Recovery without Hiring, Ten Million Fewer Full-Time Jobs, Youth Unemployment, Bank Risk Management, World Financial Turbulence and Global Economic Slowdown: Part II

 

Recovery without Hiring, Ten Million Fewer Full-Time Jobs, Youth Unemployment, Bank Risk Management, World Financial Turbulence and Global Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Recovery without Hiring

IA Hiring Collapse

IB Labor Underutilization

IC Ten Million Fewer Full-Time Jobs

ID Youth Unemployment

II United States International Trade

IIA United States International Trade Balance

IIB United States Import and Export Prices

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

 

V World Economic Slowdown. Table I-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) to show GDP in dollars in 2010 and the growth rate of real GDP of the world and selected regional countries from 2011 to 2014. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.5 percent in 2012 but accelerating to 4.1 percent in 2013, 4.4 percent in 2014 and 4.5 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,670 billion of world output of $69,660 billion, or 48.3 percent, but are projected to grow at much lower rates than world output, 2.1 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole. While the world would grow 17.6 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.5 percent. The difference in dollars of 2011 is rather high: growing by 17.6 percent would add $12.3 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.5 percent would add $5.9 trillion of output to the world, or about the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,237 billion, or 36.2 percent of world output. The EMDEs would grow cumulatively 26.5 percent or at the average yearly rate of 6.1 percent, contributing $6.7 trillion from 2012 to 2015 or the equivalent of somewhat less than the GDP of $7,298 billion of China in 2011. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,317 billion, or 19.1 percent of world output, which is equivalent to 39.6 percent of the combined output of the major advanced economies of the G7.

Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth

	GDP USD 2011	Real GDP ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World	69,660	3.5	4.1	4.4	4.5
G7	33,670	1.5	1.9	2.3	2.5
Canada	1,737	2.1	2.2	2.4	2.4
France	2,776	0.5	1.1	1.9	1.9
DE	3,577	0.6	1.5	1.3	1.3
Italy	2,199	-1.9	-0.3	0.5	1.0
Japan	5,869	2.0	1.7	1.5	1.3
UK	2,418	0.8	2.0	2.5	2.6
US	15,094	2.1	2.4	2.9	3.3
Euro Area	13,115	-0.3	0.9	1.4	1.6
DE	3,577	0.6	1.5	1.3	1.3
France	2,776	0.5	1.1	1.9	1.9
Italy	2,199	-1.9	-0.3	0.5	1.0
POT	239	-3.3	0.3	2.1	1.9
Ireland	218	0.5	2.1	2.5	2.8
Greece	303	-4.7	0.0	2.5	3.1
Spain	1,494	-1.8	0.1	1.6	1.6
EMDE	25,237	5.7	6.0	6.2	6.3
Brazil	2,493	3.0	4.2	4.0	4.1
Russia	1,850	4.0	3.9	3.9	3.9
India	1,676	6.9	7.3	7.5	7.7
China	7,298	8.2	8.8	8.7	8.7

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, fell from 55.4 in Mar to 52.2 in Apr, which is the lowest reading in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). Sharp deceleration in services offset stronger manufacturing. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth easing into the middle of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, improved marginally at 51.4 in Apr relative to 51.1 in Mar, for a fifth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520). 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^™ finds consistency of the index with global manufacturing growth at annual equivalent 2.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520).

The HSBC Brazil Services PMI^™ with Composite PMI data, compiled by Markit, fell marginally from 53.4 in Mar to 52.7 in Apr, suggesting sound activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9533). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI increased to 54.4 in Apr relative to 53.8 in Feb, but expansion of services in the Brazilian economist has continued during 33 consecutive months even at a lower reading than 55.3 in IQ2012 (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^™) fell slightly from 51.1 in Mar to 49.3 in Apr, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496). Andre Loes, Chief Economist, Brazil at HSBC, finds broad weakness in the index with all segments below the borderline of contraction at 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496 ).

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table ESV-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 12.7 percent for Portugal (POT), 14.4 percent for Ireland, 17.3 percent for Greece, 21.6 percent for Spain and 8.4 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.7 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force

	% Labor Force 2011	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015
World	NA	NA	NA	NA	NA
G7	7.7	7.4	7.3	7.0	6.7
Canada	7.5	7.4	7.3	7.1	6.9
France	9.7	9.9	10.1	9.8	9.4
DE	6.0	5.6	5.5	5.3	5.3
Italy	8.4	9.5	9.7	9.8	9.5
Japan	4.5	4.5	4.4	4.3	4.2
UK	8.0	8.3	8.2	7.8	7.4
US	8.9	8.2	7.9	7.5	6.9
Euro Area	10.1	10.9	10.8	10.5	10.1
DE	6.0	5.6	5.5	5.3	5.3
France	9.7	9.9	10.1	9.8	9.4
Italy	8.4	9.5	9.7	9.8	9.5
POT	12.7	14.3	13.9	13.2	12.4
Ireland	14.4	14.5	13.8	12.9	12.0
Greece	17.3	19.4	19.4	18.2	16.8
Spain	21.6	24.2	23.9	22.8	21.9
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	7.5	6.5	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.0	4.0	4.0	4.0

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx

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

Table USA, US Economic Indicators

Consumer Price Index	Mar 12 months NSA ∆%: 2.7; ex food and energy ∆%: 2.3 Mar month ∆%: 0.3; ex food and energy ∆%: 0.2 Blog 4/15/12
Producer Price Index	Apr 12-month NSA ∆%: 1.9; ex food and energy ∆% 2.7 Apr month SA ∆% = -0.2; ex food and energy ∆%: 0.2 Blog 5/13/12
PCE Inflation	Mar 12-month NSA ∆%: headline 2.1; ex food and energy ∆% 2.0 Blog 5/6/12
Employment Situation	Household Survey: Apr Unemployment Rate SA 8.1% Blog calculation People in Job Stress Apr: 27.8 million NSA Establishment Survey: Apr Nonfarm Jobs +115,000; Private +130,000 jobs created  Mar 12-month Average Hourly Earnings Inflation Adjusted ∆%: minus 0.5% Blog 5/6/12
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 Mar 2012 3.900 million lower by 0.873 million than 4.773 million in Mar 2006 Blog 5/13/12
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 IQ2012 SAAR ∆%: 2.2 IQ2012/IQ2011 ∆%: 2.1 Blog 4/29/12
Personal Income and Consumption	Mar month ∆% SA Real Disposable Personal Income (RDPI) Mar month SA ∆% minus 0.2 Real Personal Consumption Expenditures (RPCE): 0.1 12-month NSA ∆%: RDPI: 0.6; RPCE ∆%: 1.2 Blog 5/6/2012
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	IQ2012 SA ∆%: 0.4 Mar 12 months ∆%: 1.9 Blog 4/29/12
Industrial Production	Mar month SA ∆%: 0.0 Feb 12 months SA ∆%: 3.8 Manufacturing Mar SA ∆% Minus 0.3 Mar 12 months SA ∆% 4.8, NSA 4.7 Capacity Utilization: 78.6 Blog 4/22/12
Productivity and Costs	Nonfarm Business Productivity IQ2012∆% SAAE -0.5; IQ2012/IQ2011 ∆% 0.5; Unit Labor Costs SAAE IQ2012 ∆% 2.0; IQ2012/IQ2011 ∆%: 2.1 Blog 5/6/2012
New York Fed Manufacturing Index	General Business Conditions From Mar 20.21 to Apr 6.56 New Orders: From Mar 6.84 to Apr 6.48 Blog 4/22/12
Philadelphia Fed Business Outlook Index	General Index from Mar 12.5 to Apr 8.5 New Orders from Feb 3.3 to Feb 2.7 Blog 4/22/12
Manufacturing Shipments and Orders	Mar New Orders SA ∆%: -1.5; ex transport ∆%: 0.0 Jan-Mar New Orders NSA ∆%: 7.8; ex transport ∆% 7.3 Blog 5/6/12
Durable Goods	Mar New Orders SA ∆%: minus 4.2; ex transport ∆%: minus 1.1 Jan-Mar 12/Jan-Mar 11 NSA New Orders ∆%: 9.1; ex transport ∆% : 8.2 Blog 4/29/12
Sales of New Motor Vehicles	Apr 2012 4,651,943; Apr 2011 4,217,599. Apr SAAR 14.4 million, Mar SAAR 14/37 million, Mar 2011 SAAR 13.17 million Blog 5/6/12
Sales of Merchant Wholesalers	Jan-Mar 2012/Jan-Mar 2011 NSA ∆%: Total 9.0; Durable Goods: 11.2; Nondurable Goods 7.3 Blog 5/13/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Feb 12/Feb 11 NSA ∆%: Sales Total Business 11.9; Manufacturers 11.4 Retailers 10.2; Merchant Wholesalers 14.0 Blog 4/22/12
Sales for Retail and Food Services	Jan-Mar 2012/Jan-Mar 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 7.9 Blog 4/22/12
Value of Construction Put in Place	Mar SAAR month SA ∆%: minus 0.1 Mar 12-month NSA: 5.4 Blog 5/6/12
Case-Shiller Home Prices	Feb 2012/Feb 2011 ∆% NSA: 10 Cities minus 3.6; 20 Cities: minus 3.5 ∆% Feb SA: 10 Cities 0.1 ; 20 Cities: 0.2 Blog 4/29/12
FHFA House Price Index Purchases Only	Feb SA ∆% 0.3; 12 month ∆%: 0.4 Blog 4/29/12
New House Sales	Mar 2012 month SAAR ∆%: minus 7.1 Jan-Mar 2012/Jan-Mar 2011 NSA ∆%: 16.9 Blog 4/29/12
Housing Starts and Permits	Mar Starts month SA ∆%: Minus 5.8; Permits ∆%: +4.5 Jan-Mar 2012/Jan-Mar 2011 NSA ∆% Starts 19.2; Permits  ∆% 30.5 Blog 4/22/12
Trade Balance	Balance Mar SA -$51,825 million versus Feb -$45,416 million Exports Mar SA ∆%: 2.9 Imports Mar SA ∆%: 5.2 Goods Exports Jan-Mar 2012/2011 NSA ∆%: 8.6 Goods Imports Jan-Mar 2011/2011 NSA ∆%: 8.6 Blog 5/13/12
Export and Import Prices	Apr 12-month NSA ∆%: Imports 0.5; Exports 0.7 Blog 5/13/12
Consumer Credit	Mar ∆% annual rate: 10.2 Blog 5/13/12
Net Foreign Purchases of Long-term Treasury Securities	Feb Net Foreign Purchases of Long-term Treasury Securities: $10.1 billion Major Holders of Treasury Securities: China $1179 billion; Japan $1096 billion; Total Foreign Treausy Holdings Feb $5100 billion Blog 4/22/12
Treasury Budget	Fiscal Year Oct-Apr 2012/2011 ∆%: Receipts 5.6; Outlays -3.5; Individual Income Taxes 5.0 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Apr $719,859 million Blog 03/18/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 5/13/2012
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: 5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.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

