Recovery without Hiring, Continuance of Maturity Extension Twist Policy, World Financial Turbulence and 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 Fewer Full-time Jobs
ID Youth Unemployment
II Twist Again Extension
IIA Extension of Let’s Twist Again Policy
IIB Twist Objectives
IIC Appendix: Operation Twist
IIC1 Operation Twist
IIC2 Transmission of Quantitative Easing
IIC2i Theory
IIC2ii Policy
IIC2iii Evidence
IIC2iv Unwinding Strategy
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
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
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
Executive Summary
V World Economic Slowdown. Table V-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 ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| 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
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
Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog. Growth is weak throughout most of the world. Japan’s GDP increased 1.2 percent in IQ2012 and 2.8 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. China grew at 1.8 percent in IQ2012, which annualizes to 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). GDP was flat in the euro area in IQ2012 and fell 0.1 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. US GDP increased 0.5 percent in IQ2012 and 2.0 percent relative to a year earlier (http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html) but with substantial underemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html) and weak hiring (Section I Recovery without Hiring and earlier http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html).
Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%
| IQ2012/IVQ2011 | IQ2012/IQ2011 | |
| United States | 0.5 | 2.0 |
| Japan | 1.2 | 2.8 |
| China | 1.8 | 8.1 |
| Euro Area | 0.0 | -0.1 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.0 |
| Italy | -0.8 | -1.4 |
| United Kingdom | -0.3 | -0.1 |
Source: Country Statistical Agencies
http://www.bea.gov/national/index.htm#gdp http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html http://www.stats.gov.cn/enGliSH/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html http://www.insee.fr/en/ http://www.istat.it/en/ http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html
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, was virtually unchanged at 52.1 in May relative to 52.3 in Apr, which is the lowest reading which is the lowest reading since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9664). This index has remained above the contraction territory of 50.0 during 34 months. Slower manufacturing growth was compensated by sharper activity in services. 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, with manufacturing output growing at the weakest pace in five months while services activity maintaining strength (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9664). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell marginally from 51.4 in Apr to 50.6 in Mar, for the weakest level in five months; manufacturing has been growing during six consecutive months but at the weakest pace in May even as cost inflation moderated significantly because of decline of commodity prices (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9650). David Hensley, Director of Global Economics Coordination at JPMorgan, finds weak growth in orders together decline in international trade as factors of slowdown in manufacturing growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9650).
The Brazil Composite Output Index of the HSBC Brazil Services PMI™ with Composite PMI data, compiled by Markit, fell from 52.7 in Apr to 49.6 in May, suggesting marginal decline in output of the private sector in the first reading below 50 since Sep 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9647). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI Business Activity Index dropped from 54.4 in Apr to 49.7 in May but there is need for more observations to determine if weakness in manufacturing is spreading to services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9647). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) was unchanged at 49.3 in both Apr and May, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9631). Andre Loes, Chief Economist, Brazil at HSBC, finds that the manufacturing index fell below 50 during two consecutive months after remaining above 50.0 during IQ2012 under cost pressures and competition by imports with hopes that depreciation of the exchange rate may bring about some improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9631).
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted declined from 54.0 in May to 52.9 in Jun, indicating the weakest reading in 11 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9690). Chris Williamson, Chief Economist at Markit, finds that weaker growth, at a quarterly rate of 0.8 percent, could originate in slower growth in China and Europe with the sharpest fall of new exports orders since Sep 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9690).
The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® fell 1.3 percentage points from 54.8 in Apr to 53.5 in May, indicating slower growth in 34 months of expansion (http://www.ism.ws/ISMReport/MfgROB.cfm). The index of new orders increased 1.9 percentage points from 58.2 in Apr to 60.1 in May, indicating growth in 37 months at a faster rate. The Non-Manufacturing ISM Report on Business® PMI increased 0.2 percentage points from 53.5 in Apr to 53.7 in May while the index of new orders increased 2.0 percentage points from 53.5 in Apr to 55.5 in May (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Table USA provides the data table for the US.
Table USA, US Economic Indicators
| Consumer Price Index | May 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.3 May month ∆%: -0.3; ex food and energy ∆%: 0.2 |
| Producer Price Index | May 12-month NSA ∆%: 0.7; ex food and energy ∆% 2.7 |
| PCE Inflation | Apr 12-month NSA ∆%: headline 1.8; ex food and energy ∆% 1.9 |
| Employment Situation | Household Survey: May Unemployment Rate SA 8.2% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 IQ2012 SAAR ∆%: 1.9 IQ2012/IQ2011 ∆%: 2.0 |
| Personal Income and Consumption | Apr month ∆% SA Real Disposable Personal Income (RDPI) 0.2 Mar month SA ∆% 0.2 |
| Quarterly Services Report | IQ12/IQ11 SA ∆%: |
| Employment Cost Index | IQ2012 SA ∆%: 0.4 |
| Industrial Production | May month SA ∆%: -0.1 Manufacturing May SA ∆% -0.4 May 12 months SA ∆% 5.2, NSA 5.4 |
| Productivity and Costs | Nonfarm Business Productivity IQ2012∆% SAAE -0.9; IQ2012/IQ2011 ∆% 0.4; Unit Labor Costs SAAE IQ2012 ∆% 1.3; IQ2012/IQ2011 ∆%: 0.9 Blog 6/10/2012 |
| New York Fed Manufacturing Index | General Business Conditions From May 17.09 to Jun 2.29 |
| Philadelphia Fed Business Outlook Index | General Index from May minus 5.8 to Jun minus 16.6 |
| Manufacturing Shipments and Orders | Apr New Orders SA ∆%: -0.6; ex transport ∆%: -1.1 |
| Durable Goods | Apr New Orders SA ∆%: 0.2; ex transport ∆%: minus 0.6 |
| Sales of New Motor Vehicles | May 2012 5,986,605; May 2011 5,279,318. May SAAR 13.78 million, Apr SAAR 14.42 million, May 2011 SAAR 11.73 million Blog 6/3/12 |
| Sales of Merchant Wholesalers | Jan-Apr 2012/Jan-Apr 2011 NSA ∆%: Total 8.4; Durable Goods: 10.3; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Apr 12/Apr 11 NSA ∆%: Sales Total Business 4.9; Manufacturers 4.3 |
| Sales for Retail and Food Services | Jan-May 2012/Jan-May 2011 ∆%: Retail and Food Services 7.0; Retail ∆% 6.8 |
| Value of Construction Put in Place | Apr SAAR month SA ∆%: 0.3 Apr 12-month NSA: 6,8 |
| Case-Shiller Home Prices | Mar 2012/Mar 2011 ∆% NSA: 10 Cities minus 2.8; 20 Cities: minus 2.6 |
| FHFA House Price Index Purchases Only | Apr SA ∆% 0.8; |
| New House Sales | Apr 2012 month SAAR ∆%: |
| Housing Starts and Permits | May Starts month SA ∆%: minus 4.8 ; Permits ∆%: 7.9 |
| Trade Balance | Balance Apr SA -$50,062 million versus Mar -$52617 million |
| Export and Import Prices | May 12-month NSA ∆%: Imports -0.3; Exports -0.1 |
| Consumer Credit | Apr ∆% annual rate: 3.1 |
| Net Foreign Purchases of Long-term Treasury Securities | Apr Net Foreign Purchases of Long-term Treasury Securities: $25.6 billion |
| Treasury Budget | Fiscal Year Oct-May 2012/2011 ∆%: Receipts 5.4; Outlays -0.1; Individual Income Taxes 4.2 Deficit Fiscal Year 2012 Oct-May $844,494 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 6/17/2012 |
| Flow of Funds | IQ2012 ∆ since 2007 Assets -$4113B Real estate -$4916B Financial $367.3MM Net Worth -$3300B Blog 6/17/12 |
| Current Account Balance of Payments | IQ2012 -$137B %GDP 3.6 Blog 06/17/12 |
Links to blog comments in Table USA:
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/27/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html
The Philadelphia Business Outlook Survey in Table VA-1 provides an optimistic reading in Oct 2011 with the movement to 10.8 away from the contraction zone of minus 12.7 in Sep and recovered to 12.5 in Mar from the decline to 3.1 in Nov but then fell to 8.5 in Apr and back to contraction territory at minus 5.8 in May and even sharper contraction at minus 16.6 in Jun. New orders were signaling increasing future activity, rising from contraction at minus 5.5 in Sep 2011 to positive reading but registered only 3.3 in Mar 2012 and fell further to 2.7 in Apr and into contraction reading at minus 1.2 in May and sharp contraction at 18.8 in Jun. There is similar behavior in shipments as in new orders. Employment or number of employees fell to 1.1 in Feb 2012, near the contraction border of zero, but rose to 6.8 in Mar and jumped to 17.9 in Apr but declined to contraction at minus 1.3 in May, rebounding to 1.8 in Jun. The average work week also fell from 10.1 in Feb 2012 to 2.7 in Mar and then to contraction territory of minus 2.3 in Apr, minus 5.4 in May and sharp contraction at minus 19.1 in Jun. Most indexes of expectations for the next six months are showing sharp increases but interruptions from May to Jun 2012 for the general index. Employment increased from Jan to Apr, deteriorating in May and partially recovering in Jun while the average work week weakened in Apr and contracted at minus 1.1 in May and minus 0.8 in Jun. With most US workers on hourly remuneration, contraction of the workweek means reduction of labor income.
Table VA-1, FRB of Philadelphia Business Outlook Survey Diffusion Index SA
| General | New Orders | Ship-ments | # Workers | Average Work-week | |
| Current | |||||
| Jun 12 | -16.6 | -18.8 | -16.6 | 1.8 | -19.1 |
| May | -5.8 | -1.2 | 3.5 | -1.3 | -5.4 |
| Apr | 8.5 | 2.7 | 2.8 | 17.9 | -2.3 |
| Mar | 12.5 | 3.3 | 3.5 | 6.8 | 2.7 |
| Feb | 10.2 | 11.7 | 15.0 | 1.1 | 10.1 |
| Jan | 7.3 | 6.9 | 5.7 | 11.6 | 5.0 |
| Dec 11 | 6.8 | 10.7 | 9.1 | 11.5 | 2.8 |
| Nov | 3.1 | 3.5 | 6.0 | 10.6 | 7.1 |
| Oct | 10.8 | 8.5 | 13.6 | 5.0 | 4.2 |
| Sep | -12.7 | -5.5 | -16.6 | 7.3 | -6.2 |
| Aug | -22.7 | -22.2 | -8.9 | -0.9 | -11.2 |
| Jul | 6.2 | 0.5 | 8.2 | 9.5 | -3.9 |
| Future | |||||
| Jun 12 | 19.5 | 38.2 | 31.0 | 18.7 | -0.8 |
| May | 15.0 | 26.3 | 20.8 | 10.6 | -1.1 |
| Apr | 33.8 | 35.4 | 31.0 | 27.8 | 7.5 |
| Mar | 32.9 | 36.4 | 31.3 | 21.8 | 11.2 |
| Feb | 33.3 | 32.5 | 29.0 | 22.5 | 10.8 |
| Jan | 49.0 | 49.7 | 48.2 | 19.1 | 9.2 |
| Dec 11 | 40.0 | 44.1 | 36.4 | 10.8 | 4.5 |
| Nov | 37.7 | 36.9 | 35.5 | 25.2 | 4.0 |
| Oct | 28.8 | 28.1 | 29.0 | 15.5 | 8.4 |
| Sep | 25.2 | 24.6 | 27.1 | 14.0 | 6.8 |
| Aug | 6.3 | 20.6 | 18.4 | 11.2 | -0.7 |
| Jul | 25.8 | 31.2 | 26.1 | 12.9 | 6.6 |
Source: http://www.philadelphiafed.org/index.cfm
Chart VA-1 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jun 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully could be renewed strength from late 2011 into Jan 2012 but marginal weakness in Feb 2012 with stability in Mar and Apr followed by sharp decline in May and Jun.
Chart VA-1, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Chart VA-2 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct 2011. The strength of the first quarter of 2011 has not been recovered with weakness in Apr-Jun 2012 moving into contraction territory.
