,408	619,814
2007	1,152,351	651,883	500,468
2008	1,067,564	709,818	357,746
2009	903,201	649,273	253,928
2010	803,621	554,915	248,706
2011	789,780	544,293	245,487
∆% 1993-2011	62.7
∆% 1993-2000	65.3
∆% 2000-2011	-1.6
∆% 2002-2011	-6.9	22.1	-38.9
∆% 2005-2011	-30.7	11.8	-60.2
∆% 2006-2011	-32.3	-0.6	-60.4

Source: http://www.census.gov/const/www/c30index.html

The report of consumer credit outstanding of the Board of Governors of the Federal Reserve System is provided in Table VA-10. The data are in seasonally-adjusted annual rates both percentage changes and billions of dollars. Consumer credit is divided into two categories. (1) Revolving consumer credit (REV in Table VA-11) consists mainly of unsecured credit cards. (2) Non-revolving consumer credit (NREV in Table VA-11) consists of consumer loans such as car loans. In Feb 2012, revolving credit was $799 billion, or 31.7 percent of total consumer credit of $2522 billion, and non-revolving credit was $1723 billion, or 68.3 percent of total consumer credit outstanding. Consumer credit grew at relatively high rates before the recession beginning in IVQ2007 and extending to IIQ2009 as dated by the National Bureau of Economic Research or NBER (http://www.nber.org/cycles/cyclesmain.html). Percentage changes of consumer credit outstanding fell already in 2008. Rates were still negative in 2010. Contraction was sharper in revolving credit that fell at the rates of 10.1 percent in IIIQ2010, 2.6 percent in IVQ2010, 3.7 percent in IQ2011 and 2.0 percent in IIIQ2011. There was a sharp jump in consumer credit outstanding in Jan 2012: 8.6 percent total, minus 4.4 percent revolving and 15.3 percent non-revolving. Growth continued in Feb 2012 with 4.2 percent in total, minus 3.3 percent in revolving and 7.7 percent in non-revolving.

Table VA-10, US, Consumer Credit Outstanding, SA, Annual Rate and Billions of Dollars

	Total ∆%	REV ∆%	NRV ∆%	Total $B	REV $B	NREV $B
2012
Feb	4.2	-3.3	7.7	2522	799	1723
Jan	8.9	-4.4	15.3	2513	801	1712
2011
Dec	7.9	5.5	9.0	2495	804	1691
Nov	9.8	9.9	9.7	2478	800	1678
IVQ	6.9	6.0	7.4	2495	804	1691
IIIQ	1.4	-2.0	3.0	2452	792	1660
IIQ	3.6	1.5	4.6	2443	796	1647
IQ	2.2	-3.7	5.1	2422	793	1629
2010
IVQ	2.5	-2.6	5.0	2408	800	1608
IIIQ	-2.1	-10.1	2.1	2394	805	1588
2011	3.6	0.4	5.1	2495	804	1691
2010	-1.7	-7.5	1.5	2408	800	1608
2009	-4.4	-9.6	-1.2	2450	866	1585
2008	1.6	1.7	1.5	2562	958	1604
2007	5.8	8.1	4.4	2523	942	1581
2006	4.1	5.0	3.6	2385	871	1514

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

Source: Board of Governors of the Federal Reserve System

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

Chart VA-3 of the Board of Governors of the Federal Reserve System provides percentage changes of total consumer credit outstanding in the US since 1944. The shaded bars are the cyclical contraction dates of the National Bureau of Economic Research. Consumer credit is cyclical, declining during contractions as shown by negative percentage changes during economic contractions.

Chart VA-3, US, Consumer Credit Outstanding Seasonally Adjusted Annual Percentage Rate

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Chart.aspx?rel=G19&series=3e4b643fa48b7bff9962454e556c8761&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn&type=package&pp=Format

VB. Japan. Private-sector activity in Japan expanded sharply with the Markit Composite Output PMI^™ Index advancing from 51.2 in Feb to a record 53.2 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Alex Hamilton, economist at Markit and author of the report, finds broad strength in the index through rare strengthening activity in both services and manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit Business Activity Index of Services increased from 51.2 in Feb to 53.2 in Mar, also showing strength (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, increased from 50.5 in Feb to 51.1, for the highest reading in seven months, indicating improving manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346). Alex Hamilton, economist at Markit and author of the report, finds that investment goods drove the recovery and that new orders registered strong growth but that foreign demand and yen overvaluation are important risk of continuing improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346).

Table JPY provides the country table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 7/31/11
Corporate Goods Prices	Feb ∆% 0.2 12 months ∆% 0.6 Blog 3/18/12
Consumer Price Index	Feb NSA ∆% 0.2 Feb 12 months NSA ∆% 0.3 Blog 4/1/12
Real GDP Growth	IVQ2011 ∆%: -0.2 on IIIQ2011;  IVQ2011 SAAR minus 0.7% ∆% from quarter a year earlier: -0.6 % Blog 3/11/12
Employment Report	Feb Unemployed 2.89 million Change in unemployed since last year: minus 140 thousand Unemployment rate: 4.5% Blog 4/1/12
All Industry Indices	Jan month SA ∆% minus 1.0 12-month NSA ∆% -0.1 Blog 3/25/12
Industrial Production	Feb SA month ∆%: minus 1.2 12-month NSA ∆% 1.5 Blog 4/1/12
Machine Orders	Total Jan ∆% 21.6 Private ∆%: 4.6 Jan ∆% Excluding Volatile Orders 3.4 Blog 3/18/12
Tertiary Index	Jan month SA ∆% minus 1.7 Jan 12 months NSA ∆% 0.1 Blog 3/18/12
Wholesale and Retail Sales	Feb 12 months: Total ∆%: minus 0.1 Wholesale ∆%: minus 1.3 Retail ∆%: +3.5 Blog 4/1/12
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:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

VC. China. The HSBC China Services PMI^™, compiled by Markit, finds stagnating business activity in China with the HSBC Composite Output, combining manufacturing and services, declining to 49.9 in Mar from 51.8 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth and weakness in export orders that require more easing measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, fell to 48.3 in Mar from 49.6 in Feb, in a fourth consecutive month of declining conditions in manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). The index for the first quarter of 2012 is the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth with weakening impulse from new export orders, requiring monetary and fiscal stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). 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 Blog 3/18/12
Consumer Price Index	Feb month ∆%: -0.1 Feb 12 month ∆%: 3.2 Blog 03/11/12
Value Added of Industry	Feb month ∆%: 0.98 Jan-Feb 2012/Jan-Feb 2011 ∆%: 11.4 Blog 3/18/12
GDP Growth Rate	Year IVQ2011 ∆%: 8.9 Quarter IIQ2011 ∆%: 2.0 Blog 1/22/12
Investment in Fixed Assets	Total Jan-Feb 2012 ∆%: 21.5 Jan-Dec ∆% real estate development: 27.8 Blog 03/18/12
Retail Sales	Jan month ∆%: 1.6 Dec 12 month ∆%: 18.1 Jan-Feb ∆%: 14.7 Blog 3/18/12
Trade Balance	Feb balance minus $31.48 billion Exports ∆% 18.4 Imports ∆% 39.6 Cumulative Feb: $4.2 billion Blog 03/18/12