Sales and inventories of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-1 for Mar 2012 and percentage changes from the prior month and for Jan-Mar 2012 relative to Jan-Mar 2011. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 9.0 percent in Jan-Mar 2012 relative to Jan-Mar 2011 and increased 0.5 percent in Mar 2012 relative to Feb 2012. The value of total sales is quite high at $1194.8 billion, exceeding four trillion dollars in a year. Value in the breakdown is useful in identifying relative importance of individual categories. Sales of durable goods in Jan-Mar 2012 reached $535.3 billion, over two trillion for a year, decreasing 0.6 percent in Mar relative to Feb and increasing 11.2 percent in Jan-Mar 2012 relative to Jan-Mar 2011. Sales of automotive products reached $96.2 billion in Jan-Mar 2012, decreasing 1.7 percent in the month and increasing 24.0 percent relative to a year earlier. There is strong performance of 20.1 percent in machinery and 5.2 percent in electrical products. Sales of nondurable goods rose 7.3 percent. The influence of commodity prices moderated as shown by decrease of 8.0 percent in farm products and increase of only 11.2 percent in petroleum products even with increase of 2.7 percent in Mar alone. The final three columns in Table VA-1 provide the value of inventories and percentage changes from the prior month and relative to the same month a year earlier. US total inventories of wholesalers increased 0.3 percent in Mar and increased 8.3 percent relative to a year earlier. Inventories of durable goods of $279.4 billion are 57.8 percent of total inventories of $483.7 billion and rose 10.8 percent relative to a year earlier. Automotive inventories jumped 15.4 percent relative to a year earlier. Machinery inventories of $72.3 billion rose 14.8 percent relative to a year earlier. Inventories of nondurable goods of $204.3 billion are 42.2 percent of the total and increased 5.0 percent relative to a year earlier. Inventories of farm products increased 3.3 percent in Mar relative to Feb and declined 11.9 percent relative to a year earlier. Inventories of petroleum products decreased 5.9 percent in Mar and increased 7.1 percent relative to a year earlier.

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

2012	Sales $ Billions Jan-Mar 2012 NSA	Sales Mar ∆% SA	Sales∆% Jan-Mar 2012 from Jan-Mar 2011  NSA	INV $ Billions Mar 2012 NSA	INV  Mar ∆% SA	INV  ∆% Mar 2012 from Mar 2011 NSA
US Total	1194.8	0.5	9.0	483.7	0.3	8.3
Durable	535.3	-0.6	11.2	279.4	1.0	10.8
Automotive	96.2	-1.7	24.0	44.7	0.4	15.4
Prof. Equip.	91.9	0.3	2.8	30.8	1.1	3.5
Computer Equipment	46.8	-0.4	0.8	11.3	0.9	2.3
Electrical	90.2	-0.7	5.2	39.9	0.0	6.9
Machinery	93.5	1.7	20.1	72.3	1.6	14.8
Not Durable	659.6	1.5	7.3	204.3	-0.6	5.0
Drugs	108.1	0.2	5.6	35.3	1.7	7.3
Apparel	33.6	-0.1	3.9	20.7	0.6	8.1
Groceries	142.4	-0.8	11.9	33.8	-0.6	8.1
Farm Products	54.4	4.3	-8.0	24.5	3.3	-11.9
Petroleum	188.7	2.7	11.2	28.5	-5.9	7.1

Note: INV: inventories

Source: US Census Bureau

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

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-2. The total for the US has remained almost unaltered at 1.17 in Jan-Mar 2012 and Mar 2011. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.52 in Mar 2012 relative to 1.50 in Feb 2012 and 1.48 in Mar 2011. Computer equipment operates with low inventory/sales ratios of 0.72 in Mar 2012 relative to 0.70 in Feb 2011 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.88 in Mar 2012, which is almost equal to 0.90 in Feb 2012 and equal to 0.88 in Mar 2011. There are exceptions such as 1.91 in Mar 2012 in apparel that is higher than 1.81 in Mar 2011 and 1.90 in Mar 2011 perhaps because of the expectation of stronger spring and summer sales.

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

	Mar 2012	Feb 2012	Mar 2011
US Total	1.17	1.17	1.15
Durable	1.52	1.50	1.48
Automotive	1.39	1.36	1.46
Prof. Equip.	0.99	0.99	0.98
Comp. Equip.	0.72	0.71	0.70
Electrical	1.32	1.31	1.24
Machinery	2.25	2.25	2.35
Not Durable	0.88	0.90	0.88
Drugs	0.96	0.95	0.94
Apparel	1.91	1.90	1.81
Groceries	0.72	0.71	0.71
Farm Products	1.22	1.24	1.31
Petroleum	0.42	0.46	0.43

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

Chart VA-1 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2011 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.

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

Source: US Census Bureau

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

The US Treasury budget for fiscal year 2012 in the first seven months of Oct-Dec 2011 and Jan-Apr 2012 is shown in Table VA-3. Receipts increased 5.6 percent in the first seven months of fiscal year 2012 relative to the same seven months in fiscal year 2011 or Oct-Dec 2010 and Jan-Mar 2011. Individual income taxes have grown 5.0 percent relative to the same period a year earlier. Outlays were lower by 3.5 percent relative to a year earlier. The final two rows of Table VA-3 provide the projection of the Congressional Budget Office (CBO) of the deficit for fiscal year 2012 at $1.3 trillion not very different from that in fiscal year 2011. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.1 trillion in four years, which is the worst fiscal performance since World War II.

Table VA-3, US, Treasury Budget in Fiscal Year to Date Million Dollars

Fiscal Year 2012	Oct 2011 to Apr 2012	Oct 2010 to Apr 2011	∆%
Receipts	1,383,191	1,309,439	5.6
Outlays	2,103,050	2,179,244	-3.5
Deficit	-719,859	-869,805	NA
Individual Income Taxes	662,708	631,159	5.0
Social Insurance	332,926	338,605	-1.7
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
CBO Forecast Fiscal Year 2012	2,522	3,601	-1,079
Fiscal Year 2011	2,302	3,599	-1,296
Fiscal Year 2010	2,162	3,456	-1,294
Fiscal Year 2009	2,105	3,518	-1,413
Fiscal Year 2008	2,524	2,983	-459

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

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

The report of consumer credit outstanding of the Board of Governors of the Federal Reserve System is provided in Table VA-4. The data are in seasonally-adjusted annual rates both percentage changes and billions of dollars. The estimate of consumer credit “covers most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate (http://www.federalreserve.gov/releases/g19/current/default.htm). Consumer credit is divided into two categories. (1) Revolving consumer credit (REV in Table VA-4) consists mainly of unsecured credit cards. (2) Non-revolving consumer credit (NREV in Table VA-4) “includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers or vacations” (http://www.federalreserve.gov/releases/g19/current/default.htm). In Mar 2012, revolving credit was $804 billion, or 31.6 percent of total consumer credit of $2542 billion, and non-revolving credit was $1739 billion, or 68.4 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: 8.4 percent total, minus 4.4 percent revolving and 14.5 percent non-revolving. Growth continued in Feb 2012 with 4.4 percent in total, minus 3.3 percent in revolving and 8.1 percent in non-revolving. Consumer credit jumped in Mar 2012 with 10.2 percent total, 7.8 percent revolving and 11.3 percent non-revolving.

Table VA-4, US, Consumer Credit Outstanding, SA, Annual Rate and Billions of Dollars

	Total ∆%	REV ∆%	NRV ∆%	Total $B	REV $B	NREV $B
2012
Mar	10.2	7.8	11.3	2542	804	1739
Feb	4.4	-3.3	8.1	2521	799	1723
Jan	8.4	-4.4	14.5	2512	801	1711
IQ	7.7	-0.1	11.4	2542	804	1739
2011
Dec	7.9	5.5	9.0	2494	804	1691
Nov	9.8	9.9	9.7	2478	800	1678
IVQ	6.9	5.9	7.4	2494	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	2494	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-2 of the Board of Governors of the Federal Reserve System provides percentage changes of total consumer credit outstanding in the US since 1944. The shaded bars are the cyclical contraction dates of the National Bureau of Economic Research. Consumer credit is cyclical, declining during contractions as shown by negative percentage changes during economic contractions.

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

Source: Board of Governors of the Federal Reserve System

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

VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf). For fiscal 2012, the forecast is of growth of GDP between 2.1 and 2.4 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.4 to 0.7 percent and the all items CPI less fresh food of 0.1 to 0.4 percent.

Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year

Fiscal Year Date of Forecast	Real GDP	Domestic CGPI	CPI All Items Less Fresh Food
2011
Apr 2012	-0.2 to –0.2 [-0.2]	+1.7	0.0
Jan 2012	-0.4 to –0.3 [-0.4]	+1.8 to +1.9 [+1.8]	-0.1 to 0.0 [-0.1]
2012
Apr 2012	+2.1 to +2.4 [+2.3]	+0.4 to +0.7 [+0.6]	+0.1 to +0.4 [+0.3]
Jan 2012	+1.8 to +2.1 [+2.0]	-0.1 to +0.2 [+0.1]	0.0 to +0.2 [+0.1]
2013
Apr 2012	+1.6 to +1.8 [+1.7]	+0.7 to +0.9 [+0.8]	+0.5 to +0.7 [+0.7]
Jan 2012	+1.4 to +1.7 [+1.6]	+0.6 to 1.0 [+0.8]	+0.4 to +0.5 [+0.5]

Figures in brackets are the median of forecasts of Policy Board members

Source: Policy Board, Bank of Japan

http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf

Private-sector activity in Japan expanded at lower pace with the Markit Composite Output PMI^™ Index declining from 53.2 in Mar to 51.3 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). Alex Hamilton, economist at Markit and author of the report, finds softer conditions in Japan relative to Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit Business Activity Index of Services decreased from 53.7 in Mar to 51.0 in Apr, also showing slower pace ()http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, fell from 51.1 in Mar to 50.7 in Apr, for the highest reading in seven months, indicating marginal improvement in manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9457). 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=9457).

Table JPY provides the country data 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	Mar ∆% 0.6 12 months ∆% 0.6 Blog 4/15/12
Consumer Price Index	Mar NSA ∆% 0.5 Mar 12 months NSA ∆% 0.5 Blog 4/29/12
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	Mar Unemployed 3.07 million Change in unemployed since last year: minus 150 thousand Unemployment rate: 4.5% Blog 4/29/12
All Industry Indices	Feb month SA ∆% minus 0.1 12-month NSA ∆% 1.3 Blog 4/29/12
Industrial Production	Mar SA month ∆%: 1.0 12-month NSA ∆% 13.9 Blog 4/29/12
Machine Orders	Total Feb ∆% -14.5 Private ∆%: -3.0 Feb ∆% Excluding Volatile Orders 4.8 Blog 4/15/12
Tertiary Index	Feb month SA ∆% 0.0 Feb 12 months NSA ∆% 0.4 Blog 4/22/12
Wholesale and Retail Sales	Mar 12 months: Total ∆%: +3.0 Wholesale ∆%: +0.5 Retail ∆%: +10.3 Blog 4/29/12
Family Income and Expenditure Survey	Mar 12-month ∆% total nominal consumption 4.1, real 3.4 Blog 4/29/12
Trade Balance	Exports Mar 12 months ∆%: +5.9 Imports Mar 12 months ∆% +10.5 Blog 4/22/12

Links to blog comments in Table JPY:

429/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

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

7/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm). Table CIPMS provides this index and components from Jan to Apr 2012. Although the index fell from 58.0 in Mar to 56.1 in Apr, it is higher than in Jan and remains above the threshold of contraction of 50.0.

Table CIPMS, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Apr	56.1	52.7	57.9	50.3	66.1
Mar	58.0	53.5	60.2	52.0	66.6
Feb	57.3	52.7	59.0	51.2	63.8
Jan	55.7	52.2	58.2	51.1	65.3

Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm

Chart CIPMS provides the index from Apr 2011 to Apr 2012. There was slowing of the general index in Apr after the increase in Jan-Mar.

Chart CIPMS, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm

China estimates a manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120503_402802871.htm). Chart CIPMM provides the index from Apr 2011 to Apr 2012. There deceleration from 52.9 in Apr 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012

Chart CIPMM, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120503_402802871.htm

The HSBC China Services PMI^™, compiled by Markit, finds marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 49.9 in Mar to 51.4 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China will reach bottom in IIQ2012 because of improving conditions in services originating in new business together with moderate manufacturing conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484).The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, increased to 49.3 in Apr from 48.3 in Feb, in a six consecutive month of declining conditions in manufacturing in China but at a marginal rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479). The index for the first quarter of 2012 was the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilization with likely bottom of growth of 8.1 percent growth of GDP in IQ2012 that may increase to 8.5 percent for the second half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479).

Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy. Data still not fully available at the National Bureau of Statistics of China (http://www.stats.gov.cn/enGliSH/), which will be analyzed in this blog on Apr 20, show industrial production growing at 9.3 percent for the lowest rate in three years, retail sales growing at 14.1 percent in Apr relative to 15.2 percent in Mar and export growth falling from 8.9 percent in Mar to 4.9 percent in Apr as analyzed below.

Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Apr 12-month ∆%: minus 0.7 Apr month ∆%: 0.2 Blog 5/13/12
Consumer Price Index	Apr month ∆%: -0.1 Apr 12 month ∆%: 3.4 Blog 5/13/12
Value Added of Industry	Mar month ∆%: 0.93 Jan-Mar 2012/Jan-Mar 2011 ∆%: 11.6 Blog 4/22/12
GDP Growth Rate	Year IQ2012 ∆%: 8.1 Quarter IQ2012 ∆%: 1.8 Blog 4/15/12
Investment in Fixed Assets	Total Jan-Mar 2012 ∆%: 20.9 Real estate development: 23.5 Blog 4/22/12
Retail Sales	Mar month ∆%: 1.2 Mar 12 month ∆%: 15.2 Jan-Mar ∆%: 14.8 Blog 4/22/12
Trade Balance	Apr balance $18.42 billion Exports ∆% 4.9 Imports ∆% 0.3 Cumulative Apr: $19.3 billion Blog 5/13/12

Links to blog comments in Table CNY:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

Table VC-1 provides China’s exports, imports, trade balance and percentage changes from Dec 2010 to Apr 2012. The rate of growth of exports fell to 4.9 percent in Apr 2012 relative to a year earlier and imports increased 0.3 percent. China reversed the large trade deficit of USD 31.48 billion in Feb 2012 with a surplus of $5.35 billion in Mar 2012 and $18.42 billion in Apr 2012. Exports fell 0.5 percent in the 12 months ending in Jan while imports fell 15.3 percent for a still sizeable trade surplus of $27.28 billion. In Feb, exports increased 18.4 percent while imports jumped 39.6 percent for a sizeable deficit of $31.48 billion. There are distortions from the New Year holidays.

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

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Apr 2012	163.25	4.9	144.83	0.3	18.42
Mar	165.66	8.9	160.31	5.4	5.35
Feb	114.47	18.4	145.95	39.6	-31.48
Jan	149.94	-0.5	122.66	-15.3	27.28
Dec 2011	174.72	13.4	158.20	11.8	16.52
Nov	174.46	13.8	159.94	22.1	14.53
Oct	157.49	15.9	140.46	28.7	17.03
Sep	169.67	17.1	155.16	20.9	14.51
Aug	173.32	24.5	155.56	30.2	17.76
Jul	175.13	20.4	143.64	22.9	31.48
Jun	161.98	17.9	139.71	19.3	22.27
May	157.16	19.4	144.11	28.4	13.05
Apr	155.69	29.9	144.26	21.8	11.42
Mar	152.20	35.8	152.06	27.3	0.14
Feb	96.74	2.4	104.04	19.4	-7.31
Jan	150.73	37.7	144.27	51.0	6.46
Dec 2010	154.15	17.9	141.07	25.6	13.08

Source:

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

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

Table VC-2 provides cumulative exports, imports and the trade balance of China together with percentage growth of exports and imports. The trade balance in 2011 of $155.14 billion is lower than those from 2008 to 2010. There is a rare cumulative deficit of $4.2 billion in Feb 2012 reversed to a small surplus in Mar 2012 and a higher surplus of $19.3 billion in Apr 2012. More observations are required to detect trends of Chinese trade.

Table VC-2, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Apr 2012	593.24	6.9	573.94	5.1	19.3
Mar	430.06	7.6	428.95	6.9	1.11
Feb	264.40	6.9	268.64	7.7	-4.24
Jan	149.94	-0.5	122.66	-15.3	27.28
Dec 2011	1,898.60	20.3	1,743.46	24.9	155.14
Nov	1,724.01	21.1	1585.61	26.4	138.40
Oct	1,549.71	22.0	1,425.68	26.9	124.03
Sep	1,392.27	22.7	1,285.17	26.7	107.10
Aug	1,222.63	23.6	1,129.90	27.5	92.73
Jul	1,049.38	23.4	973.17	26.9	76.21
Jun	874.3	24.0	829.37	27.6	44.93
May	712.37	25.5	689.41	29.4	22.96
Apr	555.30	27.4	545.02	29.6	10.28
Mar	399.64	26.5	400.66	32.6	-1.02
Feb	247.47	21.3	248.36	36.0	-0.89
Jan	150.7	37.7	144.27	51.0	6.46
Dec 2010	1577.93	31.3	1394.83	38.7	183.10

Source:

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

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

VC Euro Area. The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.1 in Mar to 46.7 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542) in one of the deepest contractions since the middle of 2009. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.5 percent in Apr, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542). 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 close to a three-year low at 45.9 in Apr from 47.7 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Chris Williamson, Chief Economist at Markit, finds that output in the euro area in Apr declined at a quarterly rate in excess of 2.2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Table EUR provides the economic indicators for the euro area. Table EUR provides the 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	Mar 2012: 10.9% unemployment rate Mar 2012: 17.365 million unemployed Blog 5/6/12
HICP	Mar month ∆%: 1.3 12 months Feb ∆%: 2.7 Blog 4/22/12
Producer Prices	Euro Zone industrial producer prices Mar ∆%: 0.5 Feb 12-month ∆%: 3.3 Blog 5/6/12
Industrial Production	Feb month ∆%: 0.5 Feb 12 months ∆%: -1.8 Blog 4/15/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 2/26/12
Construction Output	Feb month ∆%: minus 7.1 Jan 12-month ∆%: minus 12.9  Blog 4/22/12
Retail Sales	Mar month ∆%: 0.3 Mar 12 months ∆%: -0.2 Blog 5/6/12
Confidence and Economic Sentiment Indicator	Sentiment 93.2 Apr 2012 Confidence minus 8.7 Apr 2012 Blog 4/29/12
Trade	Jan-Feb 2012/Jan-Feb 2011 Exports ∆%: 11.0 Imports ∆%: 5.3 Feb 2012 12-month Exports ∆% 11.2 Imports ∆% 6.9 Blog 4/22/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 4/22/12 3/18/12