Chart VA-2, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current New Orders Diffusion Index
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-2. Housing starts fell 4.8 percent in May 2012 after increasing revised 5.4 percent in Apr 2012. Housing permits, indicating future activity, increased 7.9 percent in May 2012 after declining 6.0 percent in Apr but increasing 8.8 percent in Mar. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-2.
Table VA-2, US, Housing Starts and Permits SSAR Month ∆%
| Housing | Month ∆% | Housing | Month ∆% | |
| May 2012 | 708 | -4.8 | 780 | 7.9 |
| Apr | 744 | 5.4 | 723 | -6.0 |
| Mar | 706 | -1.7 | 769 | 8.8 |
| Feb | 718 | -0.3 | 707 | 3.4 |
| Jan | 720 | 3.3 | 684 | -2.4 |
| Dec 2011 | 697 | -1.6 | 701 | -1.1 |
| Nov | 708 | 12.4 | 709 | 6.3 |
| Oct | 630 | -2.6 | 667 | 8.3 |
| Sep | 647 | 11.4 | 616 | -4.5 |
| Aug | 581 | -5.4 | 645 | 2.9 |
| Jul | 614 | -0.2 | 627 | -0.9 |
| Jun | 615 | 11.6 | 633 | 1.4 |
| May | 551 | -0.2 | 624 | 7.9 |
| Apr | 552 | -8.0 | 578 | -2.0 |
| Mar | 600 | 15.8 | 590 | 10.1 |
| Feb | 518 | -18.0 | 536 | -5.3 |
| Jan | 632 | 17.3 | 566 | -10.4 |
| Dec 2010 | 539 | -1.1 | 632 | 12.9 |
| Nov | 545 | 0.4 | 560 | 0.4 |
| Oct | 543 | -8.6 | 558 | -0.9 |
| Sep | 594 | -0.8 | 563 | -3.0 |
SAAR: Seasonally Adjusted Annual Rate
Source: US Census Bureau http://www.census.gov/construction/nrc/
Housing starts and permits in Jan-May not-seasonally adjusted are provided in Table VA-3. Housing starts increased 26.8 percent in Jan-May 2012 relative to Jan-May 2011 and in the same period new permits increased 30.9 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 64.4 percent in Jan-May 2012 relative to Jan-May 2006 and fell 65.1 percent relative to Jan-Apr 2005. Housing permits fell 64.2 in Jan-May 2012 relative to Jan-May 2006 and fell 64.9 percent in Jan-May 2012 from Jan-May 2005.
Table VA-3, US, Housing Starts and New Permits, Thousands of Units, NSA, and %
| Housing Starts | New Permits | |
| Jan-May 2012 | 289.8 | 305.2 |
| Jan-May 2011 | 228.6 | 233.2 |
| ∆% Jan-May 2012/Jan-May 2011 | 26.8 | 30.9 |
| Jan-May 2006 | 814.7 | 852.5 |
| ∆%/Jan-May 2012 | -64.4 | -64.2 |
| Jan-May 2005 | 830.8 | 868.3 |
| ∆%/ Jan-May 2012 | -65.1 | -64.9 |
Source: http://www.census.gov/construction/nrc/ http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Chart VA-3 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-3 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in Mar-May 2012.
Chart VA-3, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr020.html
Table VA-4 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) in the first five months of the year from 2000 to 2012. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 706,000 to 744,000 in 2012, which is an improvement over the range of 551,000 in Jan-May 2011.
Table VA-4, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units
| Jan | Feb | Mar | Apr | May | |
| 2000 | 1,636 | 1,737 | 1,604 | 1,626 | 1,575 |
| 2001 | 1,600 | 1,625 | 1,590 | 1,649 | 1,605 |
| 2002 | 1,698 | 1,829 | 1,642 | 1,592 | 1,764 |
| 2003 | 1,853 | 1,629 | 1,726 | 1,643 | 1,751 |
| 2004 | 1,911 | 1,846 | 1,998 | 2,003 | 1,981 |
| 2005 | 2,144 | 2,207 | 1,864 | 2,061 | 2,025 |
| 2006 | 2,273 | 2,119 | 1,969 | 1,821 | 1,942 |
| 2007 | 1,409 | 1,480 | 1,495 | 1,490 | 1,415 |
| 2008 | 1,084 | 1,103 | 1,005 | 1,013 | 973 |
| 2009 | 490 | 582 | 505 | 478 | 540 |
| 2010 | 614 | 604 | 636 | 687 | 583 |
| 2011 | 632 | 518 | 600 | 552 | 551 |
| 2012 | 720 | 718 | 706 | 744 | 708 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Table VA-5 provides actual new housing units started in the US, or not seasonally adjusted, in Jan-May from 2000 to 2012. The number of housing units started fell from the peak of 197.9 thousand in May 2005 to 68.3 thousand in May 2012 or 65.5 percent. The number of housing units started jumped from 54.0 thousand in May 2011 to 68.3 thousand in May 2012 or by 26.5 percent.
Table VA-5, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units
| Jan | Feb | Mar | Apr | May | |
| 2000 | 104.0 | 119.7 | 133.4 | 149.5 | 152.9 |
| 2001 | 106.4 | 108.2 | 133.2 | 151.3 | 154.0 |
| 2002 | 110.4 | 120.4 | 138.2 | 148.8 | 165.5 |
| 2003 | 117.8 | 109.7 | 147.2 | 151.2 | 165.0 |
| 2004 | 124.5 | 126.4 | 173.8 | 179.5 | 187.6 |
| 2005 | 142.9 | 149.1 | 156.2 | 184.6 | 197.9 |
| 2006 | 153.0 | 145.1 | 165.9 | 160.5 | 190.2 |
| 2007 | 95.0 | 103.1 | 123.8 | 135.6 | 136.5 |
| 2008 | 70.8 | 78.4 | 82.2 | 89.5 | 91.7 |
| 2009 | 31.9 | 39.8 | 42.7 | 42.5 | 52.2 |
| 2010 | 38.9 | 40.7 | 54.7 | 62.0 | 56.2 |
| 2011 | 40.2 | 35.4 | 49.9 | 49.0 | 54.0 |
| 2012 | 47.2 | 49.7 | 58.0 | 66.6 | 68.3 |
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr020.html
A longer perspective on residential construction in the US is provided by Table VA-6 with annual data from 1960 to 2011. Housing starts fell 70.6 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.3 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.4 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.
Table VA-6, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands
| Starts | Permits | |
| 2011 | 608.8 | 624.1 |
| ∆% 2011/2010 | 3.7 | 3.2 |
| ∆% 2011/2005 | -70.6 | -71.0 |
| ∆% 2011/2000 | -61.2 | -60.8 |
| ∆% 2011/1960 | -51.4 | -37.4 |
| 2010 | 586.9 | 604.6 |
| ∆% 2010/2005 | -71.6 | -71.9 |
| ∆% 2010/2000 | -62.6 | -62.0 |
| ∆% 2010/1960 | -53.1 | -39.4 |
| 2009 | 554,0 | 583.0 |
| 2008 | 905.5 | 905.4 |
| 2007 | 1,355,0 | 1,398.4 |
| 2006 | 1,800.9 | 1,838.9 |
| 2005 | 2,068.3 | 2,155.3 |
| ∆% 2005/2000 | 31.8 | 35.4 |
| 2004 | 1,955.8 | 2,070.1 |
| 2003 | 1,847.7 | 1,889,2 |
| 2002 | 1,704.9 | 1,747.2 |
| 2001 | 1,602.7 | 1,636.7 |
| 2000 | 1,568.7 | 1,592.3 |
| ∆% 2000/1990 | 31.5 | 43.3 |
| 1990 | 1,192,7 | 1,110.8 |
| 1980 | 1,292.2 | 1,190.6 |
| 1970 | 1,433.6 | 1,351.5 |
| 1960 | 1,252.2 | 997.6 |
Source: http://www.census.gov/construction/nrc/
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae- and Freddie Mac-acquired mortgages” (http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf). Table VA-7 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IQ2000 to IQ2006, the index for the US as a whole rose 60.4 percent, higher than 80 percent for New England and Middle Atlantic, 73.8 for South Atlantic but only by 30.4 percent for East South Central. Prices fell relative to 2012 from all years since 2005 with some exceptions for 2011. From IQ2000 to IQ2011, prices rose for the US and the four regions in Table VA-7.
Table VA-7, US, FHFA House Price Index Purchases Only NSA ∆%
| United States | New England | Middle Atlantic | South Atlantic | East South Central | |
| 1Q2000 | 22.9 | 42.7 | 33.9 | 23.9 | 9.8 |
| 1Q2000 | 46.8 | 74.9 | 65.6 | 53.8 | 21.0 |
| 1Q2000 to | 60.4 | 82.3 | 81.5 | 73.8 | 30.4 |
| 1Q2005 t0 | -10.5 | -12.0 | -0.2 | -14.2 | 2.3 |
| 1Q2006 | -18.1 | -15.6 | -8.9 | -24.1 | -5.0 |
| 1Q2007 to | -19.8 | -10.4 | -10.2 | -23.3 | -9.1 |
| 1Q2010 to | -5.1 | -4.6 | -4.8 | -6.2 | -3.4 |
| 1Q2011 to | 0.4 | -1.3 | -0.9 | 0.9 | 0.9 |
| 1Q2000 to | 31.4 | 53.9 | 62.3 | 32.0 | 23.8 |
Source: http://fhfa.gov/webfiles/23967/Q12012HPI_Report52312F.pdf
Data of the FHFA HPI for the remaining US regions are provided in Table VA-8. Behavior is not very different than in Table IA-8 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2012, there was still appreciation relative to 2000.
Table VA-8, US, FHFA House Price Index Purchases Only NSA ∆%
| West South Central | West North Central | East North Central | Mountain | Pacific | |
| 1Q2000 | 12.9 | 18.8 | 14.7 | 17.2 | 39.6 |
| 1Q2000 | 22.1 | 31.6 | 24.9 | 45.1 | 98.0 |
| 1Q2000 to 1Q2006 | 31.0 | 38.3 | 28.5 | 68.6 | 127.7 |
| 1Q2005 t0 | 14.5 | -3.2 | -15.5 | -15.9 | -30.2 |
| 1Q2006 | 6.7 | -7.9 | -17.9 | -27.6 | -39.3 |
| 1Q2007 to | 0.7 | -9.7 | -17.8 | -30.8 | -38.7 |
| 1Q2010 to | 0.2 | -2.5 | -4.9 | -8.3 | -9.6 |
| 1Q2011 to | 2.6 | 2.3 | 0.2 | 0.4 | -1.6 |
| 1Q2000 to 1Q2012 | 39.8 | 27.4 | 5.5 | 22.0 | 38.2 |
Source: http://fhfa.gov/webfiles/23967/Q12012HPI_Report52312F.pdf
Chart VA-4 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IQ2001 to IQ2012. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IQ2008 but there was another decline after IQ2010. The rate of decline improved in the second half of 2011 and into 2012.
Chart VA-4, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change
Source: Federal Housing Finance Agency
http://www.fhfa.gov/default.aspx?Page=14
Monthly and 12-month percentage changes of the FHFA House Price Index are provided in Table VA-9. Percentage monthly increases of the FHFA index were positive from Apr to Jul 2011 while 12 months percentage changes improved steadily from more or equal to minus 6 percent in Mar to May 2011 to minus 4.3 percent in Jun. The FHFA house price index fell 0.9 percent in Oct and fell 3.4 percent in the 12 months ending in Oct. There was significant recovery in Nov with increase in the house price index of 0.7 percent and reduction of the 12-month rate of decline to 2.2 percent. The house price index rose 0.2 percent in Dec 2011 and the 12-month percentage change fell to minus 1.4 percent. There was further improvement with revised decline 0.5 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.3 percent. The index changed to positive change of 0.3 percent in Feb 2012 and increase of 0.2 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.6 percent and 2.4 percent in 12 months. The house price index of FHFA increased 0.8 percent in Apr 2012 and 3.0 percent in 12 months.