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 Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.3 in Feb to 49.1 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The quarterly average in Jan-Mar 2012 of 49.6 is higher than 47.2 in the final quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). Chris Williamson, Chief Economist at Markit, finds that growth of services activity was not sufficient to compensate for the decline in manufacturing output for the first time in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI^® declined to a three-month low at 47.7 in Mar from 49.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Chris Williamson, Chief Economist at Markit, finds that euro area manufacturing contracted in Mar, preventing the fall of the economy back into recession by eliminating the marginal gains in the first two months of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). 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 3/11/12
Unemployment	Feb 2012: 10.8% unemployment rate Feb 2012: 17.134 million unemployed Blog 4/8/12
HICP	Feb month ∆%: 0.5 12 months Feb ∆%: 2.7 Blog 3/18/12
Producer Prices	Euro Zone industrial producer prices Feb ∆%: 0.6 Feb 12 months ∆%: 3.6 Blog 4/8/12
Industrial Production	Jan month ∆%: 0.2 Jan 12 months ∆%: -1.2 Blog 3/18/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 2/26/12
Construction Output	Jan month ∆%: minus 0.8 Jan 12-month ∆%: minus 1.4 Blog 3/25/12
Retail Sales	Feb month ∆%: -0.1 Feb 12 months ∆%: -2.1 Blog 4/8/12
Confidence and Economic Sentiment Indicator	Sentiment 93.2 Mar 2012 Confidence minus 11.8 Mar 2012 Blog 4/1/12
Trade	Jan-Dec 2011/2010 Exports ∆%: 12.7 Imports ∆%: 12.3 Jan 2012 12-month Exports ∆% 10.9 Imports ∆% 3.6 Blog 3/18/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 3/18/12

Links to blog comments in Table EUR:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

3/4/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

Eurostat reported the rate of unemployment in the euro area as 10.8 percent in Feb 2012, as shown in Table VIID-1. The number of unemployed in Feb 2012 was 17.134 million, which was 1.476 million higher than 15.658 million in Feb 2011.

Table VD-1, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions, SA 

	Unemployment Rate %	Number Unemployed Millions
Feb 2012	10.8	17.134
Jan	10.7	16.972
Dec 2011	10.6	16.793
Nov	10.5	16.681
Oct	10.4	16.456
Sep	10.3	16.277
Aug	10.2	16.043
Jul	10.1	15.961
Jun	10.0	15.800
May	10.0	15.742
Apr	9.9	15.638
Mar	10.0	15.677
Feb	10.0	15.658
Jan	10.0	15.706
Dec 2010	10.0	15.766

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Table VD-2 shows the disparity in rates of unemployment in the euro area with 10.8 for the region as a whole and 17.134 million unemployed but 5.7 percent in Germany and 2.423 million unemployed. At the other extreme is Spain with rate of unemployment of 23.6 percent and 5.475 million unemployed. The rate of unemployment of the European Union in Feb is 10.2 percent with 24.550 million unemployed.

Table VD-2, Unemployed and Unemployment Rate in Countries and Regions, Millions and %

Feb 2012	Unemployment Rate %	Unemployed Millions
Euro Zone	10.8	17.134
Germany	5.7	2.423
France	10.0	2.932
Netherlands	4.9	0.433
Finland	7.4	0.199
Portugal	15.0	0.811
Ireland	14.7	0.311
Italy	9.3	2.354
Greece	NA	NA
Spain	23.6	5.475
Belgium	7.2	0.349
European Union	10.2	24.550

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Chart VD-1 provides Eurosat estimates of unemployment rates in the European Union. There is significant diversity in the rates of unemployment in members of the euro zone and the European Union.

Chart VD-1, Unemployment Rate in Various Countries and Regions

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Advanced economies are experiencing weak demand. Table VD-4 provides the volume of retail sales in the euro zone from Jan 2011 to Feb 2012. Retail sales decreased 0.1 percent in

Feb 2012 and fell 2.1 percent in the 12 months ending in Feb 2012. The 12 months rates of growth have become negative since Mar with exception of 1.1 percent in Apr and stability in Aug.

Table VD-4, Euro Zone, Volume of Retail Sales, ∆%

	Month ∆%	12-Month ∆%
Feb 2012	-0.1	-2.1
Jan	1.1	-1.1
Dec 2011	-1.2	-1.7
Nov	-0.3	-1.4
Oct	-0.1	-0.7
Sep	-0.6	-1.1
Aug	0.0	0.0
Jul	0.5	-0.4
Jun	0.9	-0.8
May	-1.4	-1.8
Apr	0.6	1.1
Mar	-1.0	-1.3
Feb	0.3	1.1
Jan	0.2	0.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042012-AP/EN/4-04042012-AP-EN.PDF

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Growth rates of retail sales of the euro zone by products are in Table VD-5. Total sales fell 0.1 percent in Feb 2012 and declined 2.1 percent in the 12 months ending in Feb 2012. The 12-month percentage changes for all categories, food, drinks and tobacco and nonfood products, are negative. Only food increased in Feb 2012 by 0.6 percent.

Table VD-5, Euro Zone, Volume of Retail Sales by Products, ∆%

Feb 2012	Month ∆%	12-Month ∆%
Total	-0.1	-2.1
Food, Drinks, Tobacco	0.6	-1.0
Nonfood Products ex Automotive Fuel	0.0	-1.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042012-AP/EN/4-04042012-AP-EN.PDF

Month and 12-month rates of change of retail sales by member countries of the euro zone are shown in Table VD-6 for Jan 2012. Retail sales are weak throughout the euro zone. The 12-month percentage changes are negative for all members with the exception of 0.8 percent for France, 6.3 percent for Finland and 4.8 percent for Belgium. The 12-month percentage change for the UK, which is not a member of the euro zone, was 1.8 percent. The European Union’s 12-month percentage change was also negative by 1.1 percent.

Table VD-6, Euro Zone, Volume of Retail Sales by Member Countries, ∆%

Feb 2012	Month ∆%	12-Month ∆%
Euro Zone	-0.1	-2.1
Germany	-1.1	-2.5
France	1.2	0.8
Netherlands	NA	NA
Finland	0.3	6.3
Belgium	0.3	4.8
Portugal	1.6	-9.6
Ireland	-0.3	-1.5
Italy	NA	NA
Greece	NA	NA
Spain	0.7	-6.2
UK	-1.1	1.8
European Union	-0.4	-1.1

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042012-AP/EN/4-04042012-AP-EN.PDF

VE Germany. The Markit Germany Composite Output Index, combining services and manufacturing activity with high association with German GDP, fell from 53.2 in Feb to 51.6 in Mar, indicating modest growth of private-sector activity but at the lowest rate in the quarter (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Tim Moore, Senior Economist at Markit and author of the report, finds that the index is consistent with growth of GDP of only 0.2 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®) fell from 50.2 in Feb to 48.4 in Mar, which is the lowest since Dec 2011, indicating modest conditions in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). Tim Moore, Senior Economist at Markit and author of the report, finds that the contraction of export orders in Germany during nine months is the longest in ten years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). 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 2/26/12
Consumer Price Index	Feb month SA ∆%: +0.7 Feb 12-month ∆%: 2.3 Blog 3/11/12
Producer Price Index	Feb month ∆%: 0.4 12-month NSA ∆%: 3.2 Blog 3/25/12
Industrial Production	Mfg Feb month SA ∆%: -0.3 12 months NSA: 3.2 Blog 4/8/12
Machine Orders	Feb month ∆%: 0.3 Feb 12 months ∆%: -4.5 Blog 4/8/12
Retail Sales	Feb Month ∆% 1.7 12-Month ∆% minus 1.6 Blog 4/1/12
Employment Report	Unemployment Rate Feb 5.9% Blog 4/1/12
Trade Balance	Exports Jan 12 months NSA ∆%: 9.3 Imports Dec 12 months NSA ∆%: 6.3 Exports Jan month SA ∆%: 2.3; Imports Jan month SA 2.4 Blog 3/11/12

Links to blog comments in Table DE:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html

3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

The production industries index of Germany in Table VE-1 shows decrease of 1.3 percent in Feb and increase of 1.2 percent in the 12 months ending in Feb. Germany’s industry suffered decline of 7.3 percent in Dec 2008 relative to Dec 2007 and decline of 2.3 percent in 2009. Recovery was vigorous with 14.2 percent in the 12 months ending in Dec 2010. The first quarter of 2011 was quite strong when the German economy outperformed the other advanced economies. The performance of Germany’s industry from 2003 to 2006 was vigorous with average rate of 5.1 percent. Data for the production industries index of Germany fluctuate sharply from month to month and also in 12-month rates.