Links to blog comments in Table EUR:

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.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

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

VE Germany. The Markit Germany Composite Output Index, combining services and manufacturing activity with high association with German GDP, fell from 51.6 in Mar to 50.5 in Apr, indicating modest growth of private-sector activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9540). Tim Moore, Senior Economist at Markit and author of the report, finds that weakness of the index leaves thin margin for another contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9540). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®) fell from 48.4 in Mar to 46.2 in Apr, for a second month below the contraction frontier of 50.0, in the sharpest weakening since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9510). Tim Moore, Senior Economist at Markit and author of the report, finds that Germamy begins IIQ2012 in the worst conditions in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9510). 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	Apr month SA ∆%: +0.2 Mar 12-month ∆%: 2.1 Blog 5/13/12
Producer Price Index	Mar month ∆%: 0.6 12-month NSA ∆%: 3.3 Blog 4/22/12
Industrial Production	Mfg Mar month SA ∆%: 1.4 12-month NSA: -0.2 Blog 5/13/12
Machine Orders	Mar month ∆%: 2.2 Mar 12-month ∆%: -2.9 Blog 5/13/12
Retail Sales	Mar Month ∆% 0.8 12-Month ∆% 2/3 Blog 5/6/12
Employment Report	Unemployment Rate Mar 5.5% Blog 5/6/12
Trade Balance	Exports Mar 12-month NSA ∆%: 0.7 Imports Mar 12 months NSA ∆%: 2.6 Exports Mar month SA ∆%: 0.9; Imports Mar month SA 1.2 Blog 5/13/12

Links to blog comments in Table DE:

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.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 increase of 2.8 percent in Mar and increase of 0.4 percent in the 12 months ending in Mar. Germany’s production industries 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 production industries from 2003 to 2006 was vigorous with average rate of 4.4 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
Mar 2012	-0.4	2.8
Feb	2.2	-0.3
Jan	4.6	1.2
Dec 2011	1.2	-2.8
Nov	4.6	0.2
Oct	0.4	0.8
Sep	5.5	-2.4
Aug	11.3	-0.3
Jul	6.5	3.0
Jun	0.0	-0.8
May	18.9	0.7
Apr	5.8	-0.4
Mar	10.3	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
Average ∆% 2003-2006	4.4

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Produktionsindex/kpi111.html

Table VE-2 provides monthly percentage changes of the German production industries index by components from Aug 2011 to Mar 2012. The production industries index fell revised 2.8 percent in Dec with negative changes in all components. All components rebounded in Mar, with the exception of energy. Manufacturing fell 2.0 percent in Dec, declining in four of the eight months from Aug 2011 to Mar 2012. The investment goods segment also fell 2.7 percent in Dec but grew 1.9 percent in Jan, 1.4 percent in Feb and 2.0 percent in Mar. There is generalized perception that growth in the euro area slowed after the European summer of 2011.

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

	Mar	Feb	Jan	Dec	Nov	Oct	Sep	Aug
Production Industries	2.8	-0.3	1.2	-2.8	0.2	0.8	-2.4	-0.3
Industry	1.5	0.2	1.0	-2.0	-0.3	0.7	-2.5	-0.4
Mfg	1.4	0.3	1.1	-2.0	-0.3	0.7	-2.5	-0.4
Intermediate Goods	0.3	-0.3	0.7	-1.6	-0.3	-0.3	-1.9	-0.3
Investment Goods	2.0	1.4	1.9	-2.7	-0.5	1.7	-4.5	1.0
Durable Goods	1.1	-1.9	2.0	-2.3	-2.5	2.0	-0.2	-9.6
Nondurable Goods	3.4	-1.6	-1.1	-0.7	0.0	-0.1	1.9	-3.1
Energy	-1.8	9.6	0.1	-8.4	2.8	1.9	-2.6	1.4

Seasonally Calendar Adjusted

Source: Statistiche Bundesamt Deutschland https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html

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 Mar 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
Mar	-0.2	-0.2	-2.1	2,9	-6.3	-3.4	-5.3
Feb	3.5	3.6	1.8	7.4	-0.7	-2.0	0.0
Jan	6.2	6.1	4.6	9.7	4.3	1.4	-12.0
2011
Dec	1.4	1.4	2.5	1.0	-0.4	0.2	-16.4
Nov	4.9	5.1	3.9	7.9	1.9	0.0	-4.0
Oct	1.1	1.2	0.4	3.6	-2.	-2.8	-7.2
Sep	6.4	6.5	6.4	8.9	3.6	0.2	-6.3
Aug	12.8	12.6	10.8	20.2	4.5	1.2	3.5
Jul	8.0	8.1	6.8	13.1	7.7	-0.5	-8.1
Jun	0.9	0.9	1.6	2.0	-10.5	-2.0	-7.4
May	21.4	21.4	17.7	28.3	21.7	13.4	-12.0
Apr	7.4	7.5	5.9	11.1	4.9	2.2	-8.2
Mar	10.7	10.9	10.0	14.9	8.5	2.1	1.2
Feb	16.8	17.0	16.1	22.4	11.0	6.1	-2.2
Jan	16.8	17.1	16.7	23.2	11.2	4.2	-1.8
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

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 strong rebound 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

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 2012. 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

Table VE-4 provides month and 12-month rates of growth of manufacturing in Germany in 2011 and Jan-Mar 2012. There are fluctuations in both monthly rates and in the past 12 months. Recovery is strong in Jan-Mar 2012.

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

	12-Month ∆% NSA	Month ∆% SA and Calendar Adjusted
Mar 2012	-0.2	1.4
Feb	3.6	0.3
Jan	6.1	1.1
Dec 2011	1.4	-2.0
Nov	5.1	-0.3
Oct	1.2	0.7
Sep	6.5	-2.5
Aug	12.6	-0.4
Jul	8.1	3.2
Jun	0.9	-1.0
May	21.4	1.3
Apr	7.5	0.2
Mar	10.9	1.1
Feb	17.0	1.5
Jan	17.1	-0.1
Dec	17.6	1.4

Source: Statistiche Bundesamt Deutschland

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

Chart VE-3 of the Statistiche Bundesamt Deutschland, or Federal Statistical Office of Germany, provides the manufacturing index of Germany from 2007 to 2012. 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

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 2.2 percent in Mar 2012 with increase of 1.3 percent in domestic orders and sharper increase of 3.0 percent in foreign orders. As in other countries, data on orders for manufacturing are highly volatile. In Jan, decline of domestic orders of 0.8 percent was compensated by increase of foreign orders of 1.7 percent for increase of total orders of 0.6 percent. All 12-month percentage changes in Mar and 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
Mar	-2.9	2.2	-2.3	3.0	-3.9	1.3
Feb	-4.5	0.6	-4.9	1.7	-3.9	-0.8
Jan	-3.1	-1.4	-5.7	-3.8	0.1	1.7
2011
Dec	-0.2	0.7	-0.8	3.7	0.6	-2.9
Nov	-4.2	-2.8	-7.6	-4.4	0.0	-0.7
Oct	0.6	2.7	2.2	4.7	-1.3	0.6
Sep	2.4	-4.6	1.2	6.2	3.8	-2.8
Aug	6.8	-0.4	4.3	0.3	10.1	-1.3
Jul	5.6	-3.2	5.7	-7.5	5.6	2.6
Jun	3.8	1.0	8.0	10.8	-1.6	-9.7
May	22.7	2.5	16.2	-3.3	30.2	9.7
Apr	6.9	1.7	9.9	1.7	3.4	1.7
Mar	9.1	-2.5	11.9	-2.3	5.8	-2.8
Feb	21.5	0.6	24.8	-0.3	17.8	1.9
Jan	22.4	4.3	26.5	3.4	17.6	5.6
2010
Dec	22.2	-3.4	27.3	-3.5	15.8	-3.3
Nov	21.5	5.6	26.8	8.8	15.6	1.8
Oct	14.1	1.3	17.7	0.9	10.4	1.8
Sep	13.9	-2.8	16.0	-5.3	11.6	0.4
Aug	23.5	3.5	31.9	6.1	14.4	0.3
Jul	14.2	-2.2	21.7	-3.2	6.3	-1.2
Jun	28.5	4.0	32.0	6.3	24.3	1.5
May	24.4	-0.1	28.9	0.3	19.9	-0.7
Apr	29.3	2.1	33.0	2.1	25.2	2.2
Mar	29.4	6.1	32.3	6.9	26.4	5.3
Feb	23.4	-0.3	27.6	-0.2	18.6	-0.4
Jan	16.7	4.6	23.6	4.2	9.7	5.0
Dec 2009	9.2	-2.5	10.6	-2.7	7.4	-2.1
Dec 2008	-28.2	-7.2	-31.5	-9.7	-23.7	-4.2
Dec 2007	7.1	-1.9	9.1	-2.9	4.5	-0.7
Dec 2006	2.9	0.3	3.4	0.3	2.2	0.3
Dec 2005	4.9	-0.5	10.5	-0.8	-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
Average ∆% 2002-2007	6.3		8.4		3.8
Average ∆% 2002-2011	3.3		4.5		1.8