Table VA-9, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%
| Month ∆% SA | 12 Month ∆% NSA | |
| Apr 2012 | 0.8 | 3.0 |
| Mar | 1.6 | 2.4 |
| Feb | 0.3 | 0.2 |
| Jan | -0.5 | -1.3 |
| Dec 2011 | 0.2 | -1.4 |
| Nov | 0.7 | -2.2 |
| Oct | -0.9 | -3.4 |
| Sep | 0.3 | -2.6 |
| Aug | -0.3 | -3.9 |
| Jul | 0.2 | -3.6 |
| Jun | 0.6 | -4.3 |
| May | 0.1 | -5.9 |
| Apr | 0.3 | -6.0 |
| Mar | -0.6 | -6.0 |
| Feb | -1.3 | -5.4 |
| Jan | -0.7 | -4.6 |
| Dec 2010 | -3.9 | |
| Dec 2009 | -1.9 | |
| Dec 2008 | -9.7 | |
| Dec 2007 | -3.0 | |
| Dec 2006 | 2.6 | |
| Dec 2005 | 9.9 | |
| Dec 2004 | 10.1 | |
| Dec 2003 | 7.9 | |
| Dec 2002 | 7.8 | |
| Dec 2001 | 6.9 | |
| Dec 2000 | 7.1 | |
| Dec 1999 | 6.1 | |
| Dec 1998 | 5.9 | |
| Dec 1997 | 3.4 | |
| Dec 1996 | 2.8 | |
| Dec 1995 | 2.8 | |
| Dec 1994 | 2.6 | |
| Dec 1993 | 3.1 | |
| Dec 1992 | 2.4 |
Source:
http://www.fhfa.gov/default.aspx?Page=14
Table VA-10 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table VA-10 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2011, the FHFA house price index increased 74.4 percent at the yearly average rate of 3.0 percent. In the period 1992-2000, the FHFA house price index increased 39.0 percent at the average yearly rate of 4.2 percent. The rate of price increase accelerated to 7.5 percent in the period 2000-2003 and to 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 18.6 percent between 2006 and 2011 and 16.6 percent between 2005 and 2011.
Table VA-10, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2011
| Dec | ∆% | Average ∆% per Year |
| 1992-2011 | 74.4 | 3.0 |
| 1992-2000 | 39.0 | 4.2 |
| 2000-2003 | 24.2 | 7.5 |
| 2000-2005 | 50.3 | 8.5 |
| 2003-2005 | 21.0 | 10.0 |
| 2005-2011 | -16.6 | NA |
| 2000-2006 | 54.3 | 7.5 |
| 2003-2006 | 24.1 | 7.5 |
| 2006-2011 | -18.6 | NA |
Source: http://www.fhfa.gov/default.aspx?Page=14
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 | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +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 51.3 in Apr to 50.1 in May (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9619). Alex Hamilton, economist at Markit and author of the report, finds softer conditions in Japan relative to Apr with the survey’s index suggesting movement toward stagnation (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9619). The Markit Business Activity Index of Services decreased from 51.0 in Apr to 49.8 in May, also showing slower pace and the first reading below 50.0 in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9619). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, registered 50.7 in May, 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 output and new business growing at marginal rate with the impulse originating in investment goods while consumer and intermediate goods contracted (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 |
| Corporate Goods Prices | May ∆% -0.4 |
| Consumer Price Index | Apr NSA ∆% 0.1 |
| Real GDP Growth | IQ2012 ∆%: 1.2 on IVQ2011; IQ2012 SAAR 4.7; |
| Employment Report | Apr Unemployed 3.15 million Change in unemployed since last year: minus 140 thousand |
| All Industry Indices | Apr month SA ∆% 0.1 Blog 6/24/12 |
| Industrial Production | Apr SA month ∆%: 0.2 |
| Machine Orders | Total Apr ∆% -4.0 Private ∆%: 16.4 |
| Tertiary Index | Apr month SA ∆% -0.3 |
| Wholesale and Retail Sales | Apr 12 months: |
| Family Income and Expenditure Survey | Apr 12-month ∆% total nominal consumption 3.2, real 2.6 Blog 6/3/12 |
| Trade Balance | Exports May 12 months ∆%: +10.0 Imports May 12 months ∆% +9.3 Blog 6/24/12 |
Links to blog comments in Table JPY:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/27/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
7/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP increased 1.2 percent in IQ2012 (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html), industry increased 1.3 percent, the tertiary sector was unchanged, government increased 0.1 percent and construction increased 5.9 percent. The report shows that the all industry index decreased 0.1 percent in IQ2012. Industry contributed 0.23 percentage points to growth of the all industry index and the tertiary index contributed 0.00 percentage points. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 0.2 percent and revised unchanged GDP (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html Table VB-1) when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 2.0 percent (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html Table VB-1).
Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| 2012 | ||||||
| IQ | 5.7 | 1.3 | 0.0 | 0.1 | -0.1 | 1.2 |
| Cont to IVQ % Change | 0.25 | 0.23 | 0.00 | 0.01 | ||
| 2011 | ||||||
| IVQ | -1.5 | 0.4 | 0.5 | 0.2 | 0.5 | 0.0 |
| IIIQ | 3.3 | 5.4 | 1.5 | 0.2 | 2.1 | 1.9 |
| IIQ | -7.5 | -4.2 | -0.5 | 0.1 | -0.9 | -0.4 |
| IQ | 3.2 | -1.5 | -1.0 | -0.2 | -1.3 | -2.0 |
| 2010 | ||||||
| IV Q | -1.8 | -0.1 | 0.3 | -0.3 | -0.2 | 0.0 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201204j.pdf
There are more details in Table VB-2. The all industry activity index increased 0.1 percent in Apr 2012 relative to Mar 2012 with decline of 0.3 percent of the tertiary or services sector, decrease of industry of 0.2 percent while construction fell 5.6 percent and government increased 0.2 percent. Industry deducted 0.04 percentage points to growth in Apr while the tertiary sector deducted 0.20 percentage points and construction deducted 0.25 percentage points. It is not possible to explain the overall index by the reported contributions of components. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec that was interrupted in Jan-Mar 2012 with modest growth in Apr. The highest risk to Japan is if weakening world growth would affect Japanese exports.
Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Apr 2012 | -5.6 | -0.2 | -0.3 | 0.2 | 0.1 |
| Cont to Apr % Change | -0.25 | -0.04 | -0.20 | 0.02 | |
| Mar | -5.5 | 1.3 | -0.6 | 0.0 | -0.3 |
| Feb | 4.2 | -1.6 | 0.0 | -0.4 | -0.1 |
| Jan | 5.6 | 0.9 | -0.6 | 0.5 | -0.7 |
| Dec 2011 | -1.4 | 2.3 | 1.6 | -0.2 | 1.7 |
| Nov | 0.3 | -1.7 | -0.8 | 0.1 | -0.9 |
| Oct | -2.6 | 1.8 | 0.6 | 0.1 | 0.6 |
| Sep | 1.6 | -1.9 | -0.2 | 0.2 | -0.1 |
| Aug | 1.1 | 0.9 | 0.1 | -0.1 | 0.2 |
| Jul | 0.1 | 1.1 | 0.4 | -0.2 | 0.5 |
| Jun | -0.1 | 3.8 | 1.2 | 0.2 | 1.5 |
| May | 6.5 | 5.8 | 0.9 | 0.7 | 1.6 |
| Apr | -5.1 | 2.4 | 2.1 | -0.9 | 2.0 |
| Mar | -10.6 | -16.2 | -5.4 | 0.7 | -6.6 |
| Feb | 2.3 | 1.1 | 0.3 | 0.0 | 0.1 |
| Jan | 6.3 | 1.2 | 0.5 | -0.5 | 0.6 |
| Dec 2010 | -0.5 | 2.4 | -0.2 | 0.3 | 0.1 |
| Nov | -1.4 | 1.6 | 0.6 | -0.4 | 0.3 |
| Oct | 0.1 | -1.4 | 0.2 | -0.1 | 0.0 |
| Sep | -1.9 | -0.8 | -0.4 | -0.1 | -0.4 |
| Aug | 1.6 | -0.1 | 0.1 | 0.1 | -0.5 |
| Jul | 0.8 | 0.3 | 0.7 | 0.1 | 1.1 |
| Jun | -2.1 | -1.5 | 0.1 | -0.1 | 0.2 |
| May | 6.3 | -0.1 | -0.3 | 0.0 | 0.0 |
| Apr | -3.1 | 0.6 | 1.6 | -0.2 | 0.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201204j.pdf
Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.6 percent in 2011, almost equal to the revised decline of 0.7 percent in GDP. Industry fell 2.3 percent, deducting 0.43 percentage points, while the tertiary sector increased 0.1 percent, adding 0.07 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.
Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| Calendar Year | ||||||
| 2011 | -2.0 | -2.3 | 0.1 | -0.2 | -0.6 | -0.7 |
| Cont to 2011 % Change | -0.09 | -0.43 | 0.07 | -0.02 | ||
| 2010 | -7.0 | 16.4 | 1.3 | -0.7 | 3.1 | 4.4 |
| 2009 | -5.6 | -21.9 | -5.2 | 0.1 | -7.7 | -5.5 |
| 2008 | -7.6 | -3.4 | -1.0 | -1.4 | -1.9 | -1.0 |
| 2012 | ||||||
| IQ | -0.3 | 4.8 | 2.4 | 0.2 | 2.4 | 2.8 |
| Cont to IQ % Change | -0.01 | 0.84 | 1.56 | 0.02 | ||
| 2011 | ||||||
| IVQ | -2.8 | -1.6 | 0.6 | 0.6 | 0.0 | -0.6 |
| IIIQ | -3.2 | -0.9 | 0.3 | -0.1 | -0.1 | -0.5 |
| IIQ | -5.1 | -5.8 | -0.5 | -0.4 | -1.6 | -1.8 |
| IQ | 2.3 | -1.3 | -0.3 | -1.0 | -0.5 | -0.2 |
| 2010 | ||||||
| IV Q | -0.6 | 5.9 | 1.6 | -0.8 | 2.1 | 3.1 |
| III Q | -3.2 | 14.0 | 1.8 | -0.6 | 3.2 | 5.5 |
| IIQ | -11.3 | 21.3 | 1.4 | -0.7 | 3.5 | 4.4 |
| IQ | -12.4 | 28.0 | 0.8 | -0.5 | 3.9 | 4.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201204j.pdf
Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index increased 4.1 percent in Apr 2012 relative to Apr 2011, jumping from the low level caused by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201. Industry increased 12.9 percent in Apr 2012 relative to a year earlier, adding 2.11 percentage points to growth of the all industry activity index. The tertiary sector increased 2.5 percent, adding 1.70 percentage points. Construction added 0.15 percentage points to the index and government added 0.13 percentage points. The percentage point contributions add to the increase of the index by 4.1 percent.
Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Apr 2012 | 3.5 | 12.9 | 2.5 | 1.0 | 4.1 |
| Cont to Apr % Change | 0.15 | 2.11 | 1.70 | 0.13 | |
| Mar | 4.0 | 14.2 | 4.2 | 0.7 | 5.5 |
| Feb | -1.6 | 1.5 | 2.4 | -0.7 | 1.6 |
| Jan | -3.4 | -1.6 | 0.4 | 0.4 | -0.1 |
| Dec 2011 | -3.0 | -3.0 | 1.2 | 0.8 | 0.2 |
| Nov | -1.2 | -2.9 | -0.3 | 0.8 | -0.7 |
| Oct | -4.0 | 0.9 | 0.9 | 0.2 | 0.5 |
| Sep | -0.4 | -2.4 | 0.1 | 0.1 | -0.3 |
| Aug | -4.3 | 1.6 | 0.8 | -1.1 | 0.4 |
| Jul | -4.8 | -1.7 | 0.1 | 0.5 | -0.4 |
| Jun | -4.6 | -0.6 | 1.0 | 0.3 | 0.4 |
| May | -6.5 | -4.6 | -0.2 | -0.8 | -1.3 |
| Apr | -4.1 | -12.7 | -2.3 | -0.6 | -4.0 |
| Mar | -2.8 | -12.4 | -3.4 | 0.0 | -4.6 |
| Feb | 4.4 | 4.5 | 2.0 | -1.4 | 2.1 |
| Jan | 5.9 | 6.1 | 1.0 | -1.4 | 1.8 |
| Dec 2010 | -0.5 | 5.9 | 1.8 | -0.7 | 2.1 |
| Nov | -0.5 | 7.0 | 2.5 | -1.9 | 2.7 |
| Oct | -1.1 | 5.0 | 0.5 | 0.3 | 1.3 |
| Sep | -2.8 | 12.1 | 1.3 | -0.6 | 2.7 |
| Aug | -1.7 | 15.5 | 2.3 | -1.1 | 3.8 |
| Jul | -5.3 | 14.6 | 1.6 | -0.1 | 3.3 |
| Jun | -8.3 | 16.6 | 1.0 | -0.7 | 3.0 |
| May | -8.1 | 20.7 | 1.2 | -0.9 | 3.4 |
| Apr | -17.0 | 27.0 | 1.9 | -0.4 | - |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201204j.pdf
The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 33.8 percent of Japan’s imports and increased 19.6 percent in the 12 months ending in May 2012. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 14.5 percent of Japan’s exports with increase of 6.1 percent in the 12 months ending in May. Machinery contributes 19.9 percent of Japan’s exports with decrease of 1.9 percent in the 12 months ending in May. Electrical machinery contributes 17.1 percent of Japan’s exports with increase of 5.6 percent in the 12 months ending in May. The best outcome is exports of transport equipment with share of 24.3 percent in total exports and increase of 50.6 percent in the 12 months ending in May largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows increase of the major categories of motor vehicles of 87.4 percent: cars increased 93.3 percent with strong growth of 59.3 percent in the minor category of buses and trucks, increase of 46.1 percent for parts of motor vehicles, decrease of 23.0 percent for motorcycles and decline of 20.3 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversion of carry trades from zero interest rates to commodity prices.