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

	12-Month ∆% NSA	Month ∆% Calendar SA
Feb 2012	1.2	-1.3
Jan	4.6	1.2
Dec 2011	1.3	-2.6
Nov	4.4	0.0
Oct	0.4	0.9
Sep	5.4	-2.5
Aug	11.3	-0.3
Jul	6.5	3.0
Jun	0.2	-0.9
May	19.0	0.7
Apr	6.0	-0.2
Mar	10.2	1.3
Feb	16.4	1.3
Jan	16.0	1.2
Dec 2010	14.2	0.2
Dec 2009	-2.3	-0.1
Dec 2008	-7.3	-3.5
Dec 2007	-0.1	0.9
Dec 2006	2.5	0.6
Dec 2005	4.9	0.3
Dec 2004	5.3	0.0
Dec 2003	5.1	0.1
Dec 2002	2.0	-2.2

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

cms_param49170=51620

Table VE-2 provides monthly percentage changes of the German production industries index by components from Jul 2011 to Feb 2012. The production industries index fell 2.6 percent in Dec with negative changes in all components. All components rebounded in Jan, with the exception of intermediate goods and nondurable goods. There was another drop of 1.3 percent in Feb with declines of most components. Manufacturing fell 1.9 percent in Dec, declining in five of the seven months from Jul to Feb. The investment goods segment also fell 2.7 percent in Dec but grew 1.9 percent in Jan and 0.3 percent in Feb. Jul was quite strong with monthly growth of 3.0 percent for the index, 3.2 percent for manufacturing, 5.0 percent for investment goods and 14.4 percent for durable goods. It is quite difficult to analyze trends in these data. There is generalized perception that growth in the euro area slowed after the European summer.

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

	Feb	Jan	Dec	Nov	Oct	Sep	Aug	Jul
Production Industries	-1.3	1.2	-2.6	0.0	0.9	-2.5	-0.3	3.0
Industry	-0.4	1.0	-2.0	-0.3	0.7	-2.6	-0.3	3.2
Mfg	-0.3	1.0	-1.9	-0.3	0.7	-2.6	-0.3	3.3
Intermediate Goods	-0.3	0.6	-1.7	-0.2	-0.2	-1.9	-0.3	1.7
Investment Goods	0.3	1.9	-2.7	-0.4	1.7	-4.6	1.1	5.0
Durable Goods	-2.6	2.6	-2.3	-2.4	1.6	0.0	-9.7	14.4
Nondurable Goods	-2.0	-1.0	-0.6	-0.2	-0.4	1.7	-3.1	-0.3
Energy	1.6	0.4	-5.0	0.2	3.8	-4.2	1.2	-0.8

Seasonally Calendar Adjusted

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

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

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

	IND	MFG	INTG	INVG	DG	NDG	EN
2012
Feb	3.0	3.2	1.9	6.3	-1.4	-2.6	-6.7
Jan	6.0	6.1	4.6	9.7	4.3	0.9	-10.8
2011
Dec	1.4	1.5	2.8	1.0	-1.1	-0.2	-16.6
Nov	5.0	5.2	4.3	7.9	1.3	-0.4	-7.6
Oct	1.2	1.3	0.8	3.5	-3.3	-3.2	-8.5
Sep	6.6	6.6	6.8	8.9	3.3	0.3	-9.3
Aug	12.9	12.7	11.2	20.2	4.0	1.4	-5.1
Jul	8.1	8.3	6.8	13.0	7.3	-0.3	-9.4
Jun	1.0	1.0	1.8	2.0	-10.5	-2.1	-6.3
May	21.4	21.5	18.0	28.2	21.6	13.2	-11.7
Apr	7.5	7.6	6.2	11.0	4.8	2.3	-7.5
Mar	10.7	10.9	10.2	14.8	8.5	1.9	-0.3
Feb	17.0	17.2	16.3	22.4	11.0	6.1	-2.9
Jan	17.1	17.2	17.0	23.2	11.2	4.4	-3.0
2010
Dec	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Nov	13.8	13.8	13.1	19.0	7.9	3.6	2.9
Oct	9.9	10.1	10.1	13.9	6.5	0.9	0.2
Sep	9.5	9.3	12.1	10.0	7.9	1.7	-2.4
Aug	17.2	17.2	19.0	20.3	19.5	6.9	-2.1
Jul	9.1	8.8	12.7	8.7	7.2	0.9	-0.2
Jun	16.2	16.1	20.5	16.0	20.5	5.3	-2.5
May	13.3	13.3	20.2	11.6	10.7	1.7	12.8
Apr	14.9	14.8	21.8	15.3	8.5	0.0	9.9
Mar	14.2	14.5	20.4	11.7	11.8	6.4	7.2
Feb	7.1	7.5	10.8	7.0	7.4	-1.2	5.4
Jan	0.6	0.9	6.7	-3.4	-0.4	-3.9	3.3
Dec 2010	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Dec 2009	-3.3	-3.2	3.3	-9.9	-0.1	1.1	3.8
Dec 2008	-7.6	-7.4	-14.4	-5.5	-11.2	3.7	-9.0
Dec 2007	0.1	-0.3	-0.6	2.5	-10.0	-2.6	1.7
Dec 2006	3.1	3.1	5.2	2.3	8.7	-1.0	-5.4
Dec 2005	5.8	5.8	3.5	8.9	3.2	2.2	0.6
Dec 2004	5.2	5.6	7.6	3.4	0.9	5.7	9.6
Dec 2003	5.5	5.3	5.6	6.3	1.6	4.6	0.3
Dec 2002	3.7	3.4	5.3	3.4	-5.9	2.2	-2.6

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

Source:  Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

Broader perspective since 2002 is provided by Chart VE-1 of the Statistiche Bundesamt Deutschland, Federal Statistical Agency of Germany. The index rises by more than one third between 2003 and 2008 with sharp fluctuations and then collapses during the global recession in 2008. Recovery has been in a steep upward trajectory that has recovered at the more recent peaks the losses during the contraction. Recovery was reversed by the drop in Dec with a marginal increase into 2012.

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

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

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

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

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

Table VE-4 provides month and 12-month rates of growth of manufacturing in Germany in 2011 and Jan-Feb 2012. There are fluctuations in both the rates for a month and in the past 12 months. Deceleration appears in the annual equivalent rate of 10.3 percent for Jan-May but minus 3.7 percent in the annual equivalent Jun-Dec. Recovery is strong in Jan 2012 with another drop in Feb.

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

	12-Month ∆% NSA	Month ∆% SA and Calendar Adjusted
Feb 2012	3.2	-0.3
Jan	6.1	1.0
Dec 2011	1.5	-1.9
Nov	5.2	-0.3
Oct	1.3	0.7
Sep	6.6	-2.6
Aug	12.7	-0.3
Jul	8.3	3.3
Jun	1.0	-1.0
May	21.5	1.3
Apr	7.6	0.2
Mar	10.9	1.1
Feb	17.2	1.5
Jan	17.2	0.0
Dec	17.6	1.4

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

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

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

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html?cms_param49170=51620

Several tables and charts facilitate analysis of machinery orders in Germany. Table VE-5 reveals strong fluctuations in an evident deceleration of total orders for industry of Germany. The same behavior is observed for total, foreign and domestic orders with decline in 12-month rates from two-digit levels to single digits and some negative changes. An important aspect of Germany is that the bulk of orders is domestic or from other European countries while foreign orders have been growing rapidly. Total orders increased 0.3 percent in Feb 2012 with decline of 1.4 percent in domestic orders partially compensated by increase of 1.7 percent in foreign orders. As in other countries, data on orders for manufacturing are highly volatile. In Jan, decline of foreign orders of 4.7 percent was partly compensated by increase of domestic orders of 1.9 percent for decline of total orders of 1.8 percent. All 12-month percentage changes in Feb 2012 in Table VE-5 are negative.