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 4.2 percent in Mar 2012 with foreign orders increasing 7.7 percent and domestic orders decreasing 1.3 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
Mar	0.2	4.2	1.9	7.7	-2.2	-1.3
Feb	-5.9	1.3	-7.4	1.0	-3.6	1.8
Jan	-3.6	-4.4	-6.0	-5.2	0.6	-3.2
2011
Dec	1.6	2.8	0.5	4.0	3.5	1.0
Nov	-5.9	-3.6	-9.4	-6.2	-0.1	0.6
Oct	3.6	5.0	7.5	7.9	-2.3	0.6
Sep	2.9	-5.5	1.8	-6.9	4.9	-3.3
Aug	6.3	0.6	3.5	1.8	11.1	-1.2
Jul	7.7	-8.1	6.9	-13.7	8.9	2.0
Jun	8.9	3.4	13.6	17.5	1.0	-15.1
May	26.8	4.4	18.0	-4.6	40.3	19.1
Apr	11.3	3.1	14.7	3.8	6.2	1.8
Mar	11.0	-5.0	13.7	-4.1	7.0	-6.4
Feb	29.4	2.5	33.1	1.2	23.9	4.8
Jan	26.4	3.2	32.4	3.2	17.5	2.9
2010
Dec	27.3	-4.9	31.0	-6.2	21.3	-2.7
Nov	30.1	9.4	35.9	14.3	21.5	2.2
Oct	20.6	1.2	23.9	-0.6	16.0	4.1
Sep	18.1	-4.6	20.4	-7.2	14.6	-0.1
Aug	29.3	6.8	42.8	9.7	12.0	2.3
Jul	14.1	-4.7	28.4	-6.3	-2.3	-2.1
Jun	33.5	6.4	41.3	10.3	22.2	0.4
May	25.9	1.3	35.6	0.6	13.6	2.6
Apr	30.1	1.3	40.1	1.7	17.4	0.6
Mar	26.2	8.4	33.8	10.2	16.1	5.6
Feb	20.3	-1.3	30.3	-0.3	8.1	-2.5
Jan	16.9	4.3	29.5	2.2	2.5	7.2
Dec 2009	8.1	-1.4	13.6	-1.6	0.5	-1.2
Dec 2008	-32.2	-7.2	-36.7	-9.9	-24.4	-3.5
Dec 2007	9.6	-1.2	11.6	-3.3	6.3	2.2
Dec 2006	3.6	2.2	3.8	2.7	3.1	1.4
Dec 2005	1.9	-1.9	9.8	-2.1	-8.5	-1.6
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
Average ∆% 2002-2007	7.0		9.3		3.8
Average ∆% 2002-2011	3.6		4.9		1.8

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 beginning in the final months of 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/Konjunkturindikatoren.html

Twelve-month rates of growth Germany’s exports and imports are shown in Table VE-7. There was sharp decline in the rates in Jun and Jul to single-digit levels especially for exports. In the 12 months ending in Aug, exports rose 14.4 percent and imports 13.2 percent. In Sep, exports grew 10.5 percent relative to a year earlier and imports grew 12.0 percent. Growth rates in 12 months ending in Oct fell significantly to 3.7 percent for exports and 8.9 percent for imports. Lower prices may explain part of the decline in nominal values. Exports grew 8.6 percent in 12 months ending in Feb 2012 and imports 5.8 percent but the 12-month rate of exports fell to only 0.7 percent in Mar 2012 and that of imports to 2.6 percent. Growth had been much stronger in the recovery during 2010 and 2011 from the fall from 2007 to 2009. Germany’s trade grew at high rates in 2006 and 2005.

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

	Exports EURO Billions	12- Month ∆%	Imports EURO Billions	12-Month ∆%
Mar 2012	98.9	0.7	81.5	2.6
Feb	91.2	8.5	76.3	5.8
Jan	86.0	9.3	72.8	6.2
Dec 2011	85.0	4.9	72.1	5.4
Nov	94.8	8.2	78.9	7.0
Oct	89.2	3.7	77.9	8.9
Sep	95.0	10.5	77.8	12.0
Aug	85.1	14.4	73.5	13.2
Jul	85.7	5.3	75.3	10.0
Jun	88.1	3.3	75.6	6.2
May	92.0	20.8	77.4	17.2
Apr	84.3	12.1	73.4	18.1
Mar	98.2	14.7	79.4	14.5
Feb	84.1	20.1	72.1	27.1
Jan	78.6	24.1	68.5	24.4
Dec 2010	81.0	20.0	68.4	24.3
Nov	87.6	21.2	73.7	30.9
Oct	86.0	18.7	71.5	19.2
Sep	86.0	21.2	69.5	17.0
Aug	74.4	23.8	64.9	27.1
Jul	81.4	15.3	68.4	24.4
Jun	85.3	27.5	71.2	33.9
May	76.2	25.6	66.0	31.2
Apr	75.2	16.7	62.2	14.5
Mar	85.6	22.0	69.3	18.0
Feb	70.0	9.7	56.8	3.2
Jan	63.4	-0.3	55.1	-1.9
Dec 2009	67.5	1.2	55.0	-7.3
Dec 2008	66.7	-8.6	59.4	-5.1
Dec 2007	73.0	-0.6	62.5	-0.1
Dec 2006	73.4	10.2	62.6	8.5
Dec 2005	66.6	11.5	57.7	18.1
Dec 2004	59.7	9.2	48.9	10.8
Dec 2003	54.7	7.6	44.1	3.9
Dec 2002	50.8	5.5
Dec 2001	48.2	-3.7
Dec 2000	50.0

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_159_51.html;jsessionid=7CC7F790355DE141D52C2EF9D33E4BBC.cae2

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

Table VE-8 provides monthly rates of growth of exports and imports of Germany. Exports surged in Jan and Feb after sharp negative growth in Dec and continuing growing with exports increasing 0.9 percent in Mar and imports 1.2 percent. The decline in 12-month growth rates in Mar 2012 is explained by the jump of 5.6 percent in exports in Mar 2011 and 2.6 percent in imports. Export growth and import growth were vigorous in Jan-Mar 2011 when Germany’s economy outperformed most advanced economies but less dynamic and consistently in following months.

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

	Exports	Imports
Mar 2012	0.9	1.2
Feb	1.5	3.6
Jan	3.4	2.4
Dec 2011	-4.3	-3.9
Nov	2.8	-0.2
Oct	-3.2	0.1
Sep	0.9	-0.9
Aug	3.3	0.0
Jul	-1.0	0.5
Jun	-0.5	-0.3
May	2.9	3.0
Apr	-4.1	-1.9
Mar	5.6	2.6
Feb	1.7	3.2
Jan	1.1	3.6
Dec 2010	-1.0	-2.6

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_159_51.html;jsessionid=7CC7F790355DE141D52C2EF9D33E4BBC.cae2

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

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

Source: Statistisches Bundesamt Deutschland

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

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

Chart VE-7, Germany, Imports Original Value and Trend 2007-2012

Source: Statistisches Bundesamt Deutschland

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

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

Chart VE-8, Germany, Trade Balance Original and Trend 2007-2012

Source: Statistisches Bundesamt Deutschland

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

There is extremely important information in Table VE-9 for the current sovereign risk crisis in the euro zone. Table VE-3 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Mar 2012. German exports to other European Union (EU) members are 57.6 percent of total exports in Mar 2012 and 58.4 percent in Jan-Mar 2012. Exports to the euro area are 38.5 percent in Mar and 39.0 percent in Jan-Mar. Exports to third countries are 42.4 percent of the total in Mar and 41.6 percent in Jan-Mar. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of its high share in exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.

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

	Mar 2012  € Billions	Mar 12-Month ∆%	Jan–Mar 2012 € Billions	Jan-Mar 2012/ Jan-Mar 2011 ∆%
Total Exports	98.9	0.7	276.1	5.8
A. EU Members	57.0 % 57.6	-2.8	161.3 % 58.4	2.3
Euro Area	38.1 % 38.5	-3.6	107.7 % 39.0	1.1
Non-euro Area	18.9 % 19.1	-1.4	53.6 % 19.4	4.7
B. Third Countries	41.9 % 42.4	6.1	114.8 % 41.6	11.2
Total Imports	81.5	2.6	230.6	4.8
C. EU Members	52.4 % 64.3	2.1	145.8 % 63.2	5.0
Euro Area	37.0 % 45.4	2.3	102.4 % 44.4	4.7
Non-euro Area	15.4 % 18.9	1.7	43.4 % 18.8	5.8
D. Third Countries	29.1 % 35.7	3.5	84.8 % 36.8	4.3

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

Source:

Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_159_51.html;jsessionid=7CC7F790355DE141D52C2EF9D33E4BBC.cae2

VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 48.7 in Mar to 45.9 in Apr, which is the lowest reading in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds general deteriorating conditions in France with hopes of improvement of outlook after the elections (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538).The Markit France Manufacturing Purchasing Managers’ Index^® was virtually unchanged at 46.9 in Apr relative to 46.7 in Mar with the sharpest decline in new orders in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing deterioration in manufacturing with trend of decline in new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511).Table FR provides the country data table for France. Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Mar month ∆% 0.8 12 months ∆%: 2.3 4/15/12
PPI	Mar month ∆%: 0.5 Mar 12 months ∆%: 3.7 Blog 4/29/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.3 Blog 4/1/12
Industrial Production	Mar SA ∆%: Industrial Production -0.9; Manufacturing +1.4 Feb YOY NSA ∆%: Industrial Production -1.4; Manufacturing -1.7 Blog 5/13/12
Industrial New Orders	Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12
Consumer Spending	Mar Manufactured Goods ∆%: minus 1.1 Mar 12-Month Manufactured Goods ∆%: minus 1.9 Blog 4/29/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 3/4/12
Trade Balance	Mar Exports ∆%: month -1.5, 12 months 3.9 Mar Imports ∆%: month -2.6, 12 months 2.1 Blog 5/13/12
Confidence Indicators	Historical averages 100 Apr Mfg Business Climate 95 Blog 4/29/12

Links to blog comments in Table FR:

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

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

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

France’s industrial production by segments is provided in Table VF-1. Total industry fell 0.9 percent in Mar after increasing 0.9 percent in Feb. Construction increased 17.8 percent in Mar after falling 15.7 percent in Feb. Mining fell 14.2 percent in Mar. There were declines for all categories relative to the same quarter a year earlier with exception of growth of mining by 1.3 percent.