Table VB-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens
| May 2012 | Value JPY Millions | % of Total | 12 Months ∆% | Contribution Degree % |
| Exports | 5,234,698 | 100.0 | 10.0 | 10.0 |
| Foodstuffs | 27,188 | 0.5 | 14.2 | 0.1 |
| Raw Materials | 97,858 | 1.9 | 40.2 | 0.6 |
| Mineral Fuels | 106,391 | 2.0 | 13.4 | 0.3 |
| Chemicals | 525,664 | 10.0 | -2.4 | -0.3 |
| Manufactured Goods | 757,562 | 14.5 | 6.1 | 0.9 |
| Machinery | 1,042,133 | 19.9 | -1.9 | -0.4 |
| Electrical Machinery | 896,147 | 17.1 | 5.6 | 1.0 |
| Transport Equipment | 1,220,851 | 24.3 | 50.6 | 8.6 |
| Motor Vehicles | 753,938 | 14.4 | 87.4 | 7.4 |
| Cars | 643,420 | 12.3 | 93.3 | 6.5 |
| Buses & Trucks | 101,266 | 1.9 | 59.3 | 0.8 |
| Parts of Motor Vehicles | 269,096 | 5.1 | 46.1 | 1.8 |
| Motorcycles | 15,150 | 0.3 | -23.0 | -0.1 |
| Ships | 131,395 | 2.5 | -20.3 | -0.7 |
| Other | 560,904 | 10.7 | -6.2 | -0.8 |
| Imports | 6,141,953 | 100.0 | 9.3 | 9.3 |
| Foodstuffs | 536,437 | 8.7 | 1.6 | 0.1 |
| Raw Materials | 467,691 | 7.6 | 1.6 | 0.1 |
| Mineral Fuels | 2,078,105 | 33.8 | 19.6 | 6.1 |
| Chemicals | 524,036 | 8.5 | -2.0 | -0.2 |
| Manufactured Goods | 504,021 | 8.2 | -11.2 | -1.1 |
| Machinery | 457,720 | 7.5 | 7.6 | 0.6 |
| Electrical Machinery | 686,407 | 11.2 | 10.9 | 1.2 |
| Transport Equipment | 190,306 | 3.1 | 68.3 | 1.4 |
| Other | 696,730 | 11.3 | 9.9 | 1.1 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year in the years from 1979 to 2010. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.
Table VB-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens
| Years | Exports | Imports | Balance |
| 1950 | 298 | 348 | -50 |
| 1955 | 723 | 889 | -166 |
| 1960 | 1,459 | 1,616 | -157 |
| 1965 | 3,042 | 2,940 | 102 |
| 1970 | 6,954 | 6,797 | 157 |
| 1975 | 16,545 | 17,170 | -625 |
| 1979 | 22,531 | 24,245 | -1,714 |
| 1980 | 29,382 | 31,995 | -2,613 |
| 1981 | 33,468 | 31,464 | 2,004 |
| 1982 | 34,432 | 32,656 | 1,776 |
| 1983 | 34,909 | 30,014 | 4,895 |
| 1984 | 40,325 | 32,321 | 8,004 |
| 1985 | 41,955 | 31,084 | 10,871 |
| 1986 | 35,289 | 21,550 | 13,739 |
| 1987 | 33,315 | 21,736 | 11,579 |
| 1988 | 33,939 | 24,006 | 9,933 |
| 1989 | 37,822 | 28,978 | 8,844 |
| 1990 | 41,456 | 33,855 | 7,601 |
| 1991 | 42,359 | 31,900 | 10,459 |
| 1992 | 43,012 | 29,527 | 13,485 |
| 1993 | 40,202 | 26,826 | 13,376 |
| 1994 | 40,497 | 28,104 | 12,393 |
| 1995 | 41,530 | 31,548 | 9,982 |
| 1996 | 44,731 | 37,993 | 6,738 |
| 1997 | 50,937 | 40,956 | 9,981 |
| 1998 | 50,645 | 36,653 | 13,992 |
| 1999 | 47,547 | 35,268 | 12,279 |
| 2000 | 51,654 | 40,938 | 10,716 |
| 2001 | 48,979 | 42,415 | 6,564 |
| 2002 | 52,108 | 42,227 | 9,881 |
| 2003 | 54,548 | 44,362 | 10,186 |
| 2004 | 61,169 | 49,216 | 11,953 |
| 2005 | 65,656 | 56,949 | 8,707 |
| 2006 | 75,246 | 67,344 | 7,902 |
| 2007 | 83,931 | 73,135 | 10,796 |
| 2008 | 81,018 | 78,954 | 2,424 |
| 2009 | 54,170 | 51,499 | 2,671 |
| 2010 | 67,399 | 60,764 | 6,635 |
| 2011 | 65,546 | 68,111 | -2,565 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-7 for May 2012. The share of Asia in Japan’s trade is more than one half, 55.1 percent of exports and 44.2 percent of imports. Within Asia, exports to China are 18.5 percent of total exports and imports from China 20.7 percent of total imports. The second largest export market for Japan in May 2012 is the US with share of 17.0 percent of total exports and share of imports from the US of 9.1 percent in total imports. Western Europe has share of 10.8 percent in Japan’s exports and of 10.0 percent in imports. High growth rates of exports and imports in May 2012 relative to May 2011 reflect the low levels after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201 Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity.
Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| May 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 5,234,698 | 10.0 | 6,141,953 | 9.3 |
| Asia | 2,881,779 | 4.5 | 2,715,842 | 10.7 |
| China | 966,176 | 3.0 | 1,268,837 | 10.0 |
| USA | 891,408 | 38.2 | 557,031 | 2.8 |
| Canada | 62,010 | 34.2 | 94,895 | 9.3 |
| Brazil | 36,414 | 12.8 | 85,789 | 16.9 |
| Mexico | 70,167 | 8.7 | 32,762 | 3.7 |
| Western Europe | 565,231 | -4.8 | 616,791 | 5.3 |
| Germany | 144,600 | -2.7 | 168,383 | 16.7 |
| France | 41,445 | -15.6 | 78,123 | -10.0 |
| UK | 89,006 | 3.6 | 54,672 | 12.1 |
| Middle East | 179,457 | 60.5 | 1,103,451 | 12.3 |
| Australia | 121,883 | 21.7 | 416,296 | 11.9 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical distribution of Japan’s trade balance is provided in Table VB-8. The combined trade surpluses with the US, UK and Mexico of JPY 406,116 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,218,407 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 302,661 million in May 2012.
Table VB-8, Japan, Trade Balance, Millions of Yen
| May 2012 | Millions of Yen |
| Total | -907,225 |
| Asia | 165,937 |
| China | -302,661 |
| USA | 334,377 |
| Canada | -32,885 |
| Brazil | -49,375 |
| Mexico | 37,405 |
| Western Europe | -51,560 |
| Germany | -23,783 |
| France | -36,378 |
| UK | 34,334 |
| Middle East | -923,994 |
| Australia | -294,413 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
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/t20120605_402810072.htm). Table CIPMS provides this index and components from Jan to May 2012. The index fell from 57.3 in Mar to 55.2 in May and is now lower than 55.7 in Jan but still remains above the threshold of contraction of 50.0.
Table CIPMS, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| May | 55.2 | 52.5 | 53.6 | 48.5 | 65.4 |
| 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/t20120605_402810072.htm
Chart CIPMS provides China’s nonmanufacturing purchasing managers’ index from May 2011 to May 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012, which is the lowest level since May 2011.
Chart CIPMS, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120605_402810072.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/t20120605_402810071.htm). Chart CIPMM provides the index from May 2011 to May 2012. There is deceleration from 52.0 in May 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012, which is the second lowest level in a year, lower than 49.0 in Nov 2011 and equal to 50.4 in Oct 2011, and close to the contraction zone at 50.0.
Chart CIPMM, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120605_402810072.htm
There is deterioration in the HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9680). The overall Flash China PMI™ decreased from 48.4 in May to 48.1 in Jun for a seven-month low, while the Flash China Manufacturing Output Index fell from 49.7 in May to 49.1 in Jun, at a three-month high and in contraction territory below 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that exports in China may continue decelerating in coming months while there are indications of weakness in domestic demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9680). More stimulus measures are required to strengthen manufacturing. The HSBC China Services PMI™, compiled by Markit, improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 51.4 in Apr to 51.9 in May for a second consecutive month above 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9620). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds improving activity in services resulting from continuing gains in new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9620
).The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, fell slightly to 48.4 in May from 49.3 in Feb, in a seventh consecutive month of declining conditions in manufacturing in China but at a marginal rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9613). 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 continuing slowdown in China’s economy into IIQ2012, which requires further reduction of bank reserve requirements and the policy interest rate together with fiscal measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9613).