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

	Total 12 M	Total M	Foreign 12 M	Foreign M	Home 12 M	Home M
2012
Feb	-4.5	0.3	-4.7	1.7	-4.1	-1.4
Jan	-3.1	-1.8	-5.7	-4.7	0.1	1.9
2011
Dec	-0.2	1.3	-0.8	4.3	0.6	-2.3
Nov	-4.2	-3.5	-7.6	-5.8	0.0	-0.7
Oct	0.6	3.6	2.2	5.9	-1.3	0.7
Sep	2.4	-4.7	1.2	-5.8	3.8	-3.4
Aug	6.8	-1.0	4.3	0.1	10.1	-2.0
Jul	5.6	-3.2	5.7	-8.2	5.6	3.6
Jun	3.8	1.4	8.0	12.2	-1.6	-10.3
May	22.7	2.3	16.2	-4.2	30.2	10.4
Apr	6.9	2.4	9.9	2.8	3.4	1.8
Mar	9.1	-2.8	11.9	-2.6	5.8	-3.1
Feb	21.5	0.3	24.8	-0.7	17.8	1.5
Jan	22.4	4.3	26.5	3.3	17.6	5.8
2010
Dec	22.2	-2.9	27.3	-3.0	15.8	-2.8
Nov	21.5	5.0	26.8	7.6	15.6	1.8
Oct	14.1	1.7	17.7	1.4	10.4	2.0
Sep	13.9	-2.8	16.0	-4.9	11.6	-0.2
Aug	23.5	3.3	31.9	6.5	14.4	-0.4
Jul	14.2	-1.9	21.7	-3.4	6.3	-0.3
Jun	28.5	3.3	32.0	5.4	24.3	0.9
May	24.4	0.5	28.9	1.0	19.9	-0.1
Apr	29.3	2.6	33.0	2.7	25.2	2.4
Mar	29.4	5.7	32.3	6.2	26.4	5.1
Feb	23.4	-0.7	27.6	-0.7	18.6	-0.8
Jan	16.7	4.7	23.6	4.4	9.7	5.1
Dec 2009	9.2	-2.1	10.6	-2.4	7.4	-1.7
Dec 2008	-28.2	-7.1	-31.5	-9.8	-23.7	-3.9
Dec 2007	7.1	-1.5	9.1	-2.4	4.5	-0.4
Dec 2006	2.9	0.3	3.4	0.0	2.2	0.5
Dec 2005	4.9	-0.9	10.5	-1.6	-1.5	0.0
Dec 2004	12.7	6.6	12.9	8.4	12.7	4.9
Dec 2003	10.7	2.4	16.4	5.4	5.1	-0.8
Dec 2002	-0.2	-3.4	-0.8	-6.6	0.2	-0.3

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

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html

Orders for investment goods of Germany are shown in Table VE-6. Total investment goods orders increased 1.3 percent in Feb 2012 with foreign orders increasing 1.0 percent and domestic orders increasing 1.8 percent. There has been evident deceleration from 2010 and early 2011 with growth rates falling from two digit levels to single digits and multiple negative changes. An important aspect of Germany’s economy shown in Tables VE-5 and VE-6 is the success in increasing the competitiveness of its economic activities as shown by rapid growth of orders for industry after the recession of 2001 in the period before the global recession beginning in late 2007.

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

	Total 12 M	Total M	Foreign 12 M	Foreign M	Domestic 12 M	Domestic M
2012
Feb	-5.7	1.3	-7.0	1.0	-3.8	1.8
Jan	-3.6	-5.1	-6.0	-5.9	0.6	-3.9
2011
Dec	1.6	3.1	0.5	4.2	3.5	1.5
Nov	-5.9	-5.1	-9.4	-8.4	-0.1	0.6
Oct	3.6	6.1	7.5	9.8	-2.3	0.5
Sep	2.9	-4.7	1.8	-5.6	4.9	-3.3
Aug	6.3	-0.1	3.5	1.4	11.1	-2.3
Jul	7.7	-8.6	6.9	-14.9	8.9	3.0
Jun	8.9	4.9	13.6	20.0	1.0	-14.9
May	26.8	3.3	18.0	-6.2	40.3	19.0
Apr	11.3	4.4	14.7	5.9	6.2	1.9
Mar	11.0	-5.6	13.7	-5.0	7.0	-6.4
Feb	29.4	2.1	33.1	0.4	23.9	4.9
Jan	26.4	3.2	32.4	3.6	17.5	2.3
2010
Dec	27.3	-4.6	31.0	-6.1	21.3	-2.1
Nov	30.1	8.1	35.9	12.2	21.5	2.2
Oct	20.6	1.7	23.9	0.3	16.0	4.0
Sep	18.1	-3.9	20.4	-6.2	14.6	-0.2
Aug	29.3	6.8	42.8	10.4	12.0	1.4
Jul	14.1	-4.7	28.4	-6.9	-2.3	-1.3
Jun	33.5	5.6	41.3	8.8	22.2	0.7
May	25.9	2.0	35.6	1.8	13.6	2.5
Apr	30.1	2.2	40.1	3.2	17.4	0.6
Mar	26.2	7.5	33.8	8.6	16.1	5.7
Feb	20.3	-1.9	30.3	-1.5	8.1	-2.5
Jan	16.9	4.6	29.5	3.3	2.5	6.6
Dec 2009	8.1	-1.4	13.6	-1.9	0.5	-0.8
Dec 2008	-32.2	-7.6	-36.7	-10.7	-24.4	-3.1
Dec 2007	9.6	-0.6	11.6	-2.7	6.3	2.7
Dec 2006	3.6	1.8	3.8	1.9	3.1	1.9
Dec 2005	1.9	-2.8	9.8	-3.8	-8.5	-1.3
Dec 2004	19.4	11.2	18.6	12.2	20.5	9.8
Dec 2003	11.7	2.1	17.2	5.0	5.4	-1.6
Dec 2002	-2.8	-4.3	-3.7	-8.1	-1.8	0.2

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

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html

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

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

Source:  Statistisches Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html

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

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

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Auftragseingangsindex/kae211.html?cms_gtp=146446_list%253D3&https=1

VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 50.2 in Feb to 48.7 in Mar, for the first downturn of activity in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds stagnation of French services activity for a second consecutive month but improving confidence on future activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). The Markit France Manufacturing Purchasing Managers’ Index^® fell to 46.7 in Mar from 50.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds that manufacturing output was restricted by the deepest decline in new orders in about years, particularly with weak internal demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340).Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Feb month ∆% 0.4 12 months ∆%: 2.3 3/18/12
PPI	Feb month ∆%: 0.8 Feb 12 months ∆%: 4.3 Blog 04/01/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.3 Blog 4/1/12
Industrial Production	Jan/Dec SA ∆%: Industrial Production 0.3; Manufacturing 0.2 Dec YOY NSA ∆%: Industrial Production -0.6; Manufacturing 0.6 Blog 3/11/12
Industrial New Orders	Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12
Consumer Spending	Feb Manufactured Goods ∆%: 1.5 Feb 12-Month Manufactured Goods ∆%: minus 1.3 Blog 4/1/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 3/4/12
Trade Balance	Feb Exports ∆%: month 1.0, 12 months 7.2 Feb Imports ∆%: month 2.8, 12 months 6.7 Blog 4/8/12
Confidence Indicators	Historical averages 100 Mar: France 95 Mfg Business Climate 96 Retail Trade 94 Services 93 Building 98 Household 82 Blog 3/25/12

Links to blog comments in Table FR:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

France has been running a trade deficit fluctuating around €6,000 million, as shown in Table VF-1. Exports increased 1.0 percent in Feb while imports increased 2.8 percent, resulting in increase of the trade deficit from €5593 million in Jan to €6398 million in Feb.