Table VF-1, France, Industrial Production ∆%

2011-2012	Mar/Feb	Feb/Jan	QOQ	YOY
Industry	-0.9	0.9	-0.1	-1.4
Manufacturing	1.4	-0.9	-0.5	-1.7
Mining, Quarrying, Energy, Water, Waste Mgt	-14.2	12.4	3.5	1.3
Construction	17.8	-15.7	-4.6	-5.0

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

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120510

Table VF-2 provides longer historical perspective of manufacturing in France. The increase of 1.4 percent in manufacturing in Apr 2012 reduced the decline in 12 months to minus 0.3 percent. In the quarter Dec 2011 to Feb 2012, manufacturing fell 2.2 at the annual equivalent rate of minus 8.5 percent. There is strength earlier in the recovery in 2010 and early 2011 with less strong performance in the latter part of 2011. Manufacturing fell 12.9 percent in 2008 during the global contraction and an additional 2.8 percent in 2009.

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

	Month ∆%	12-Month ∆%
Mar 2012	1.4	-0.3
Feb	-0.9	-3.2
Jan	0.0	-1.5
Dec 2011	-1.3	0.8
Nov	1.3	2.2
Oct	0.2	2.7
Sep	-2.4	1.8
Aug	0.5	4.9
Jul	1.7	4.0
Jun	-2.0	3.2
May	1.2	4.0
Apr	-0.1	3.6
Mar	-1.5	4.5
Feb	0.9	7.4
Jan	2.3	6.7
Dec 2010	0.1	5.1
Dec 2009		-2.8
Dec 2008		-12.9
Dec 2007		-0.2
Dec 2006		2.3
Dec 2005		0.0
Dec 2004		1.5
Dec 2003		0.4
Dec 2002		-0.5
Dec 2001		-4.9
Dec 2000		5.2
Annual
Average ∆% 1990-2000		1.1

Source:

Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120510

Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques shows indices of manufacturing in France from 2008 to 2012. Manufacturing, which is CZ in Chart VF-1, fell deeply in 2008 and part of 2009. All curves of industrial indices tend to flatten recently with oscillations.

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

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

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120510

France has been running a trade deficit fluctuating around €6,000 million, as shown in Table VF-3. Exports decreased 1.5 percent in Mar while imports fell 2.6 percent, resulting in decrease of the trade deficit from revised €6278 million in Feb to €5721 million in Mar.

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

	Exports	Imports	Trade Balance
Mar 2012	36,491	42,212	-5,721
Feb	37,049	43,328	-6,279
Jan	36,778	42,221	-5,443
Dec 2011	36,172	41,429	-5,257
Nov	37,192	41,544	-4,352
Oct	35,888	41,759	-5,871
Sep	35,731	42,116	-6,385
Aug	37,611	42,182	-4,571
Jul	34,947	41,439	-6,492
Jun	34,805	40,048	-5,243
May	34,809	41,468	-6,659
Apr	34,511	41,534	-7,023
Mar	35,136	41,326	-6,190
Feb	34,661	40,965	-6,304
Jan	34,306	40,888	-6,582
Dec 2010	34,009	39,534	-5,525

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

Monthly and 12-month rates of growth of exports and imports of France are provided in Table VF-4. Exports fell 2.7 percent in Dec but increased 1.7 percent in Jan and 0.7 percent in Feb with increase of 6.9 percent in the 12 months ending in Feb. Performance deteriorated with decline of 1.5 percent in exports in Mar for 12-month increase of 3.9 percent while imports fell 2.6 percent, increasing 2.1 percent in 12 months. Growth of exports and imports has fluctuated in 2011 as a result of price surges of commodities and raw materials.

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

	Exports Month ∆%	Exports 12-Month ∆%	Imports Month ∆%	Imports 12-Month ∆%
Mar 2012	-1.5	3.9	-2.6	2.1
Feb	0.7	6.9	2.6	5.8
Jan	1.7	7.2	1.9	3.3
Dec 2011	-2.7	6.4	-0.3	4.8
Nov	3.6	7.5	-0.5	4.6
Oct	0.4	8.7	-0.8	14.5
Sep	-5.0	7.6	-0.2	10.9
Aug	7.6	11.0	1.8	8.5
Jul	0.4	1.9	3.5	8.8
Jun	0.0	3.6	-3.4	8.1
May	0.9	15.4	-0.2	16.3
Apr	-1.8	7.6	0.5	14.4
Mar	1.4	11.5	0.9	14.9
Feb	1.0	13.9	0.2	21.7
Jan	0.9	13.8	3.4	20.4
Dec 2011		6.4		4.8
Dec 2010		14.5		15.1
Dec 2009		-9.8		-1.9
Dec 2008		-7.3		-11.3
Dec 2007		6.1		8.4
Dec 2006		7.4		6.8
Dec 2005		11.2		15.1
Dec 2004		1.2		-2.4
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-5. France’s trade balance deteriorated sharply from 2007 to 2011 with the deficit increasing from €42,494 million in 2007 to €70,671 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-5, France, Exports, Imports and Balance Year € Millions and ∆%

	Exports € Millions	∆%	Imports € Millions	∆%	Balance € Millions
Mar 2012 12 Months	433,379		501,976		-68,597
Year
2011	427,231	8.3	497,902	11.5	-70,671
2010	394,343	13.9	446,655	14.1	-52,312
2009	346,299	-17.1	391,521	-17.4	-45,422
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 fell from 44.3 in Mar to 42.3 in Apr, indicating sharp contraction of output of Italy’s services sector at the lowest reading in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the rates of contraction are approaching the ones experienced at the bottom of the 2008-2009 contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), fell from 47.9 in Mar relative to 43.8 in Apr for a ninth consecutive month of contraction of Italy’s manufacturing and the sharpest since Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds the sharpest fall in monthly new business in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Apr month ∆%: 0.5 Apr 12-month ∆%: 3.3 Blog 5/6/12
Producer Price Index	Mar month ∆%: 0.3 Mar 12-month ∆%: 2.7 Blog 5/6/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.4 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 3/18/12
Labor Report	Mar 2012 Participation rate 63.3% Employment ratio 57.0% Unemployment rate 9.8% Blog 5/6/12
Industrial Production	Mar month ∆%: +0.5 12 months ∆%: minus 5.8 Blog 5/13/12
Retail Sales	Feb month ∆%: 0.6 Feb 12-month ∆%: 0.1 Blog 4/29/12
Business Confidence	Mfg Apr 89.5, Dec 91.3 Construction Apr 82.9, Dec 80.5 Blog 4/29/12
Consumer Confidence	Consumer Confidence Apr 89.0, Mar 96.3 Economy Apr 72.1, Mar 85.4 Blog 4/29/12
Trade Balance	Balance Feb SA -€588 million versus Jan -€379 Exports Feb month SA ∆%: 0.1; Imports Feb month ∆%: 0.7 Exports 12 months NSA ∆%: +7.3 Imports 12 months NSA ∆%: 0.8 Blog 4/22/12

Links to blog comments in Table IT:

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html

Italy’s industrial production increased 0.5 percent in Mar 2012, pulling down the 12-month rate of growth to minus 5.8 percent, as shown in Table VG-1. There have been negative changes with oscillations in monthly industrial production. Industrial production fell 18.8 percent in 2009 after falling 3.2 percent in 2008.

Table VG-1, Italy, Industrial Production ∆% 

	Month ∆% SA	12-Month ∆% Calendar Adjusted
Mar 2012	0.5	-5.8
Feb	-0.7	-6.8
Jan	-2.5	-4.6
Dec 2011	1.2	-1.7
Nov	0.1	-4.1
Oct	-0.9	-3.8
Sep	-4.6	-2.6
Aug	3.4	4.8
Jul	-0.9	-1.1
Jun	-0.8	0.4
May	-0.7	2.1
Apr	0.4	3.8
Mar	0.0	3.3
Feb	1.5	2.6
Jan	-0.8	0.1
Dec 2010	-0.6	6.7
Nov	0.8	5.5
Oct	0.0	4.1
Sep	0.3	5.8
Aug	-0.6	11.4
Jul	0.4	7.5
Jun	0.8	9.9
May	1.0	9.0
Apr	0.6	9.5
Mar	-0.2	8.5
Feb	-0.3	4.5
Jan	4.0	0.6
Dec 2009	-1.3	-6.6
Year
2011		0.1
2010		6.8
2009		-18.8
2008		-3.2

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/61358

Chart VG-1 of Italy’s 12-month percentage changes of Italy’s industrial production are provided in Chart VG-1 of Istituto Nazionale di Statistica. There is trend of deterioration after Aug 2011, sharply deteriorating after Dec 2011 into 2012.

Chart VG-1, Italy, Industrial Production, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en

Month and 12-month rates of growth of Italy’s industrial production and major categories are provided in Table VG-2 for Mar 2012. There is improvement with monthly rates of 0.5 percent for total industry, 0.8 percent for consumer goods, 1.4 percent for nondurable goods and 0.5 percent for intermediate goods. Energy fell 7.2 percent in Mar after jumping in Feb because of higher use during inclement winter weather.