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. On Jun 8, 2012, the People’s Bank of China lowered the one year benchmark deposit and loan interest rates by 25 basis points (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). The measures are intended to strengthen the economy. Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | May 12-month ∆%: minus 1.4 May month ∆%: minus 0.4 |
| Consumer Price Index | May month ∆%: -0.2 May 12 month ∆%: 3.0 |
| Value Added of Industry | May month ∆%: 0.89 Jan-May 2012/Jan-May 2011 ∆%: 10.7 |
| GDP Growth Rate | Year IQ2012 ∆%: 8.1 |
| Investment in Fixed Assets | Total Jan-May 2012 ∆%: 20.1 Real estate development: 18.5 |
| Retail Sales | May month ∆%: 0.84 Jan-May ∆%: 14.5 |
| Trade Balance | May balance $18.7 billion Cumulative May: $37.9 billion |
Links to blog comments in Table CNY:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html
VD Euro Area. Table VD-EUR provides inflation, unemployment and real GDP growth in the euro area yearly from 1999 to 2011 together with growth forecasts of EUROSTAT for 2012 and 2013. Inflation in the euro zone remained subdued around 2 percent in the first five years of the euro zone from 1999 to 2004, as shown in Table VD-EUR. Inflation climbed above 2.0 percent after 2005, peaking at 3.3 percent in 2008 with the surge in commodity prices but falling to 0.3 percent in 2009 with the collapse of commodity prices. Inflation climbed back to 1.6 percent in 2010 and 2.7 percent in 2011. Under the regime of zero interest rates inflation returns worldwide during relaxation of risk aversion. The rate of unemployment increased in 2011 while the rate of GDP growth fell. EUROSTAT forecasts slightly negative growth of 0.3 percent in 2012 and growth of 1.0 percent in 2013.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, ∆%
| Year | HICP ∆% | Unemployment | GDP ∆% |
| 1999 | 1.2 | 9.6 | 2.9 |
| 2000 | 2.2 | 8.7 | 3.8 |
| 2001 | 2.4 | 8.1 | 2.0 |
| 2002 | 2.3 | 8.5 | 0.9 |
| 2003 | 2.1 | 9.0 | 0.7 |
| 2004 | 2.2 | 9.3 | 2.2 |
| 2005 | 2.2 | 9.2 | 1.7 |
| 2006 | 2.2 | 8.5 | 3.3 |
| 2007 | 2.1 | 7.6 | 3.0 |
| 2008 | 3.3 | 7.6 | 0.4 |
| 2009 | 0.3 | 9.6 | -4.4 |
| 2010 | 1.6 | 10.1 | 2.0 |
| 2011 | 2.7 | 10.2 | 1.5 |
| 2012* | -0.3 | ||
| 2013* | 1.0 |
*EUROSTAT forecast
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI®, combining activity in manufacturing and services, was unchanged in Jun from 46.0 in May, for the lowest reading in 35 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9683). Chris Williamson, Chief Economist at Markit, finds that GDP could have declined 0.6 percent in the euro area in IIQ2012, with weaker conditions in the indebted countries spreading to France with decline of output of 0.6 percent and Germany with moderate decline of output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9683). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 46.7 in Apr to 46.0 in May (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9638) in the deepest contraction since the Jun 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 IIQ2012 but even higher depending on data for Jun, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9638). The Markit Eurozone Manufacturing PMI® declined close to a three-year low at 45.1 in May from 45.9 in Apr in ten consecutive monthly readings of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area in May declined at a quarterly rate of about 1 percent, exerting pressure on GDP in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IQ2012 ∆% 0.0; IQ2012/IQ2011 ∆% -0.1 Blog 6/10/12 |
| Unemployment | Apr 2012: 11.0% unemployment rate Apr 2012: 17.405 million unemployed Blog 6/3/12 |
| HICP | May month ∆%: -0.1 12 months May ∆%: 2.4 |
| Producer Prices | Euro Zone industrial producer prices Apr ∆%: 0.0 |
| Industrial Production | Apr month ∆%: -0.8; Apr 12 months ∆%: -2.3 |
| Retail Sales | Apr month ∆%: -1.0 |
| Confidence and Economic Sentiment Indicator | Sentiment 90.6 May 2012 Confidence minus 19.3 May 2012 Blog 6/3/12 |
| Trade | Jan-Apr 2012/Jan-Apr 2011 Exports ∆%: 7.9 Apr 2012 12-month Exports ∆% 6.1 Imports ∆% -0.9 |
Links to blog comments in Table EUR:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-DE, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2011 | 3.0 | 3.1 |
| 2010 | 3.7 | 3.6 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html
The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, fell from 50.5 in Apr to 49.6 in May, which is a six-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9561). The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, fell from 50.5 in Apr to 49.3 in May, indicating marginal deterioration in private sector output for the first time in six months and the deepest since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9659). Tim Moore, Senior Economist at Markit and author of the report, finds that the index suggests flat GDP in Germany in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9659). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 46.2 in Apr to 45.2 in May, indicating the sharpest decline of manufacturing conditions since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9626). Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output is showing the sharpest drop in about three years with contracting orders from export markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9626). Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IQ2012 0.5 ∆%; I/Q2012/IQ2011 ∆% 1.7 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 5/27/12 |
| Consumer Price Index | May month SA ∆%: -0.2 |
| Producer Price Index | May month ∆%: -0.3 |
| Industrial Production | Mfg Apr month SA ∆%: -0.9 |
| Machine Orders | Apr month ∆%: -3.7 |
| Retail Sales | Apr Month ∆% 0.6 12-Month ∆% minus 3.8 Blog 6/3/12 |
| Employment Report | Unemployment Rate Mar 5.2% |
| Trade Balance | Exports Apr 12-month NSA ∆%: 3.4 Blog 6/10/12 |
Links to blog comments in Table DE:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
VF France. The Markit Flash France Composite Output Index increased from 44.6 in May to 46.7 in Jun, for the highest reading in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9678). Jack Kennedy, Senior Economist at Markit and author of the report, finds that IIQ2012 may have been the weakest in activity in France in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9678). The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 45.9 in Apr to 44.6 in May, which is the lowest reading in 37 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9630). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that weak services and manufacturing survey data suggest contraction of GDP in IIQ2012 after no growth in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9630).The Markit France Manufacturing Purchasing Managers’ Index® fell to 44.7 in May from 46.9 in Apr for the sharpest decline of the manufacturing economy in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9629). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing deterioration in manufacturing with the sharpest contraction of new orders since Apr 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9629). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | May month ∆% -0.1 |
| PPI | Apr month ∆%: 0.0 Blog 6/3/12 |
| GDP Growth | IQ2012/IVQ2011 ∆%: 0.0 |
| Industrial Production | Apr SA ∆%: |
| Consumer Spending | Apr Manufactured Goods |
| Employment | IQ2012 Unemployed 2.746 million |
| Trade Balance | Apr Exports ∆%: month 1.8, 12 months 7.4 Apr Imports ∆%: month 2.1, 12 months 3.4 Blog 6/10/12 |
| Confidence Indicators | Historical averages 100 Jun Mfg Business Climate 92 Blog 6/24/12 |
Links to blog comments in Table FR:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html
The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds worsening conditions in Apr, May and Jun after improvement in Mar. Table VF-1 shows the INSEE business climate indicator. The headline synthetic index increased to 98 in Mar from 94 in Dec, 92 in Jan and 93 in Feb, but fell to 95 in Apr, 93 in May and 92 in Jun. The final row shows general production expectations falling to -27 in Feb, well below the average of -8 since 1976, but improving to -15 in Mar and -14 in Apr, declining sharply to -29 in May and minus 30 in Jun. The indicator of demand and export order levels fell to -33 in Feb, well below the average of -12 since 1976, but improved to -10 in Mar, declining to -25 in Apr, -28 in May and -29 in Jun.
Table VF-1, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA
| Mfg 2012 | Average since 1976 | Feb | Mar | Apr | May | Jun |
| Synthetic Index | 100 | 93 | 98 | 95 | 93 | 92 |
| Recent Changes in Output | 5 | -7 | -8 | -2 | -4 | -7 |
| Finished- Goods Inventory Level | 13 | 14 | 11 | 10 | 12 | 10 |
| Demand and Total Order Levels | -17 | -26 | -20 | -22 | -29 | -31 |
| Demand and Export Order Levels | -12 | -33 | -10 | -25 | -28 | -29 |
| Personal Production Expectations | 5 | -1 | 8 | -5 | -4 | -4 |
| General Production Expectations | -8 | -27 | -15 | -14 | -28 | -30 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120619
Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jun 2012.
Chart VF-1, France, INSEE Business Climate Synthetic Index
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120619
Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jun 2012.
Chart VF-2, INSEE Business Climate Turning Point Indicator
Source: Institut National de la Statistique et des Études
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120619
Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar that weakens in Apr through Jun 2012.
Chart VF-3, Climate General Production, Personal Production and Recent Changes in Output of INSEE
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120619
VG Italy. The Markit/ADACI Business Activity Index increased from 42.3 in Apr to 42.8 in May, indicating sharp contraction of output of Italy’s services sector in 12 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9651). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the combined manufacturing and services indexes suggest continuing recession into IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9651). The Markit/ADACI Purchasing Managers’ Index® (PMI®), increased from 43.8 in Apr to 44.8 in May for a tenth consecutive month of contraction of Italy’s manufacturing and the sharpest since Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9615). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds continuing sharp contraction of new orders of manufacturing in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9615). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | May month ∆%: 0.0 |
| Producer Price Index | Apr month ∆%: 0.3 Blog 6/3/12 |
| GDP Growth | IQ2012/IVQ2011 SA ∆%: minus 0.8 |
| Labor Report | Apr 2012 Participation rate 63.4% Employment ratio 57.0% Unemployment rate 10.2% Blog 6/3/12 |
| Industrial Production | Apr month ∆%: -1.9 |
| Retail Sales | Mar month ∆%: -0.2 Mar 12-month ∆%: 1.7 Blog 5/27/12 |
| Business Confidence | Mfg May 86.2, Jan 91.3 Construction Apr 81.9, Jan 82.8 Blog 6/3/12 |
| Consumer Confidence | Consumer Confidence May 86.5, Apr 88.8 Economy May 64.4, Apr 71.6 Blog 5/27/12 |
| Trade Balance | Balance Apr SA -€36 million versus Mar +€714 |
Links to blog comments in Table IT:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html
5/27/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
VH United Kingdom. Revised annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of revised 4.4 percent in 2009 after dropping revised 1.1 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.7 percent in 2011. The bottom part of Table VH-1 provides average growth rates of UK GDP since 1948. The UK economy grew at 2.4 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 2.9 percent. Growth in the current cyclical expansion has been only at 1.4 percent as advanced economies struggle with weak internal demand and world trade.
Table VH-UK, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.8 |
| 1999 | 3.7 |
| 2000 | 4.6 |
| 2001 | 3.1 |
| 2002 | 2.6 |
| 2003 | 3.5 |
| 2004 | 2.9 |
| 2005 | 2.0 |
| 2006 | 2.6 |
| 2007 | 3.5 |
| 2008 | -1.1 |
| 2009 | -4.4 |
| 2010 | 2.1 |
| 2011 | 0.7 |
| Average ∆% per Year | |
| 1948-2011 | 2.4 |
| 1948-1959 | 2.5 |
| 1960-1969 | 2.9 |
| 1970-1979 | 2.4 |
| 1980-1989 | 2.9 |
| 1990-1999 | 2.4 |
| 2000-2011 | 1.5 |
| 2000-2007 | 2.9 |
| 2009-2011 | 1.4 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html
The Business Activity Index of the Markit/CIPS UK Services PMI® was unchanged at 53.3 in May for 17 consecutive monthly increases but the slowest growth since Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9666). Chris Williamson, Chief Economist at Markit, finds that services continue to expand with encouragement from growth of new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9666). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell sharply from 50.2 in Apr to 45.9 in Apr, which is the lowest level in three years and in contraction territory below 50 for the first month since Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9618). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds that output contraction originated in sharp decline of new business with developing weakness in the internal market and not only in the euro area (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9618).Table UK provides the country data table for the UK.
Table UK, UK Economic Indicators
| CPI | May month ∆%: -0.1 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IQ2012 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: minus 0.1 |
| Industrial Production | Apr 2012/Apr 2011 NSA ∆%: Production Industries minus 1.0; Manufacturing minus 0.3 |
| Retail Sales | May month SA ∆%: +1.4 |
| Labor Market | Feb-Apr Unemployment Rate: 8.2%; Claimant Count 4.9%; Earnings Growth 1.4% |
| Trade Balance | Balance Apr minus ₤4421 million |
Links to blog comments in Table UK:
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
5/27/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
Labor market statistics of the UK for the quarter Feb-Apr 2012 are provided in Table VH-1. The unemployment rate fell to 8.2 percent and the number unemployed decreased 51,000 in the quarter, reaching 2.615 million. There are 886,000 unemployed over one year, up 30,000 on the quarter, and 434,000 unemployed over two years, up 29,000 on the quarter. The employment rate is 70.6 percent. Earnings growth including bonuses was 1.4 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 4.9 percent, unchanged on the month but up 0.3 percentage point on the year. There are 7.94 million people working part time in Dec-Feb. The number of employees and self-employed part-time because they could not find full-time employment increased 25,000 to 1.41 million, which is the highest since 1992 when records begin. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992 but other data show higher numbers in the mid 1980s.