Table VF-1, France, Exports, Imports and Trade Balance, € Millions 

	Exports	Imports	Trade Balance
Feb 2012	37,155	43,553	-6,398
Jan	36,769	42,362	-5,593
Dec 2011	36,186	41,505	-5,319
Nov	37,216	41,592	-4,376
Oct	35,898	41,805	-5,907
Sep	35,728	42,132	-6,404
Aug	37,605	42,150	-4,545
Jul	35,012	41,408	-6,396
Jun	34,773	40,009	-5,236
May	34,775	41,433	-6,658
Apr	34,474	41,449	-6,975
Mar	35,002	41,138	-6,136
Feb	34,661	40,815	-6,154
Jan	34,339	40,962	-6,623
Dec 2010	34,037	39,602	-5,565

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

Table VF-2, France, Exports and Im Month and 12-month rates of growth of exports and imports of France are provided in Table VF-4. Exports fell 2.8 percent in Dec but increased 1.6 percent in Jan and 1.0 percent in Feb with increase of 7.2 percent in the 12 months ending in Feb. Imports fell 0.2 percent in Dec and grew 4.8 percent in 12 months but rebounded with growth of 2.1 percent in Jan and 3.4 percent in 12 months and growth of 2.8 percent in Feb with 12-month increase of 6.7 percent. Growth of exports and imports has fluctuated in 2011 as a result of price surges of commodities and raw materials.

Table VF-2, France, Exports and Imports, Month and 12-Month ∆%

	Exports Month ∆%	Exports 12-Month ∆%	Imports Month ∆%	Imports 12-Month ∆%
Feb 2012	1.0	7.2	2.8	6.7
Jan	1.6	7.1	2.1	3.4
Dec 2011	-2.8	6.3	-0.2	4.8
Nov	3.7	7.5	-0.5	4.7
Oct	0.5	8.7	-0.8	14.6
Sep	-5.0	7.6	0.0	11.0
Aug	7.4	11.0	1.8	8.6
Jul	0.7	1.9	3.5	8.9
Jun	0.0	3.4	-3.4	8.2
May	0.9	15.3	0.0	16.3
Apr	-1.5	7.5	0.8	14.3
Mar	1.0	11.2	0.8	14.6
Feb	0.9	13.9	0.4	21.5
Jan	0.9	13.8	3.4	20.4
Dec 2011		6.3		4.8
Dec 2010		14.5		15.1
Dec 2009		-9.8		-1.8
Dec 2008		-7.3		-11.2
Dec 2007		6.1		8.4
Dec 2006		7.4		6.8
Dec 2005		11.1		15.1
Dec 2004		-3.5		6.0
Dec 2003		7.1		1.6

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

Annual data for France’s exports, imports and trade balance are provided in Table VF-3. France’s trade balance deteriorated sharply from 2007 to 2011 with the deficit increasing from €42,494 million in 2007 to €70,437 million in 2011. Annual growth rates of exports have not been sufficiently high to compensate for growth of imports driven in part by commodity price increases.

Table VF-3, France, Exports, Imports and Balance Year € Millions and ∆%

	Exports € Millions	∆%	Imports € Millions	∆%	Balance € Millions
Feb 2012 12 Months	432,858		502,909		-70,051
Year
2011	427,134	8.3	497,571	11.5	-70,437
2010	394,407	13.9	446,283	14.0	-51,876
2009	346,279	-17.1	391,356	-17.4	-45,077
2008	417,634	2.7	473,853	5.5	-56,219
2007	406,487	3.0	448,981	5.8	-42,494
2006	394,621	9.5	424,549	10.4	-29,928
2005	360,376	4.4	384,588	9.6	-24,212
2004	345,256	5.4	350,996	7.0	-5,740
2003	327,653		327,884		-231

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

VG Italy. The Markit/ADACI Business Activity Index remained almost unchanged at 44.3 in Mar relative to 44.1 in Feb, indicating sharp contraction of output of Italy’s services sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the services sector of Italy has experienced continuing contraction during the past ten months with likely contraction of GDP in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), remained almost unchanged at 47.9 in Mar relative to 47.8 in Feb for an eighth consecutive month of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396).Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Mar month ∆%: 0.5 Mar 12-month ∆%: 3.3 Blog 4/1/12
Producer Price Index	Feb month ∆%: 0.4 Feb 12-month ∆%: 3.2 Blog 4/1/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.4 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 3/18/12
Labor Report	Feb 2012 Participation rate 62.8% Employment ratio 56.9% Unemployment rate 9.3% Blog 4/8/12
Industrial Production	Jan month ∆%: -2.5 12 months ∆%: minus 5.0 Blog 3/11/12
Retail Sales	Jan month ∆%: 0.7 Jan 12-month ∆%: minus 0.8 Blog 3/25/12
Business Confidence	Mfg Mar 92.1, Nov 94.1 Construction Feb 81.8, Nov 87.5 Blog 4/1/12
Consumer Confidence	Consumer Confidence Mar 96.8, Feb 94.4 Economy Mar 87.4, Feb 86.8 Blog 4/1/12
Trade Balance	Balance Jan SA -€199 million versus Dec €466 Exports Jan month SA ∆%: -2.5; Imports Jan month SA ∆%: -0.5 Exports 12 months NSA ∆%: +4/3 Imports 12 months NSA ∆%: -2/6 Blog 3/18/12

Links to blog comments in Table IT:

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

3/4/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

Data on Italy’s labor market since 2004 are provided in Table VG-1. The unemployment rate has risen from 6.1 percent in Dec 2006 to 9.3 in Feb 2012. As in other advanced economies, unemployment has stabilized at high levels.

Table VG-1, Italy, Labor Report

	Participation Rate %	Employment Ratio %	Unemployment Rate %
Feb 2012	62.8	56.9	9.3
Jan	62.7	57.0	9.1
Dec 2011	62.6	57.0	8.9
Nov	62.4	56.9	8.8
Oct	62.4	57.0	8.5
Sep	62.2	56.8	8.6
Aug	62.2	57.0	8.3
Jul	62.3	57.1	8.3
Jun	62.1	56.9	8.2
May	62.2	57.0	8.3
Apr	62.0	56.9	8.2
Mar	62.3	57.1	8.2
Feb	61.9	56.9	8.1
Jan	62.0	56.8	8.2
Dec 2010	62.0	56.9	8.1
Dec 2009	62.2	57.1	8.3
Dec 2008	62.5	58.1	7.0
Dec 2007	63.3	59.1	6.5
Dec 2006	62.5	58.5	6.1
Dec 2005	62.5	57.8	7.4
Dec 2004	62.5	57.5	7.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/58277

Table VG-2 provides more detail on the labor report for Italy in Feb 2012. The level of employment decreased 29,000 from Jan and increased 16,000 from a year earlier. Unemployment increased 45,000 in Feb and 335,000 from a year earlier. A dramatic aspect found in most advanced economies is the high rate of unemployment of youth at 31.9 percent in Feb 2012 for ages 15 to 24.

Table VG-2, Italy, Labor Report

Feb 2012	1000s	Change from Prior Month 1000s	∆% from Prior Month	Change from Prior Year 1000s	∆% from Prior Year
EMP	22.918	-29	-0.1	16	0.1
UNE	2.354	45	1.9	335	16.6
INA   15-64	14.750	-35	-0.2	-340	-2.3
EMP %	56.9		-0.1		0.1
UNE %	9.3		0.2		1.2
Youth UNE %  15-24	31.9		0.9		4.1
INA % 15-64	37.2		-0.1		-0.9

Notes: EMP: Employed; UNE: Unemployed; INA 15-64: Inactive aged 15 to 64; EMP %: Employment Rate; UNE %: Unemployment Rate; Youth UNE % 15-24: Youth Unemployment Rate aged 15 to 24; INA % 15-64: Inactive Rate aged 15 to 64.

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/58277

Chart VG-1 of the Istituto Nazionale di Statistica provides the rate of unemployment in Italy. The rate stabilized in 2011 at around 8 percent until mid year and then climbed to 9.3 percent in Feb 2012.