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

Mar 2012	Month ∆%	12-Month ∆%
Total	0.5	-5.8
Consumer Goods	0.8	-6.6
Durable	-2.3	-11.1
Nondurable	1.4	-5.5
Capital Goods	-1.1	-3.9
Intermediate Goods	0.5	-6.3
Energy	-7.2	-8.7

Source:

Istituto Nazionale di Statistica http://www.istat.it/it/archivio/61358

VH United Kingdom. The Business Activity Index of the Markit/CIPS UK Services PMI^® fell from 55.3 in Mar to 53.3 in Apr for 16 consecutive monthly increases but the slowest growth since Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). Chris Williamson, Chief Economist at Markit, finds that services continue to expand and that the data from panelists are not consistent with the economy in recession such that there is room for a change of the first estimate of IQ2012 GDP from negative to moderately positive (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) fell from revised 51.9 in Mar to 50.5 in Apr, which is above the border of contraction of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that manufacturing growth requires dynamism in new orders that was frustrated by declining foreign demand in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487).Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Mar month ∆%: 0.3 Mar 12-month ∆%: 3.5 Blog 4/22/12
Output/Input Prices	Output Prices: Apr 12-month NSA ∆%: 3.3; excluding food, petroleum ∆%: 2.3 Input Prices: Apr 12-month NSA ∆%: 1.2 Excluding ∆%: 2.5 Blog 5/13/12
GDP Growth	IQ2012 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.0 Blog 4/29/12
Industrial Production	Mar 2012/Mar 2011 NSA ∆%: Production Industries minus 2.6; Manufacturing minus 0.9 Blog 5/13/12
Retail Sales	Mar month SA ∆%: 1.8 Mar 12-month NSA ∆%: 3.5 Blog 4/22/12
Labor Market	Dec-Feb Unemployment Rate: 8.3%; Claimant Count 4.9%; Earnings Growth 1.1% Blog 4/22/12
Trade Balance	Balance Feb minus ₤3396 million Exports Feb ∆%: -2.0 Dec-Feb ∆%: 1.5 Imports Feb ∆%: 0.2 Feb-Dec ∆%: 2.3 Blog 4/15/12

Links to blog comments in Table UK:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.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 Mar. Manufacturing accounts for 66.6 percent of the production industries of the UK and decreased 0.9 percent in the 12 months ending in Mar. Capital goods industries grew at 1.0 percent in the 12 months ending in Mar 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 21.2 percent in the 12 months ending in Jan 2012, 9.5 percent in the 12 months ending in Feb and 10.6 percent in the 12 months ending in Mar. The 12-month rates of growth of the entire index of production industries registered declines for all 12 months from Mar 2011 to Mar 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 and 2.0 percent in 2011.

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
Mar	-2.6	-10.6	-0.9	-8.7	-4.3	-1.6	1.0
Feb	-2.3	-9.5	-1.5	-5.2	-5.4	-0.2	-0.5
Jan	-4.0	-21.2	-0.1	-15.9	-4.9	0.8	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/march-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 1.1 percent in Feb 2012, growing 0.9 percent in Mar 2012. Growth was stronger in the first five months to May 2011 with the exception of decline by 1.3 percent in Apr. Output of consumer durables has fallen sharply from Jul 2011 to Mar 2012 by cumulative 5.5 percent with growth only in Nov by 1.3 percent but jumped 1.2 percent in Jan 2012, declining 1.6 percent in Feb and increasing 1.9 percent in Mar 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. Output of capital goods increased 2.4 percent in Mar 2012 after declining 1.0 percent in Jan 2012 and decreasing 2.1 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
Mar	-0.3	-2.5	0.9	-4.5	1.9	-0.2	2.4
Feb	0.4	4.1	-1.1	5.4	-1.6	-0.7	-2.1
Jan	-0.6	-2.9	-0.3	-1.7	1.2	-0.3	-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/march-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 2.6 percent was driven by negative contribution of 1.42 percentage points of the general component of mining with the subcomponent of oil and gas contributing negative 1.42 percentage points. Manufacturing deducted 0.62 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 0.9 percent in 12 months. The contributions do not add exactly because of rounding. Manufacturing increased 0.9 percent in Mar, contributing minus 0.65 percentage points. Decline of mining by 2.5 percent contributed minus 0.32 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 Mar 2012	% Point Contrib.	Volume Month ∆% Mar 2012	% Point Contrib.
PROD IND	100.0	-2.6	-2.65	-0.3	0.30
MNG	16.4	-10.6	-1.42	-2.5	-0.32
MNG 06	14.1	-12.9	-1.42	-3.8	-0.38
MFG	66.6	-0.9	-0.62	0.9	0.65
ELEC	9.3	-6.2	-0.59	-6.4	-0.62
WATER & SEW	7.7	-0.2	-0.02	-0.1	-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/march-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 manufacture of food products, beverages and tobacco (CA) with 0.42 percentage points and 12-month growth of minus 3.2 percent. Computer, electronic and optical products (CI) deducted 0.17 percentage points with 12-month decline of 3.5 percent. Rubber and plastic products and nonmetallic mineral products (CG) deducted 0.35 percentage points with decline of 7.3 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	-3.2	-0.42	0.2	0.03
CB	2.1	-4.0	-0.09	1.3	0.03
CC	5.9	3.0	-0.17	-2.3	-0.13
CD	0.4	5.3	0.02	-4.8	-0.02
CE	5.5	2.7	0.13	5.6	0.28
CF	4.9	-1.8	-0.08	-2.3	-0.11
CG	5.0	-7.3	-0.35	1.6	0.07
CH	9.3	0.7	0.06	0.9	0.08
CI	4.9	-3.5	-0.17	2.3	0.11
CJ	2.2	9.9	0.20	0.0	0.00
CK	4.4	2.7	0.13	1.3	0.06
CL	5.8	4.9	0.38	3.4	0.27
CM	4.9	-4.9	-0.26	-0.2	-0.01

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/march-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 8.4 percent by Fri May 11, 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	5/11/2012
Rate	1.1423	1.5914	1.192	1.2917
CNY/USD	01/03 2000	07/21 2005	7/15 2008	5/11/ 2012
Rate	8.2798	8.2765	6.8211	6.3114
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 1.2917/EUR on May 11, 2012 or by 8.4 percent {[(1.2917/1.192)-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 6.3114/USD on Fri May 4, 2012, or by an additional 7.5 percent, for cumulative revaluation of 23.7 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-2 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. Financial markets were closed in China during the week of Jan 27. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. In the week of Feb 10 China revalued by an additional 0.1 percent. There was marginal devaluation of 0.1 percent in the week of Feb 17. 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, appreciated 0.1 percent in the week of Apr 13, depreciated 0.1 percent in the week of Apr 20 and appreciated 0.1 percent in the week of Apr 27, as shown in the final row of Table VI-2. The rate of CNY 6.3114/USD on May 11, 2012 is equivalent to revaluation of 7.5 percent from CNY 6.8211 on Jul 15, 2008 {[(6.3114/6.8211) – 1]100} and cumulative 23.7 percent from CNY 8.2765 on Jul 21, 2005 {[(6.3114/8.2765) -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. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):

“Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:

Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.

In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.”

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	5/11 /2012
Rate	1.1423	1.5914	1.192	1.2917
CNY/USD	01/03 2000	07/21 2005	7/15 2008	5/11/2012
Rate	8.2798	8.2765	6.8211	6.3114
Weekly Rates	4/20/2012	4/27/2012	5/4/2012	5/11/2012
CNY/USD	6.3048	6.3016	6.2928	6.3114
∆% from Earlier Week*	-0.1	0.1	0.1	-0.3

*Negative sign is depreciation, positive sign is appreciation

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

The database of the World Economic Outlook (WEO) of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2011 and 2015. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

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	15094	-7.3	-3.1	80.3	-2.3	-3.2	88.3
Japan	5869	-9.1	2.0	126.6	-5.8	2.4	155.0
UK	2418	-5.8	-1.9	78.3	-0.8	-0.4	88.1
Euro	13115	-1.6	0.3	68.4	1.1	1.2	71.3
Ger	3577	0.7	5.7	56.1	1.4	4.3	52.4
France	2776	-2.9	-2.2	80.4	0.3	-0.8	83.8
Italy	2199	0.8	-3.2	99.6	4.4	-1.6	101.5
Can	1737	-4.1	-2.8	33.3	-1.1	-2.5	37.4
China	7298	-1.2	2.7	25.8	-0.1	3.4	14.8
Brazil	2493	3.1	-2.1	36.4	3.1	-3.4	31.9

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/2012/01/weodata/weoselgr.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 (2012WEOApr) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSRApr) (http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMApr) (http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf). 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. The quarterly growth rate of GDP in IQ2012 of 1.8 percent is equivalent to 7.4 percent per year (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). 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), 1.7 percent in annual equivalent in the five quarters from IQ2011 to IQ2012 and 2.1 percent in IQ2012 relative to IQ2011 (see Section I at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html). (ii) The labor market continues fractured with 27.8 million unemployed or underemployed (see Section I at http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.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 and 0.2 percent in IQ2012. 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/2012/04/fractured-labor-market-with-hiring.html and earlier 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) and consolidation can restrict growth as analyzed by Blanchard (2012WEOApr). 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 32.4 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has also gained 32.4 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. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” Another version of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (1)

Equation (1) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The present value of the firm can also be expressed as the discounted future value of net cash flows. Equities can inflate beyond sound values if cash flows that depend on economic activity prove to be illusory in continuing mediocre growth

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 Apr 25, 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/20120425a.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/fomcprojtabl20120425.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 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 or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). 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 5/11/12,” 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 have fluctuated with events such as the 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. Financial markets were under stress in the week of Apr 13 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt, continuing into the week of Apr 27. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. The highest valuations in column “∆% Trough to 5/11/12” are by US equities indexes: DJIA 32.4 percent and S&P 500 also 32.4 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. 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, almost all assets in the column “∆% Trough to 5/11/12” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations of equity indexes show increase of less than 10 percent: China’s Shanghai Composite is 0.5 percent above the trough; STOXX 50 of Europe is 1.8 percent below the trough; Japan’s Nikkei Average is 1.5 percent above the trough; Dow Asia Pacific is 5.9 percent above the trough; Dow Global is 8.9 percent above the trough; and NYSE Financial is 5.7 percent above the trough. DJ UBS Commodities is 8.7 percent above the trough. DAX is 16.0 percent above the trough. Japan’s Nikkei Average is 1.5 percent above the trough on Aug 31, 2010 and 21.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8953.31 on Fri May 11, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 12.7 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 8.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 5/11/12” in Table VI-4 shows that with exception of increase of 0.3 percent of Germany’s Dax there were decreases of all valuations of risk financial assets in the week of May 4, 2012 such as 1.7 percent for DJIA, 1.1 percent for S&P 500, 1.6 percent for NYSE Financial, 2.1 percent for Dow Global, 4.3 percent for DJ Asia Pacific, 2.3 percent for Shanghai Composite, 4.9 percent for STOXX 50 and 1.7 percent for DJ UBS Commodities. 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 5/11/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to May 4, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 5/11/12” but also relative to the peak in column “∆% Peak to 5/11/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 14.4 percent, S&P 500 11.2 percent and Dax 3.9 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 15.8 percent, Nikkei Average by 21.4 percent, Shanghai Composite by 24.3 percent, Dow Asia Pacific by 7.3 percent, STOXX 50 by 16.9 percent and Dow Global by 11.2 percent. DJ UBS Commodities Index is now 7.1 percent below the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.