Table VH-1, UK, Labor Market Statistics
| Quarter Feb-Apr 2012 | |
| Unemployment Rate | 8.2% -0.2 % points on quarter and +0.5 from year earlier, highest since 8.6% in Sep-Nov 1995 |
| Number Unemployed | (1) -51,000 on quarter +185,000 from year earlier to reach 2.615 million (2) Unemployment rate 16 to 24 years of age -0.6 % points on quarter to 21.9% of that age group; number unemployed 16 to 24 years 1.013 million down 29,000 on quarter; unemployment rate and number for 16-24 years highest since 1992 when records begin but other data show higher unemployment ages 16 to 24 in mid 1980s (3) Unemployed 16 to 24 years excluding those in full-time education 709,000 (314,000 in full-time education) down 23,000 on quarter; unemployment rate 20.5%, down 0.3 % points |
| Number Unemployed > one and two years | (1) Number unemployed over one year: 886,000, up 30,000 on quarter, highest since Jul-Sep 1996, 33.8% of all unemployed (2) Number unemployed over two years: 434,000, up 29,000 on quarter |
| Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks) | (1) 23.0%, down 0.2 % points on quarter (2) Economically inactive 16-64 years down 69,000 on quarter and down 139,000 on year to 9.229 million |
| Employment Rate | 70.6% Jan-Mar, up 0.3 % points on quarter |
| Number Employed | (1) Up 166,000 on quarter, +42,000 on year to 29.281 million (2) Number of employees down 109,000 on quarter to 24.79 million, fastest decline since 1992 (when records begin) (3) Self-employed +101,000 on quarter to 4.12 million, largest number since 1992 (5) Number in other job categories +26,000 to 210,000 |
| Earnings Growth Rates Year on Year | (1) Total +1.4% (including bonuses) over year earlier, up 0.5 on quarter; regular 1.8% up 0.2 on quarter; private sector fell from 1.2% to 0.3% on year earlier, public sector rose 1.4% on year earlier, lowest since 2001 when comparable records begin (2) Regular private +2.1% (excluding bonuses) over year earlier; regular public 1.2% on year earlier |
| Full-time and Part-time | (1) Number full-time 21.32 million, up 82,000 on quarter (2) Number part-time 7.94 million in Dec-Feb, up 80,000 on quarter (3) Number employees and self-employed working part-time because they could not find full-time employment up 25,000 to 1.41 million, highest since 1992 when records begin |
| Claimant Count (Jobseeker’s Allowance, JSA) | (1) Latest estimate: 1.599 million; up 8,100 in month +96,300 on year earlier (2) Claimant count 4.9%, unchanged on month but up 0.3 % point on year |
| Labor Productivity | (1) Output per worker rose 0.5% from IIIQ2011 to IVQ2011 |
Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/june-2012/index.html
Table VH-2 UK provides indicators of the labor force survey of the UK for Feb-Apr 2012 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.7 percent in Feb-Apr 2011 to 8.2 percent in Feb-Apr 2012.
Table VH-2, UK, Labor Force Survey Indicators
| LFHP | EMP | PART | UNE | RATE | |
| Feb-Apr 2012 | 40,191 | 29,281 | 70.6 | 2,615 | 8.2 |
| Nov-Jan 2012 | 40,186 | 29,115 | 70.3 | 2,666 | 8.4 |
| Aug-Oct 2011 | 40,181 | 29,107 | 70.3 | 2,638 | 8.3 |
| May-Jul 2011 | 40,176 | 29,169 | 70.5 | 2,510 | 7.9 |
| Feb-Apr 2011 | 40,133 | 29,239 | 70.6 | 2,430 | 7.7 |
| Feb-Apr 2010 | 39,945 | 28,862 | 70.3 | 2,487 | 7.9 |
Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 to 64 in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed in thousands; Rate: Number Unemployed as % of Employed plus Unemployed
Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/june-2012/index.html
The volume of retail sales in the UK seasonally adjusted increased 1.4 percent in May 2012 and increased 2.4 percent not seasonally adjusted in the 12 months ending in May, as shown in Table VH-3. Retail sales percentage changes in 12 months had been positive since Sep 2011 with exception of decline of 1.1 percent in Apr 2012. Cumulative growth from Sep 2011 to Mar 2012 was 3.3 percent, or at the high annual equivalent rate of 5.8 percent, which has been reduced to 2.3 percent from Sep 2011 to May 2012, or 3.0 percent in annual equivalent, after the sharp decline of 2.4 percent in Apr 2012. There has been significant volatility in monthly retail sales in the UK.
Table VH-3, UK, Volume of Retail Sales ∆%
| Month SA ∆% | 12-Month NSA ∆% | |
| May 2012 | 1.4 | 2.4 |
| Apr | -2.4 | -1.1 |
| Mar | 2.1 | 3.2 |
| Feb | -0.9 | 0.7 |
| Jan | 0.2 | 1.0 |
| Dec 2011 | 0.6 | 2.6 |
| Nov | -0.2 | 0.4 |
| Oct | 0.7 | 0.7 |
| Sep | 0.8 | 0.5 |
| Aug | -0.5 | -1.1 |
| Jul | 0.1 | -0.7 |
| Jun | 0.7 | -0.4 |
| May | -2.1 | -0.6 |
| Apr | 1.8 | 2.2 |
| Mar | -0.3 | 0.3 |
| Feb | -0.7 | 0.5 |
| Jan | 1.8 | 3.9 |
| Dec 2010 | -1.6 | -1.9 |
Source:
http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-2012/index.html
Retail sales in the UK struggle with relatively high inflation. Table VH-4 provides 12-month percentage changes of the implied deflator of UK retail sales. The implied deflator of all retail sales increased 0.9 percent in the 12 months ending in May while that of sales excluding auto fuel increased 1.0 percent. The implied deflator of auto fuel sales rose to 17.0 in Sep 2011, which is the highest 12-month increase in 2011, but then declined to 14.8 percent in Oct, 12.6 percent in Nov and 1.2 percent in May. The percentage change of the implied deflator of sales of food stores at 3.0 percent in May is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 with exception of the decline of 9.7 percent in 2008 when commodity carry trades were reversed in the panic of the financial crisis, as shown in Table VH-4. UK inflation is particularly sensitive to changes in commodity prices
Table VH-4, UK, Implied Deflator of Retail Sales, 12-Month Percentage Changes, ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| May 2012 | 0.9 | 1.0 | 3.0 | -0.6 | 1.2 |
| Apr | 1.7 | 1.4 | 3.7 | -0.4 | 5.2 |
| Mar | 2.6 | 2.2 | 4.4 | 0.5 | 4.9 |
| Feb | 2.5 | 2.1 | 3.9 | 0.4 | 5.3 |
| Jan | 2.3 | 1.9 | 3.5 | 0.6 | 5.3 |
| Dec 2011 | 2.5 | 1.8 | 4.2 | 0.3 | 9.1 |
| Nov | 3.6 | 2.5 | 4.6 | 1.1 | 12.6 |
| Oct | 4.5 | 3.2 | 5.0 | 1.8 | 14.8 |
| Sep | 4.9 | 3.4 | 6.0 | 1.2 | 17.0 |
| Aug | 5.2 | 3.8 | 5.9 | 2.1 | 16.3 |
| Jul | 4.9 | 3.7 | 5.9 | 1.9 | 14.5 |
| Jun | 4.4 | 3.1 | 6.0 | 0.8 | 14.5 |
| May | 4.4 | 3.2 | 5.5 | 1.5 | 13.2 |
| Apr | 4.1 | 3.1 | 4.7 | 1.7 | 12.3 |
| Mar | 4.1 | 2.7 | 4.2 | 1.5 | 15.0 |
| Feb | 4.7 | 3.4 | 5.4 | 1.6 | 15.1 |
| Jan | 3.8 | 2.6 | 5.3 | 0.8 | 14.5 |
| Dec 2010 | 3.1 | 2.4 | 5.1 | 0.6 | 12.4 |
| Dec 2009 | 3.4 | 2.0 | 2.1 | 1.4 | 17.0 |
| Dec 2008 | -0.5 | 0.2 | 6.9 | -4.4 | -9.7 |
| Dec 2007 | 1.7 | 0.4 | 3.9 | -2.0 | 15.4 |
| Dec 2006 | 1.0 | 0.8 | 3.3 | -1.1 | 1.1 |
| Dec 2005 | -0.4 | -1.0 | 1.3 | -2.6 | 6.6 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-2012/index.html
UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Total volume of sales increased 1.4 percent in May 2012. There were increases in all major categories in May after decreases in all major categories in Apr following increases in all categories in Mar with exception of flat change for food stores. All categories also weakened with declines in Feb.
Table VH-5, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| May 2012 | 1.4 | 0.9 | 0.2 | 1.3 | 6.2 |
| Apr | -2.4 | -1.1 | -0.6 | -1.7 | -13.4 |
| Mar | 2.1 | 1.8 | -0.1 | 3.3 | 5.3 |
| Feb | -0.9 | -0.9 | -0.3 | -1.8 | -1.3 |
| Jan | 0.2 | 0.5 | -0.3 | 1.0 | -2.3 |
| Dec 2011 | 0.6 | 0.5 | 0.6 | 0.5 | 1.1 |
| Nov | -0.2 | -0.6 | -0.7 | -0.9 | 2.9 |
| Oct | 0.7 | 0.6 | 0.6 | 0.8 | 1.3 |
| Sep | 0.8 | 0.9 | 0.1 | 1.7 | -0.1 |
| Aug | -0.5 | -0.4 | 0.0 | -1.0 | -0.8 |
| Jul | 0.1 | 0.0 | 1.0 | -0.5 | 0.8 |
| Jun | 0.7 | 0.9 | 0.4 | 0.7 | -1.2 |
| May | -2.1 | -2.4 | -4.3 | -1.3 | 0.5 |
| Apr | 1.8 | 1.9 | 2.9 | 1.1 | 0.8 |
| Mar | -0.3 | -0.2 | 1.2 | -1.3 | -0.9 |
| Feb | -0.7 | -0.9 | -0.7 | -1.3 | 1.1 |
| Jan | 1.8 | 1.2 | 0.4 | 1.9 | 7.7 |
| Dec 2010 | -1.6 | -1.1 | -1.9 | -1.2 | -6.4 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-2012/index.html
Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales increased 2.4 percent in the 12 months ending in May 2012 with increase of 3.0 percent in sales excluding auto fuel. Sales including auto fuel fell 2.9 percent. Significant improvement since Aug 2011 was interrupted with sharp declines in Apr 2012.
Table VH-6, UK, Growth of Retail Sales Volume by Component Groups 12-Month NSA ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| May 2012 | 2.4 | 3.0 | 1.0 | 3.3 | -2.9 |
| Apr | -1.1 | -0.3 | -3.5 | 0.6 | -8.1 |
| Mar | 3.2 | 2.7 | 0.0 | 3.5 | 7.0 |
| Feb | 0.7 | 0.7 | 1.2 | -1.1 | 0.7 |
| Jan | 1.0 | 0.7 | 0.8 | -0.6 | 3.1 |
| Dec 2011 | 2.6 | 1.4 | 1.4 | 0.4 | 13.6 |
| Nov | 0.4 | -0.2 | -1.2 | -1.3 | 5.3 |
| Oct | 0.7 | 0.5 | 0.5 | -0.6 | 2.4 |
| Sep | 0.5 | 0.2 | -0.1 | -1.0 | 3.5 |
| Aug | -1.1 | -1.5 | -0.5 | -3.7 | 2.1 |
| Jul | -0.7 | -1.0 | -1.0 | -2.6 | 2.3 |
| Jun | -0.4 | -0.8 | -4.0 | -0.4 | 3.1 |
| May | -0.6 | -0.9 | -3.2 | -0.7 | 2.4 |
| Apr | 2.2 | 2.0 | 1.8 | 0.8 | 3.9 |
| Mar | 0.3 | -0.1 | -0.9 | -0.4 | 3.8 |
| Feb | 0.5 | 0.0 | -2.2 | 0.3 | 4.8 |
| Jan | 3.9 | 3.5 | -2.3 | 7.4 | 7.4 |
| Dec 2010 | -1.9 | -1.2 | -3.8 | 0.0 | -8.4 |
| Dec 2009 | 1.3 | 2.0 | 2.5 | 0.9 | -4.2 |
| Dec 2008 | 1.3 | 2.6 | -1.1 | 4.3 | -9.0 |
Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-2012/index.html
Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to 12-month percentage changes of value and volume of retail sales in the UK. The volume of retail sales seasonally adjusted increased 2.4 percent in the 12 months ending in May 2012. Sales of predominantly food stores with weight of 41.7 increased 1.0 percent in the 12 months ending in May, contributing 0.5 percentage points. Mostly nonfood stores with weight of 43.2 percent increased 3.3 percent with contribution of 1.5 percentage points. Positive contribution to 12-month percentage changes of volume was made by non-store retailing with weight of 4.9 percent, growth of 14.9 percent and positive contribution of 0.7 percentage points but automotive fuel with weight of 10.2 percent and growth of minus 2.9 percent deducted 0.3 percentage points. The value of retail sales increased 3.3 percent in the 12 months ending in May. There were positive contributions: 1.7 percentage points for predominantly food stores and 1.1 percentage points for predominantly nonfood stores.