Chart VG-1, Italy, Rate of Unemployment, %

Source: Istituto Nazionale di Statistica

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

VH United Kingdom. The Business Activity Index of the Markit/CIPS UK Services PMI^® increased from 53.8 in Feb to 55.3 in Mar for the highest reading since IIQ2010, indicating improvement over the entire IQ2012 and robust conditions in the UK’s services sector (

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). Chris Williamson, Chief Economist at Markit, finds that the combination of construction, manufacturing and services activity suggests that GDP growth in the UK in IQ2012 could be as high as 0.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased to 52.1 in Mar relative to 51.5 in Feb, for a high of ten months with the average reading of IQ2012 of 51.8 being the highest since IIQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that the data suggest growth of manufacturing output of about 0.3 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367).Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Feb month ∆%: 0.6 Feb 12-month ∆%: 3.6 Blog 3/25/12
Output/Input Prices	Output Prices: Feb 12 months NSA ∆%: 4.1; excluding food, petroleum ∆%: 3.0 Input Prices: Jan 12 months NSA ∆%: 7.3 Excluding ∆%: 5.4 Blog 3/11/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: 0.5 Blog 4/01/12
Industrial Production	Feb 2011/Feb 2011 NSA ∆%: Production Industries minus 2.3; Manufacturing minus 1.4 Blog 4/8/12
Retail Sales	Feb month SA ∆%: -0.8 Feb 12-month ∆%: +0.7 Blog 3/25/12
Labor Market	Nov-Jan Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.4% Blog 3/18/12
Trade Balance	Balance Jan minus ₤1762 million Exports Jan ∆%: 0.2 Nov-Jan ∆%: 4.7 Imports Jan ∆%: 1.5 Nov/Jan ∆%: 4.7 Blog 3/18/12

Links to blog comments in Table UK:

4/1/25 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

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

The UK Office for National Statistics provides the output of production industries with revisions. Table VH-1 incorporates the revisions released on Oct 11, 2011(http://www.ons.gov.uk/ons/rel/iop/index-of-production/august-2011/index.html) and the latest available data for Feb. Manufacturing accounts for 66.6 percent of the production industries of the UK and decreased 1.4 percent in the 12 months ending Feb. Capital goods industries grew at 0.5 percent in the 12 months ending in Feb 2012 and had been growing at very high rates during the current cyclical recovery but falling from the unsustainable high of 10.0 percent in the 12 months ending in Jan 2011. Mining and quarrying fell 21.1 percent in the 12 months ending in Jan 2012 and 9.6 percent in the 12 months ending in Feb. The 12-month rates of growth of the entire index of production industries registered declines for all 12 months from Mar 2011 to Feb 2012. Energy and mining have been the drivers of decline. The lower part of Table VH-1 provides rates of change of yearly values. Manufacturing output fell 9.6 percent in 2009 after falling 2.6 percent in 2008 but grew at 3.7 percent in the initial phase of the recovery in 2010.

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

	PROD IND	MNG	MFG	ENGY	CON DUR	CON NDUR	CAP
2012
Feb	-2.3	-9.6	-1.4	-5.4	-5.2	-0.1	0.5
Jan	-4.0	-21.1	-0.1	-15.9	-4.5	0.7	3.2
2011
Dec	-3.1	-15.4	0.9	-15.9	-3.7	0.1	5.7
Nov	-3.3	-15.0	-1.0	-12.7	0.6	-0.9	4.2
Oct	-2.5	-14.0	-0.4	-11.4	-1.3	-1.4	4.6
Sep	-1.9	-18.0	0.9	-11.9	-1.2	-0.1	6.1
Aug	-1.5	-15.7	0.9	-9.6	-1.5	1.7	3.7
Jul	-1.4	-16.8	1.9	-11.0	1.5	3.2	4.1
Jun	-0.7	-16.5	2.8	-10.1	6.5	2.3	7.1
May	-1.6	-22.3	3.3	-14.2	1.7	3.6	5.9
Apr	-2.0	-16.3	1.9	-12.4	1.1	3.8	4.1
Mar	-0.8	-16.7	2.8	-11.4	0.9	0.4	8.2
Feb	1.3	-12.3	4.7	-8.4	0.4	0.8	10.2
Jan	3.3	-3.2	5.6	-3.3	3.4	-0.3	10.0
2010
Dec	3.3	-4.8	4.3	0.8	-4.6	3.1	8.0
Nov	2.7	-6.2	5.1	-3.1	-9.4	1.2	9.5
Oct	2.7	-6.2	5.3	-3.1	-9.5	4.2	7.3
Sep	3.7	2.9	5.2	1.2	-9.0	2.1	9.7
Aug	3.8	0.3	6.2	-1.1	0.2	3.5	12.7
Jul	1.6	-8.9	5.0	-7.1	-1.4	-0.9	12.7
Jun	1.2	-9.5	3.9	-6.6	-6.2	0.5	9.6
May	2.5	-1.0	3.5	-1.4	-2.6	-3.3	12.2
Apr	0.9	-5.9	2.1	-3.6	-3.7	-6.3	10.1
Mar	2.2	-1.4	3.2	-0.9	0.2	-1.7	9.2
Feb	-0.6	-8.4	1.0	-5.9	-1.5	-2.7	7.4
Jan	-1.6	-8.7	-0.4	-5.1	-3.5	-1.4	4.9
2011/ 2010	-1.2	-15.2	2.0	-11.0	0.7	1.1	6.1
2010/ 2009	1.9	-4.9	3.7	-3.1	-4.3	-0.2	9.4
2009/ 2008	-9.0	-9.0	-9.6	-6.2	-7.5	-0.8	-10.7
2008/ 2007	-2.8	-6.5	-2.6	-2.9	-5.6	-1.9	-3.0
2007/ 2006	0.5	-2.5	0.8	-1.2	1.0	-1.7	2.5
2006/ 2005	0.0	-7.6	1.7	-5.4	0.3	0.7	2.9

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

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/february-2012/index.html

Percentage changes in the production industries and major components in the latest month relative to the prior month are shown in Table VH-2. Manufacturing fell in all months from Jun to Nov with the exception of no growth in Sep. In Dec, manufacturing grew 1.1 percent but decreased 0.3 percent in Jan 2012 and 1.0 percent in Feb 2012. Growth was stronger in the first five months to May with the exception of decline by 1.3 percent in Apr. Output of consumer durables has fallen sharply in Jul-Dec by cumulative 5.9 percent with growth only in Nov by 1.0 percent but jumped 1.6 percent in Jan 2012, declining 1.8 percent in Feb 2012. Output of capital goods fell 0.8 percent in Jul and then another 0.1 percent in Aug but grew strongly by 2.0 percent in Sep but declined slightly by 1.0 percent in Oct, increasing 1.5 percent in Nov and 0.8 percent in Dec, declining 1.0 percent in Jan 2012 and decreasing 2.0 percent in Feb 2012.