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

	Peak	Trough	∆% to Trough	∆% Peak to 5/11 /12	∆% Week 5/11/ 12	∆% Trough to 5/11 12
DJIA	4/26/ 10	7/2/10	-13.6	14.4	-1.7	32.4
S&P 500	4/23/ 10	7/20/ 10	-16.0	11.2	-1.1	32.4
NYSE Finance	4/15/ 10	7/2/10	-20.3	-15.8	-1.6	5.7
Dow Global	4/15/ 10	7/2/10	-18.4	-11.2	-2.1	8.9
Asia Pacific	4/15/ 10	7/2/10	-12.5	-7.3	-4.3	5.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-21.4	-4.6	1.5
China Shang.	4/15/ 10	7/02 /10	-24.7	-24.3	-2.3	0.5
STOXX 50	4/15/10	7/2/10	-15.3	-16.9	-4.9	-1.8
DAX	4/26/ 10	5/25/ 10	-10.5	3.9	0.3	16.0
Dollar Euro	11/25 2009	6/7 2010	21.2	14.6	1.3	8.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-7.1	-1.7	8.7
10-Year T Note	4/5/ 10	4/6/10	3.986	1.845

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 May 11, 2012, shows that the S&P 500 is now 11.7 percent above the Apr 26, 2010 level and the DJIA is 14.4 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
Apr 13	-1.6	14.7	-2.0	13.1
Apr 20	1.4	16.3	0.6	13.7
Apr 27	1.5	18.1	1.8	15.8
May 4	-1.4	16.4	-2.3	12.9
May 11	-1.7	14.4	-1.1	11.7

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 11.9 percent to ZAR 8.0986/USD on May 11, 2012, which is still 30.1 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.7 percent stronger at SGD 1.2527/USD on May 11, 2012 relative to the trough of depreciation but still stronger by 19.3 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 13.2 percent relative to the trough to BRL 1.9659/USD on May 11, 2012 but still stronger by 19.1 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 by 75 basis points for the fifth 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 9.00 percent

18/04/2012 8:06:00 PM

Brasília - Continuing the adjustment process of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 9.00 percent.”

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	May 11, 2012	∆T May 11, 2012	∆P May 11, 2012
EUR USD	7/15 2008	6/7 2010		5/11 2012
Rate	1.59	1.192		1.2917
∆%			-33.4		7.7	-23.1
JPY USD	8/18 2008	9/15 2010		5/11 2012
Rate	110.19	83.07		79.94
∆%			24.6		3.8	27.5
CHF USD	11/21 2008	12/8 2009		5/11 2012
Rate	1.225	1.025		0.9299
∆%			16.3		9.3	24.1
USD GBP	7/15 2008	1/2/ 2009		5/11 2012
Rate	2.006	1.388		1.6070
∆%			-44.5		13.6	-24.8
USD AUD	7/15 2008	10/27 2008		5/11 2012
Rate	1.0215	1.6639		1.002
∆%			-62.9		40.0	2.3
ZAR USD	10/22 2008	8/15 2010		5/11 2012
Rate	11.578	7.238		8.0986
∆%			37.5		-11.9	30.1
SGD USD	3/3 2009	8/9 2010		5/11 2012
Rate	1.553	1.348		1.2527
∆%			13.2		7.1	19.3
HKD USD	8/15 2008	12/14 2009		5/11 2012
Rate	7.813	7.752		7.7658
∆%			0.8		-0.2	0.6
BRL USD	12/5 2008	4/30 2010		5/11 2012
Rate	2.43	1.737		1.9659
∆%			28.5		-13.2	19.1
CZK USD	2/13 2009	8/6 2010		5/11 2012
Rate	22.19	18.693		19.567
∆%			15.7		-4.7	11.8
SEK USD	3/4 2009	8/9 2010		5/11 2012
Rate	9.313	7.108		6.9552
∆%			23.7		2.1	25.3
CNY USD	7/20 2005	7/15 2008		5/11 2012
Rate	8.2765	6.8211		6.3114
∆%			17.6		7.5	23.7

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, US Dollar Currency Indexes

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 1.845 percent at the close of market on Fri May 11, 2012 would be equivalent to price of 107.0930 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.8 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 May 9, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2847 billion, or $2.9 trillion, with portfolio of long-term securities of $2581 billion, or $2.6 trillion, consisting of $1572 billion Treasury nominal notes and bonds, $66 billion of notes and bonds inflation-indexed, $95 billion Federal agency debt securities and $848 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1508 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
04/13/12	1.987	105.7603	4.4
04/20/12	1.959	106.0216	4.7
04/27/12	1.931	106.2836	5.0
05/04/12	1.876	106.8004	5.5
05/11/12	1.845	107.0930	5.8

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 0.7 percent to 14,595 thousand barrels per day on average in the four weeks ending on May 4, 2012 from 14,498 thousand barrels per day in the four weeks ending on Apr 27, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 85.4 percent on May, 2012, which is higher than 82.4 percent on May 6, 2011 and almost equal to 84.8 percent on Apr 27, 2012. Imports of crude oil increased 1.3 percent from 8,668 thousand barrels per day on average in the four weeks ending on Apr 27 to 8,779 thousand barrels per day in the week of May 4. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 9.0 million barrels per day last week, up by 145 thousand barrels per day from the previous week [Apr 27]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Similar use in utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 3.6 million barrels from 375.9 million barrels on Apr 27 to 379.5 million barrels on May 4. Motor gasoline production decreased 0.5 percent to 8,894 thousand barrels per day in the week of May 4 from 8,851 thousand barrels per day on average in the week of Apr 27. Gasoline stocks decreased 2.6 million barrels and stocks of fuel oil decreased 3.2 million barrels. Supply of gasoline fell from 8,995 thousand barrels per day on May 6, 2011, to 8,707 thousand barrels per day on May 4, 2012, or by 3.2 percent, while fuel oil supply decreased 1.2 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. WTI crude oil price traded at $98.49/barrel on May 4, 2012, increasing 1.7 percent relative to $96.87/barrel on May 6, 2011. Gasoline prices fell 4.4 percent from May 9, 2011 to May 6, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices had been 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	5/4/12	4/27/12	5/6/11
Crude Oil Refineries Input	14,595 Week       ∆%: 0.7	14,498	14,087
Refinery Capacity Utilization %	85.4	84.8	82.4
Motor Gasoline Production	8,894 Week      ∆%: 0.5	8,851	8,928
Distillate Fuel Oil Production	4,286 Week     ∆%: 0.8	4,252	4,150
Crude Oil Imports	8,779 Week        ∆%: 1.3	8,668	8,756
Motor Gasoline Supplied	8,707 ∆% 2012/2011= -3.2%	8,661	8,995
Distillate Fuel Oil Supplied	3,830 ∆% 2012/2011 = -1.2%	3,824	3,878
	5/4/12	4/27/12	5/6/11
Crude Oil Stocks Million B	379.5     ∆= +3.6 MB	375.9	370.3
Motor Gasoline Million B	207.1    ∆= -2.6 MB	209.7	205.8
Distillate Fuel Oil Million B	120.8 ∆= -3.2 MB	124.0	144.3
WTI Crude Oil Price $/B	98.49 ∆% 2012/2011 1.7	104.86	96.87
	5/7/12	4/30/12	5/9/11
Regular Motor Gasoline $/G	3.790 ∆% 2012/2011 -4.4	3.830	3.965

B: barrels; G: gallon

Source: US Energy Information Administration 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 several 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, Crude Oil Stocks

Source: US Energy Information Administration

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

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

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 1,000 from 368,000 on Apr 28 to 367,000 on May 5. Claims not adjusted for seasonality increased 4,942 from 333,476 on Apr 28 to 338,418 on May 5. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
May 5, 12	367,000	338,418	379,000
Apr 28, 12	368,000	333,476	384,250
Change	-1,000	+4,942	-5,250
Apr 21, 12	392,000	370,632	382,750
Prior Year	430,000	397,737	433,500

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

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

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 536,648 on May 2, 2009 to 415,974 on Apr 30, 2011, and now to 338,418 on May 5, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Section IA Hiring Collapse and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
May 5, 2001	336,319	381,000
May 4, 2002	362,681	409,000
May 3, 2003	377,383	428,000
May 1, 2004	283,236	324,000
Apr 30, 2005	290,824	334,000
Apr 29, 2006	279,715	321,000
Apr 28, 2007	267,672	301,000
May 3, 2008	335,533	370,000
May 2, 2009	536,648	601,000
May 1, 2010	399,350	448,000
Apr 30, 2011	415,974	464,000
May 5, 2012	338,418	367,000

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 Jan to Mar 2012, CPI inflation for all items seasonally adjusted was 3.7 percent in annual equivalent, that is, compounding inflation in Jan-Mar 2012 and assuming it would be repeated for a full year. In the 12 months ending in Mar, CPI inflation of all items not seasonally adjusted was 2.7 percent. Inflation in Mar 2012 not seasonally adjusted was 0.3 percent relative to Feb 2011 (http://www.bls.gov/cpi/), which is equivalent to 3.7 percent per year. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.09 percent for three months, 0.14 percent for six months, 0.17 percent for 12 months, 0.26 percent for two years, 0.36 percent for three years, 0.75 percent for five years, 1.23 percent for seven years, 1.84 percent for ten years and 3.01 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 Mar 2012/Mar 2011 NSA	∆% Annual Equivalent Jan-Mar 2012 SA
CPI All Items	2.7	3.7
CPI ex Food and Energy	2.3	2.0

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 and now 2012 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