Table VH-7, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors
| May 2012 | Weight | Volume SA | PP Cont. | Value SA | PP Cont. |
| All Retailing | 100.0 | 2.4 | 3.3 | ||
| Mostly | 41.7 | 1.0 | 0.5 | 4.1 | 1.7 |
| Mostly Nonfood Stores | |||||
| Total | 43.2 | 3.3 | 1.5 | 2.6 | 1.1 |
| Non- | 7.8 | 11.3 | 0.9 | 9.3 | 0.7 |
| Textile, Clothing & Footwear | 12.2 | -1.0 | -0.1 | 0.7 | 0.1 |
| Household Goods Stores | 9.7 | 5.1 | 0.5 | 3.9 | 0.4 |
| Other | 13.5 | 1.4 | 0.2 | -0.6 | -0.1 |
| Non-store Retailing | 4.9 | 14.9 | 0.7 | 13.5 | 0.7 |
| Automotive Fuel | 10.2 | -2.9 | -0.3 | -1.8 | -0.2 |
Cont.: Contribution http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-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 5.5 percent by Fri Jun 22, 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 | 6/22/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2570 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 6/22/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3650 |
| 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 1.2570/EUR on Jun 22, 2012 or by 5.5 percent {[(1.2570/1.192)-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. Risk aversion erodes devaluation of the dollar. 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 6.3650/USD on Fri Jun 22, 2012, or by an additional 6.7 percent, for cumulative revaluation of 23.1 percent.
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 | 6/22 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2570 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 6/22/2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3752 |
| Weekly Rates | 6/1/2012 | 6/8/2012 | 6/15/2012 | 6/22/2012 |
| CNY/USD | 6.3708 | 6.3752 | 6.3678 | 6.3650 |
| ∆% from Earlier Week* | -0.5 | -0.1 | 0.1 | 0.0 |
*Negative sign is depreciation, positive sign is 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
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). Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Jun 15, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. After depreciation of 0.5 percent in the week of Jun 5 and 0.1 percent in the week of Jun 8 but appreciation of 0.1 percent in the week of Jun 15 and no change in the week of Jun 22 (see Table VI-2), the CNY has depreciated 0.1 percent relative to Oct 28, 2011, as shown in Table VI-2A. 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-2A, Renminbi Yuan US Dollar Rate
| CNY/USD | ∆% from 10/28/2011 | |
| 6/22/12 | 6.3650 | -0.1 |
| 6/15/12 | 6.3678 | -0.1 |
| 6/8/2012 | 6.3752 | -0.3 |
| 6/1/2012 | 6.3708 | -0.2 |
| 4/27/2012 | 6.3016 | 0.9 |
| 3/23/2012 | 6.3008 | 0.9 |
| 2/3/2012 | 6.3030 | 0.9 |
| 12/30/2011 | 6.2940 | 1.0 |
| 11/25/2011 | 6.3816 | -0.4 |
| 10/28/2011 | 6.3588 | - |
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
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 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| 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 current account of the US balance of payments is provided in Table VI-A for IQ2011 and IQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $119.9 billion in IQ2011, or 3.2 percent of GDP to $137.3 billion in IQ2012, or 3.6 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table VI-3A, US Balance of Payments, Millions of Dollars NSA
| IQ2011 | IQ2012 | Difference | |
| Goods Balance | -181,358 | -194,462 | -13,104 |
| X Goods | 360,917 | 388,501 | 11.0 ∆% |
| M Goods | -542,276 | -582.963 | 12.9 ∆% |
| Services Balance | 44,133 | 43,465 | -668 |
| X Services | 147,894 | 154,420 | 9.1 ∆% |
| M Services | -103,761 | -110,955 | 8.0 ∆% |
| Balance Goods and Services | -137,225 | -150,997 | -13,772 |
| Balance Income | 52,451 | 47,571 | -4,880 |
| Unilateral Transfers | -35,223 | -33,887 | 1,336 |
| Current Account Balance | -119,997 | -137,313 | -17,316 |
| % GDP | IQ2011 | IVQ2011 | IQ2012 |
| 3.2 | 3.1 | 3.6 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: Bureau of Economic Analysis
http://www.bea.gov/international/index.htm#bop
In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.
This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.
The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):
“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”
The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table VI-3B provides data on US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012MarBEO, 2) estimates the federal deficit in 2012 at $1171 billion or 7.6 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5178 billion or 33 percent of the estimate of GDP of $15,508 billion for 2012 by the CBO (2012MarBEO, 2). Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5178 billion, and corresponded to 36.3 percent of GDP. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 73.2 percent of GDP in 2012 (CBO2012MarBEO, 2). This situation may worsen in the future (CBO 2012LTBO):
“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”
Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Goods & | -377 | -697 | -698 | -379 | -495 | -559 |
| Income | 19 | 101 | 147 | 119 | 184 | 227 |
| UT | -58 | -115 | -126 | -122 | -131 | -133 |
| Current Account | -416 | -710 | -677 | -382 | -442 | -466 |
| NGDP | 9951 | 14028 | 14291 | 13939 | 14526 | 15094 |
| Current Account % GDP | -3.8 | -5.0 | -4.9 | -2.7 | -3.4 | -3.7 |
| NIIP | -1337 | -1796 | -3260 | -2396 | -2471 | NA |
| NIIP % GDP | -13.4 | -12.8 | -22.8 | -17.2 | -17.0 | NA |
| Exports | 1425 | 2488 | 2657 | 2181 | 2519 | 2848 |
| NIIP % | -94 | -72 | -123 | -110 | -98 | NA |
| DIA MV | 2694 | 5274 | 3102 | 4331 | 4843 | NA |
| DIUS MV | 2783 | 3551 | 2486 | 3027 | 3451 | NA |
| Fiscal Balance | +236 | -161 | -459 | -1413 | -1294 | -1300 |
| Fiscal Balance % GDP | +2.4 | -1.2 | -3.2 | -9.9 | -8.9 | -8.7 |
| Federal Debt | 3410 | 5035 | 5803 | 7545 | 9019 | 10128 |
| Federal Debt % GDP | 34.7 | 36.3 | 40.5 | 54.1 | 62.8 | 67.7 |
| Federal Outlays | 1789 | 2729 | 2983 | 3518 | 3456 | 3598 |
| ∆% | 5.1 | 2.8 | 9.3 | 17.9 | -1.8 | 4.1 |
| % GDP | 18.2 | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 |
| Federal Revenue | 2052 | 2568 | 2524 | 2105 | 2162 | 2303 |
| ∆% | 10.8 | 6.7 | -1.7 | -16.6 | 2.7 | 6.5 |
| % GDP | 20.6 | 18.5 | 17.6 | 15.1 | 15.1 | 15.4 |
Sources:
Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which they original number of the CBO source is maintained. These discrepancies do not alter conclusions.
Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop
Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/national/index.htm#gdp
Federal Outlays, Revenues and Debt, Congressional Budget Office (CBO) http://www.cbo.gov/publication/42911
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. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm).
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.7 percent in 2011 (Section I in http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html), 1.7 percent in annual equivalent in the five quarters from IQ2011 to IQ2012 and 2.0 percent in IQ2012 relative to IQ2011 (see Section II http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html). (ii) The labor market continues fractured with 28.4 million unemployed or underemployed (see Section I http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5178 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (see Section VA http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 67.7 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012MarBEO, 2) at 73.2 percent in 2012. The CBO (2012MarBEO) 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 but grew 2.8 percent in IQ2012 relative to a year earlier and 1.2 percent in IQ2012 relative to IVQ2011. The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012, falling 0.1 percent relative to a year earlier in IQ2011; Germany’s GDP fell 0.2 percent in IVQ2011 but grew 0.5 percent in IQ2012; and the UK’s GDP fell 0.3 percent in IVQ2011 and 0.3 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 http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and 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 30.5 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 30.6 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:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (1)
Equation (1) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+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 Rt, 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 Jun 20, 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 1/4 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 for the federal funds rate at least through late 2014.” (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.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. 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.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ), 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 and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.
The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 6/22/12,” 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 [(1.018)4]. 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. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. The highest valuations in column “∆% Trough to 6/22/12” are by US equities indexes: DJIA 30.5 percent and S&P 500 30.6 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 13,331.77 in intraday trading 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 6/22/12” 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 5.1 percent below the trough; STOXX 50 of Europe is 1.9 percent above the trough; Japan’s Nikkei Average is 0.3 percent below the trough; DJ Asia Pacific TSM is 1.9 percent above the trough; Dow Global is 5.2 percent above the trough; and NYSE Financial is 2.9 percent above the trough. DJ UBS Commodities is 3.5 percent above the trough. DAX is 10.5 percent above the trough. Japan’s Nikkei Average is 0.3 percent below the trough on Aug 31, 2010 and 22.8 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8798.35 on Fri Jun 22, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 14.2 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 5.5 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 6/22/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Jun 22, 2012 such as 0.1 percent for DJ Asia Pacific, 2.7 percent for Nikkei Average and 0.9 percent for STOXX 50. DJ UBS Commodities fell 0.4 percent. Other valuations also increased such as 0.3 percent for NYSE Financial, 0.2 percent for Dow Global and 0.5 percent for DAX. The DJIA lost 1.0 percent and S&P 500 declined 0.6 percent. There are still high uncertainties on European sovereign risks and banking soundness, 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 6/22/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jun 22, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 6/22/12” but also relative to the peak in column “∆% Peak to 6/22/12.” There are now only two equity indexes above the peak in Table VI-4: DJIA 12.8 percent and S&P 500 9.7 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 18.0 percent, Nikkei Average by 22.8 percent, Shanghai Composite by 28.6 percent, DJ Asia Pacific by 10.8 percent, STOXX 50 by 13.7 percent, DAX by 1.1 percent and Dow Global by 14.1 percent. DJ UBS Commodities Index is now 11.6 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 6/22 /12 | ∆% Week 6/22/ 12 | ∆% Trough to 6/22 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 12.8 | -1.0 | 30.5 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 9.7 | -0.6 | 30.6 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -18.0 | 0.3 | 2.9 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -14.1 | 0.2 | 5.2 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -10.8 | 0.1 | 1.9 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -22.8 | 2.7 | -0.3 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -28.6 | -2.0 | -5.1 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -13.7 | 0.9 | 1.9 |
| DAX | 4/26/ | 5/25/ | -10.5 | -1.1 | 0.5 | 10.5 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 16.9 | 0.6 | -5.5 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -11.6 | -0.4 | 3.5 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.676 |
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 Jun 15, 2012, shows that the S&P 500 is now 10.1 percent above the Apr 26, 2010 level and the DJIA is 12.8 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.
Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from prior date | ∆% DJIA from | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 1 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 8 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16 | -2.6 | 5.9 | -2.8 | 0.6 |
| Dec 23 | 3.6 | 9.7 | 3.7 | 4.4 |
| Dec 30 | -0.6 | 9.0 | -0.6 | 3.8 |
| Jan 6 2012 | 1.2 | 10.3 | 1.6 | 5.4 |
| Jan 13 | 0.5 | 10.9 | 0.9 | 6.4 |
| Jan 20 | 2.4 | 13.5 | 2.0 | 8.5 |
| Jan 27 | -0.5 | 13.0 | 0.1 | 8.6 |
| Feb 3 | 1.6 | 14.8 | 2.2 | 11.0 |
| Feb 10 | -0.5 | 14.2 | -0.2 | 10.8 |
| Feb 17 | 1.2 | 15.6 | 1.4 | 12.3 |
| Feb 24 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
| 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 |
| May 18 | -3.5 | 10.4 | -4.3 | 6.4 |
| May 25 | 0.7 | 11.2 | 1.7 | 8.7 |
| Jun 1 | -2.7 | 8.2 | -3.0 | 5.4 |
| Jun 8 | 3.6 | 12.0 | 3.7 | 9.4 |
| Jun 15 | 1.7 | 13.9 | 1.3 | 10.8 |
| Jun 22 | -1.0 | 12.8 | -0.6 | 10.1 |
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 16.1 percent to ZAR 8.4002/USD on Jun 22, 2012, which is still 27.4 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 5.3 percent stronger at SGD 1.2769/USD on Jun 22, 2012 relative to the trough of depreciation but still stronger by 17.8 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 18.9 percent relative to the trough to BRL 2.0661/USD on Jun 22, 2012 but still stronger by 15.0 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 50 basis points for the sixth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3554&IDPAI=NEWS):
“Copom reduces the Selic rate to 8.5 percent
30/05/2012 8:04:00 PM
Brasília - Continuing the adjustment process of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 8.50 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 | Jun 22, 2012 | ∆% T Jun 22, 2012 | ∆% P Jun 22, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 6/22 2012 | |||
| Rate | 1.59 | 1.192 | 1.2570 | |||
| ∆% | -33.4 | 5.2 | -26.5 | |||
| JPY USD | 8/18 | 9/15 | 6/22 2012 | |||
| Rate | 110.19 | 83.07 | 80.43 | |||
| ∆% | 24.6 | 3.2 | 27.0 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 6/22 2012 | |||
| Rate | 1.225 | 1.025 | 0.9553 | |||
| ∆% | 16.3 | 6.8 | 22.0 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 6/22 2012 | |||
| Rate | 2.006 | 1.388 | 1.5587 | |||
| ∆% | -44.5 | 10.9 | -28.7 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 6/22 | |||
| Rate | 1.0215 | 1.6639 | 1.0065 | |||
| ∆% | -62.9 | 40.3 | 2.7 | |||
| ZAR USD | 10/22 2008 | 8/15 | 6/22 2012 | |||
| Rate | 11.578 | 7.238 | 8.4002 | |||
| ∆% | 37.5 | -16.1 | 27.4 | |||
| SGD USD | 3/3 | 8/9 | 6/22 | |||
| Rate | 1.553 | 1.348 | 1.2769 | |||
| ∆% | 13.2 | 5.3 | 17.8 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 6/22 | |||
| Rate | 7.813 | 7.752 | 7.7605 | |||
| ∆% | 0.8 | -0.1 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 6/22 2012 | |||
| Rate | 2.43 | 1.737 | 2.0661 | |||
| ∆% | 28.5 | -18.9 | 15.0 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 6/22 | |||
| Rate | 22.19 | 18.693 | 20.507 | |||
| ∆% | 15.7 | -9.7 | 7.6 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 6/22 2012 | |||
| Rate | 9.313 | 7.108 | 7.0092 | |||
| ∆% | 23.7 | 1.4 | 24.7 | |||
| CNY USD | 7/20 2005 | 7/15 | 6/22 | |||
| Rate | 8.2765 | 6.8211 | 6.3650 | |||
| ∆% | 17.6 | 6.7 | 23.1 |
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
Chart VI-2 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.
Chart VI-2, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.676 percent at the close of market on Fri Jun 22, 2012 would be equivalent to price of 108.7039 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 7.4 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the first to the last row of Table VI-7. The price loss between Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. 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. These losses defy annualizing. 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 Jun 20, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2854 billion, or $2.8 trillion, with portfolio of long-term securities of $2594 billion, or $2.6 trillion, consisting of $1567 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $91 billion Federal agency debt securities and $868 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1460 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 |
| 05/18/12 | 1.714 | 108.3393 | 7.0 |
| 05/25/12 | 1.738 | 108.1098 | 6.8 |
| 06/01/12 | 1.454 | 110.8618 | 9.5 |
| 06/08/12 | 1.635 | 109.0989 | 7.7 |
| 06/15/12 | 1.584 | 109.5924 | 8.2 |
| 06/22/12 | 1.676 | 108.7039 | 7.4 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
VII Economic Indicators. Crude oil input in refineries increased 1.0 percent to 15,466 thousand barrels per day on average in the four weeks ending on Jun 15, 2012 from 15,311 thousand barrels per day in the four weeks ending on Jun 8, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 91.0 percent on Jun 15, 2012, which is higher than 87.1 percent on Jun 17, 2011 and higher than 90.0 percent on Jun 8, 2012. Imports of crude oil increased 2.4 percent from 8,889 thousand barrels per day on average in the four weeks ending on Jun 8 to 9,105 thousand barrels per day in the week of Jun 15. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 9.4 million barrels per day last week, up by 328 thousand barrels per day from the previous week [Jun 8]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Increasing utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 2.9 million barrels from 384.4 million barrels on Jun 8 to 387.3 million barrels on Jun 15. Motor gasoline production increased 0.2 percent to 9,196 thousand barrels per day in the week of Jun 15 from 9,176 thousand barrels per day on average in the week of Jun 8. Gasoline stocks increased 1.1 million barrels and stocks of fuel oil increased 1.1 million barrels. Supply of gasoline decreased from 9,321 thousand barrels per day on Jun 17, 2011, to 8,851 thousand barrels per day on Jun 15, 2012, or by 5.0 percent, while fuel oil supply decreased 1.7 percent. Part of the fall in consumption of gasoline is due to high prices and part to the growth recession. WTI crude oil price traded at $84.03/barrel on Jun 15, 2012, decreasing 9.7 percent relative to $93.02/barrel on Jun 17, 2011. Gasoline prices fell 3.3 percent from Jun 20, 2011 to Jun 18, 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 | 6/15/12 | 6/8/12 | 6/17/11 |
| Crude Oil Refineries Input | 15,466 Week ∆%: 1.0 | 15,311 | 15,028 |
| Refinery Capacity Utilization % | 91.0 | 90.0 | 87.1 |
| Motor Gasoline Production | 9,196 Week ∆%: 0.2 | 9,176 | 9,472 |
| Distillate Fuel Oil Production | 4,678 Week ∆%: 1.1 | 4,627 | 4,332 |
| Crude Oil Imports | 9,105 Week ∆%: 2.4 | 8,889 | 8,942 |
| Motor Gasoline Supplied | 8,851 ∆% 2012/2011= -5.0% | 8,836 | 9,321 |
| Distillate Fuel Oil Supplied | 3,607 ∆% 2012/2011 = -1.7% | 3,633 | 3,668 |
| 6/15/12 | 6/8/12 | 6/17/11 | |
| Crude Oil Stocks | 387.3 ∆= +02.9 MB | 384.4 | 363.8 |
| Motor Gasoline Million B | 202.7 ∆= +0.9 MB | 201.8 | 214.6 |
| Distillate Fuel Oil Million B | 121.1 | 120.0 | 142.0 |
| WTI Crude Oil Price $/B | 84.03 ∆% 2012/2011 -9.7 | 84.08 | 93.02 |
| 6/18/12 | 6/11/12 | 6/20/11 | |
| Regular Motor Gasoline $/G | 3.533 ∆% 2012/2011 | 3.572 | 3.652 |
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 provides the evolution of crude oil stocks in the US since 2007. After prolonged decline, there is sharp upward trend.
Chart VII-2, US, Crude Oil Stocks
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices. Risk aversion resulted in another drop in recent weeks.
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 typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 2,000 from 389,000 on Jun 9, 2012, to 387,000 on Jun 16. Claims not adjusted for seasonality decreased 17,032 from 376,610 on Jun 9, 2012 to 359,578 on Jun 16. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| June 16, 12 | 387,000 | 359,578 | 386,250 |
| June 9, 12 | 389,000 | 376,610 | 382,750 |
| Change | -2,000 | -17,032 | +3,500 |
| Jun 2, 12 | 380,000 | 324,385 | 378,500 |
| Prior Year | 424,000 | 394,286 | 422,750 |
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 562,449 on Jun 13, 2009 to 400,608 on Jun 11, 2011, and 359,578 on Jun 16, 2012. There is strong indication of significant decline in the level of layoffs in the US but some doubts at the margin after the high increase in unadjusted claims in the week of Jun 9, 2012. Hiring has not recovered (see Section IA Hiring Collapse and earlier http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Jun 16, 2001 | 354,526 | 394,000 |
| Jun 15, 2002 | 356,096 | 396,000 |
| Jun 14, 2003 | 383,371 | 421,000 |
| Jun 12, 2004 | 313,930 | 339,000 |
| Jun 11, 2005 | 315,938 | 333,000 |
| Jun 10, 2006 | 285,892 | 298,000 |
| Jun 16, 2007 | 290,951 | 320,000 |
| Jun 14, 2008 | 349,254 | 373,000 |
| Jun 13, 2009 | 562,449 | 599,000 |
| Jun 12, 2010 | 448,305 | 472,000 |
| Jun 11, 2011 | 400,608 | 418,000 |
| Jun 16, 2012 | 359,578 | 387,000 |
Source: http://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 four months Jan to May 2012, CPI inflation for all items seasonally adjusted was 1.4 percent in annual equivalent, that is, compounding inflation in Jan-May 2012 and assuming it would be repeated for a full year. In the 12 months ending in May, CPI inflation of all items not seasonally adjusted was 1.7 percent. Inflation in May 2012 not seasonally adjusted was minus 0.1 percent relative to Apr 2012 and minus 0.3 percent seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.2 percent in annual equivalent Jan-May 2012. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.08 percent for three months, 0.14 percent for six months, 0.17 percent for 12 months, 0.30 percent for two years, 0.41 percent for three years, 0.75 percent for five years, 1.14 percent for seven years, 1.67 percent for ten years and 2.76 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. May inflation is low because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. 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 May 2012/May | ∆% Annual Equivalent Jan-May 2012 SA | |
| CPI All Items | 1.7 | 1.4 |
| CPI ex Food and Energy | 2.3 | 2.2 |
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/
IX Conclusion. Table IX-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 11 quarters of the current cyclical expansion from IIIQ2009 to IQ2012, GDP increased 6.7 percent at the annual equivalent rate of 2.4 percent; real disposable personal income (RDPI) increased 2.5 percent at the annual equivalent rate of 0.9 percent; RDPI per capita increased 0.3 percent at the annual equivalent rate of 0.1 percent; and population increased 2.1 percent at the annual equivalent rate of 0.8 percent. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing.
Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %
| # Quarters | ∆% | ∆% Annual Equivalent | |
| IQ1983 to IVQ1985 | 13 | ||
| GDP | 19.6 | 5.7 | |
| RDPI | 14.5 | 4.3 | |
| RDPI Per Capita | 11.5 | 3.4 | |
| Population | 2.7 | 0.8 | |
| IIIQ2009 to IQ2012 | 11 | ||
| GDP | 6.7 | 2.4 | |
| RDPI | 2.5 | 0.9 | |
| RDPI per Capita | 0.3 | 0.1 | |
| Population | 2.1 | 0.8 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
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Appendix I. The Great Inflation
Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”
The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:
“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”
Chart I1, Brazil, Phillips Circuit 1963-1987
©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4.5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.
Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994
| 1994 | FF | 30Y | 30P | 10Y | 10P | MOR | CPI |
| Jan | 3.00 | 6.29 | 100 | 5.75 | 100 | 7.06 | 2.52 |
| Feb | 3.25 | 6.49 | 97.37 | 5.97 | 98.36 | 7.15 | 2.51 |
| Mar | 3.50 | 6.91 | 92.19 | 6.48 | 94.69 | 7.68 | 2.51 |
| Apr | 3.75 | 7.27 | 88.10 | 6.97 | 91.32 | 8.32 | 2.36 |
| May | 4.25 | 7.41 | 86.59 | 7.18 | 88.93 | 8.60 | 2.29 |
| Jun | 4.25 | 7.40 | 86.69 | 7.10 | 90.45 | 8.40 | 2.49 |
| Jul | 4.25 | 7.58 | 84.81 | 7.30 | 89.14 | 8.61 | 2.77 |
| Aug | 4.75 | 7.49 | 85.74 | 7.24 | 89.53 | 8.51 | 2.69 |
| Sep | 4.75 | 7.71 | 83.49 | 7.46 | 88.10 | 8.64 | 2.96 |
| Oct | 4.75 | 7.94 | 81.23 | 7.74 | 86.33 | 8.93 | 2.61 |
| Nov | 5.50 | 8.08 | 79.90 | 7.96 | 84.96 | 9.17 | 2.67 |
| Dec | 6.00 | 7.87 | 81.91 | 7.81 | 85.89 | 9.20 | 2.67 |
Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months
Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t
© Carlos M. Pelaez, 2010, 2011, 2012
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