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

	PROD IND	MNG	MFG	ENGY	CON DUR	CON NDUR	CAP
2012
Feb	0.4	3.8	-1.0	5.2	-1.8	-0.5	-2.0
Jan	-0.6	-2.8	-0.3	-1.7	1.6	-0.5	-1.0
2011
Dec	0.4	-2.9	1.1	-1.7	-0.6	1.3	0.8
Nov	-0.5	-1.9	-0.1	-1.5	1.3	-0.2	1.5
Oct	-1.1	-0.2	-0.9	-1.8	-0.2	-0.7	-1.0
Sep	-0.2	-1.6	0.0	-1.2	-2.6	-2.2	2.0
Aug	0.2	2.5	-0.4	1.8	-1.8	0.3	-0.1
Jul	-0.4	-0.2	-0.2	-1.2	-2.1	-0.2	-0.8
Jun	0.1	0.7	-0.3	1.1	0.6	0.3	-0.2
May	0.9	-5.1	1.7	-1.1	0.5	0.7	2.8
Apr	-1.6	-0.8	-1.3	-2.2	-0.9	0.3	-3.3
Mar	0.1	-1.3	0.3	-0.8	0.6	1.2	0.9
Feb	-1.4	-9.4	0.3	-6.5	-1.0	0.2	1.6
Jan	0.3	4.3	0.7	-1.8	2.4	-1.0	1.4
2010
Dec	0.2	-2.5	-0.7	2.1	3.9	0.2	-0.6

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

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/february-2012/index.html

The weights of components of the production index and contributions by components to the monthly and 12-month percentage changes of volume are provided in Table VH-3. The 12-month rate of output of the production industries of minus 2.3 percent was driven by negative contribution of 1.31 percentage points of the general component of mining with the subcomponent of oil and gas contributing negative 1.20 percentage points. Manufacturing deducted 0.97 percentage points to growth of the production industries index. The contribution of manufacturing is strong because of its share of 66.6 percent in the production index with growth of minus 1.4 percent in 12 months. The contributions do not add exactly because of rounding. Manufacturing decreased 1.0 percent in Feb contributing minus 0.72 percentage points. Growth of mining by 3.8 percent contributed 0.46 percentage points.

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

	Weight %	Volume 12-Month ∆% Ending in Feb 2012	% Point Contrib.	Volume Month ∆% Feb 2012	% Point Contrib.
PROD IND	100.0	-2.3	-2.25	-0.4	0.41
MNG	16.4	-9.6	-1.31	3.8	0.46
MNG 06	14.1	-10.7	-1.20	4.6	0.45
MFG	66.6	-1.4	-0.97	-1.0	-0.72
ELEC	9.3	0.0	0.00	6.1	0.56
WATER & SEW	7.7	0.2	0.02	1.3	0.11

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

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/february-2012/index.html

Table VH-4 provides the breakdown of manufacturing 12-month and monthly growth and percentage contributions. The strongest negative contribution to 12-month growth was by rubber and plastic products and nonmetallic mineral products with 0.42 percentage points and 12-month growth of minus 8.9 percent. Computer, electronic and optical products (CI) deducted 0.29 percent with 12-month decline of 6.0 percent. Manufacture of food products, beverages and tobacco (CA) deducted 0.31 percentage points with decline of 2.4 percent in 12 months.

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

Sub-sector	% of production	12-Month Growth %	Contribution to production (% points)	Month on month growth (%)	Contribution to production (% points)
CA	11.2	-2.4	-0.31	-0.7	-0.09
CB	2.1	-3.2	-0.07	-4.9	-0.11
CC	5.9	0.0	0.00	0.1	0.01
CD	0.4	4.2	0.02	7.9	0.04
CE	5.5	-3.7	-0.19	-0.8	-0.04
CF	4.9	-0.7	-0.03	0.0	0.00
CG	5.0	-8.9	-0.42	-2.7	-0.12
CH	9.3	-0.4	-0.04	-0.5	-0.04
CI	4.9	-6.0	-0.29	2.3	-0.11
CJ	2.2	10.3	0.21	4.6	0.10
CK	4.4	0.7	0.03	-2.0	-0.10
CL	5.8	2.1	0.16	-2.0	-0.16
CM	4.9	-0.6	-0.03	-1.7	-0.09

Notes:

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

Source: http://www.ons.gov.uk/ons/rel/iop/index-of-production/february-2012/index.html

VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 9.9 percent by Fri Apr 6, 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	4/6/2012
Rate	1.1423	1.5914	1.192	1.3096
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/6/ 2012
Rate	8.2798	8.2765	6.8211	6.3068
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 1.3096/EUR or by 9.9 percent {[(1.3096/1.192)-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 6.3068/USD on Fri Apr 6, 2012, or by an additional 7.5 percent, for cumulative revaluation of 23.8 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 yuan depreciated 0.1 percent in the week of Apr 6, 2012. The rate of CNY 6.3068/USD on Apr, 2012 is equivalent to revaluation of 7.5 percent from CNY 6.8211 on Jul 15, 2008 {[(6.3068/6.8211) – 1]100} and cumulative 23.8 percent from CNY 8.2765 on Jul 21, 2005 {[(6.3068/8.2765) -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	4/6 /2012
Rate	1.1423	1.5914	1.192	1.3096
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/6/2012
Rate	8.2798	8.2765	6.8211	6.3068
Weekly Rates	3/16/2012	3/23/2012	3/30/2012	4/6/2012
CNY/USD	6.3226	6.3008	6.2976	6.3068
∆% from Earlier Week*	-0.2	0.3	0.1	-0.1

*Negative sign is depreciation, positive sign is appreciation

Source: Table VI-1 and same table in earlier blog posts

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table VI-3. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx

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 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html). (ii) The labor market continues fractured with 29.4 million unemployed or underemployed (see Section I in this blog comment). 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 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 34.8 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 36.7 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

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:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e 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(π_t, U_t) (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 (π_t, U_t - 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: R_t 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; R_t+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; i_f is the domestic interest rate of the high-yielding country where investment will be made; i_usd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; i_f >i_usd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); S_t is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal S_t in the local currency debt of the foreign country provides a profit of:

π = (1 + i_f)(R_tS_t)(1/R_t+τ) – (1 + i_usd)S_t (3)

The profit from the carry trade, π, is nonnegative when:

(1 + i_f)/ (1 + i_usd) ≥ R_t+τ/R_t (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 i_f be 0.10 (10 percent), i_usd 0.005 (0.5 percent), S_t USD100 and R_t 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 R_t+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 A_ij = f(r, x) where A_ij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, r_i, 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 A_ij 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 4/6/12,” 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 with exception of China’s Shanghai Composite show positive change in valuation in column “∆% Trough to 4/6/12” 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. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 34.8 percent and S&P 500 36.7 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 4/6/12” had double digit gains relative to the trough around Jul 2, 2010 but now only three valuation show increase of less than 10 percent: China’s Shanghai Composite is 3.2 percent below the trough; STOXX 50 of Europe is 5.7 percent above the trough; and Japan’s Nikkei Average is 9.8 percent above the trough. DJ UBS Commodities is 14.3 percent above the trough; Dow Global is 14.5 percent above the trough; and DAX is 19.5 percent above the trough. Japan’s Nikkei Average is 9.8 percent above the trough on Aug 31, 2010 and 15.0 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9688.45 on Fri Apr 6, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 5.5 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 9.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 4/6/12” in Table VI-4 shows declines of all valuations of risk financial assets in the week of Apr 6, 2012, with exception of gain of 1.9 percent by China’s Shanghai Composite, 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 4/6/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Apr 6, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 4/6/12” but also relative to the peak in column “∆% Peak to 4/6/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 16.6 percent, S&P 500 14.9 percent and Dax 7.0 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 12.0 percent, Nikkei Average by 15.0 percent, Shanghai Composite by 27.1 percent, STOXX 50 by 10.4 percent and Dow Global by 6.5 percent. DJ UBS Commodities Index is now 2.3 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 4/6 /12	∆% Week 4/6/ 12	∆% Trough to 4/6 12
DJIA	4/26/ 10	7/2/10	-13.6	16.6	-1.1	34.8
S&P 500	4/23/ 10	7/20/ 10	-16.0	14.9	-0.7	36.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	-12.0	-2.0	10.5
Dow Global	4/15/ 10	7/2/10	-18.4	-6.5	-2.4	14.5
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.4	-1.5	11.4
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-15.0	-3.9	9.8
China Shang.	4/15/ 10	7/02 /10	-24.7	-27.1	1.9	-3.2
STOXX 50	4/15/10	7/2/10	-15.3	-10.4	-1.3	5.7
DAX	4/26/ 10	5/25/ 10	-10.5	7.0	-2.5	19.5
Dollar Euro	11/25 2009	6/7 2010	21.2	13.4	1.8	-9.9
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-2.3	-0.2	14.3
10-Year T Note	4/5/ 10	4/6/10	3.986	2.058

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 Apr 6, 2012, shows that the S&P 500 is now 15.3 percent above the Apr 26, 2010 level and the DJIA is 16.6 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from  prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6
Feb 3	1.6	14.8	2.2	11.0
Feb 10	-0.5	14.2	-0.2	10.8
Feb 17	1.2	15.6	1.4	12.3
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
Apr 6	-1.1	16.6	-0.7	15.3

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

Table VI-6, updated with every blog comment, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 9.0 percent to ZAR 7.8874/USD on Apr 6, 2012, which is still 31.9 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 6.5 percent stronger at SGD 1.2605/USD on Apr 6 relative to the trough of depreciation but still stronger by 18.8 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 5.1 percent relative to the trough to BRL 1.8259/USD on Apr 6, 2012 but still stronger by 24.9 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the 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	Apr 6, 2012	∆T Apr 6, 2012	∆P Apr 6, 2012
EUR USD	7/15 2008	6/7 2010		4/6 2012
Rate	1.59	1.192		1.3096
∆%			-33.4		9.0	-21.4
JPY USD	8/18 2008	9/15 2010		4/6 2012
Rate	110.19	83.07		81.63
∆%			24.6		1.7	25.9
CHF USD	11/21 2008	12/8 2009		4/6 2012
Rate	1.225	1.025		0.9169
∆%			16.3		10.5	25.2
USD GBP	7/15 2008	1/2/ 2009		4/6 2012
Rate	2.006	1.388		1.5874
∆%			-44.5		12.6	-26.4
USD AUD	7/15 2008	10/27 2008		4/6 2012
Rate	1.0215	1.6639		1.0309
∆%			-62.9		41.7	5.0
ZAR USD	10/22 2008	8/15 2010		4/6 2012
Rate	11.578	7.238		7.8874
∆%			37.5		-9.0	31.9
SGD USD	3/3 2009	8/9 2010		4/6 2012
Rate	1.553	1.348		1.2605
∆%			13.2		6.5	18.8
HKD USD	8/15 2008	12/14 2009		4/6 2012
Rate	7.813	7.752		7.7647
∆%			0.8		0.2	0.6
BRL USD	12/5 2008	4/30 2010		4/6 2012
Rate	2.43	1.737		1.8259
∆%			28.5		-5.1	24.9
CZK USD	2/13 2009	8/6 2010		4/6 2012
Rate	22.19	18.693		18.876
∆%			15.7		-1.0	14.9
SEK USD	3/4 2009	8/9 2010		4/6 2012
Rate	9.313	7.108		6.7511
∆%			23.7		5.0	27.5
CNY USD	7/20 2005	7/15 2008		4/6 2012
Rate	8.2765	6.8211		6.3068
∆%			17.6		7.5	23.8

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

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

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

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/RXI$US_N.B.EU%7d

Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.058 percent at the close of market on Fri Apr 6, 2012 would be equivalent to price of 105.1010 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 3.8 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 Apr 4, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2848 billion, or $2.8 trillion, with portfolio of long-term securities of $2574 billion, or $2.6 trillion, consisting of $1571 billion Treasury nominal notes and bonds, $70 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 $1560 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
04/06/12	2.058	105.1010	3.8

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

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

VII Economic Indicators. Crude oil input in refineries increased 0.3 percent to 14,507 thousand barrels per day on average in the four weeks ending on Mar 30, 2012 from 14,467 thousand barrels per day in the four weeks ending on Mar 23, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 83.8 percent on Mar 30, 2012, which is slightly lower than 84.0 percent on Apr 1, 2011 and slightly higher than 83.3 percent on Mar 23, 2012. Imports of crude oil increased 3.0 percent from 8,693 thousand barrels per day on average in the four weeks ending on Mar 23 to 8,958 thousand barrels per day in the week of Mar 30. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 9.8 million barrels per day last week, up by 505 thousand barrels per day from the previous week [Mar 30]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight increase in utilization in refineries with sharply increasing imports at the margin in the prior week resulted in sharp increase of commercial crude oil stocks by 9.0 million barrels from 353.4 million barrels on Mar 23 to 362.4 million barrels on Mar 30. Motor gasoline production increased 1.1 percent to 8,828 thousand barrels per day in the week of Mar 30 from 8,732 thousand barrels per day on average in the week of Mar 23. Gasoline stocks decreased 1.5 million barrels and stocks of fuel oil were unchanged. Supply of gasoline fell from 8,906 thousand barrels per day on Apr 1, 2011, to 8,572 thousand barrels per day on Mar 30, 2012, or by 3.8 percent, while fuel oil supply fell 5.0 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 decrease in the WTI price of crude oil by 4.2 percent from Apr 1, 2011 to Mar 30, 2012. Gasoline prices rose 7.0 percent from Apr 4, 2011 to Apr 2, 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	3/30/12	3/23/12	4/1/11
Crude Oil Refineries Input	14,507 Week       ∆%: +0.3	14,467	14,309
Refinery Capacity Utilization %	83.8	83.3	84.0
Motor Gasoline Production	8,828 Week      ∆%: +1.1	8,732	8,819
Distillate Fuel Oil Production	4,254 Week     ∆%: 0.7	4,226	4,243
Crude Oil Imports	8,958 Week        ∆%: +3.0	8,693	8,903
Motor Gasoline Supplied	8,572 ∆% 2012/2011= -3.8%	8,442	8,906
Distillate Fuel Oil Supplied	3,561 ∆% 2012/2011 = -5.0%	3,548	3,748
	3/30/12	3/23/12	4/1/11
Crude Oil Stocks Million B	362.4     ∆= +9.0 MB	353.4	357.7
Motor Gasoline Million B	221.9    ∆= -1.5 MB	223.4	216.7
Distillate Fuel Oil Million B	135.9 ∆= 0.0 MB	135.9	153.5
WTI Crude Oil Price $/B	103.03 ∆% 2012/2011 -4.2	106.43	107.55
	4/2/12	3/26/12	4/4/11
Regular Motor Gasoline $/G	3.941 ∆% 2012/2011 +7.0	3.918	3.684

B: barrels; G: gallon

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

Chart VII-1 of the US Energy Information Administration shows 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 followed by two sharp weekly increases.

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 crude oil stocks since Jun 2010. There is a recent spike in crude oil stocks.

Chart VII-2, US, Distillate Fuel Oil Stocks

Source: US Energy Information Administration

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

Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart IIC-13, 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 6,000 from 363,000 on Mar 24 to 357,000 on Mar 31. Claims not adjusted for seasonality fell 12,054 from 323,393 on Mar 24 to 311,339 on Mar 31. 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 31, 12	357,000	311,339	361,750
Mar 24, 12	363,000	323,393	366,000
Change	-6,000	-12,054	-4,250
Mar 17, 12	364,000	319,498	368,500
Prior Year	400,000	353,817	402,250

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

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

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 599,299 on Mar 28, 2009 to 353,817 on Apr 2, 2011, and now to 328,576 on Mar 31, 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 31, 2001	328,576	388,000
Mar 30, 2002	386,296	479,000
Mar 29, 2003	371,692	436,000
Mar 27, 2004	296,776	340,000
Apr 4, 2005	294,994	335,000
Apr 1, 2006	253,985	291,000
Mar 31, 2007	268,218	307,000
Mar 29, 2008	342,189	386,000
Mar 28, 2009	599,299	667,000
Apr 3, 2010	421,710	484,000
Apr 2, 2011	353,817	400,000
Mar 31, 2012	328,576	357,000

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, 0.14 percent for six months, 0.19 percent for 12 months, 0.33 percent for two years, 0.45 percent for three years, 0.91 percent for five years, 1.44 percent for seven years, 2.07 percent for ten years and 3.22 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 2011 NSA	∆% 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.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bls.gov/web/empsit/cpseea01.htm

http://data.bls.gov/pdq/SurveyOutputServlet

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

© Carlos M. Pelaez, 2010, 2011, 2012