Twenty Nine Million Unemployed or Underemployed, Inadequate Job Creation, Stagnating Real Disposable Income per Capita, Financial Repression and World Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Twenty Nine Million Unemployed or Underemployed
IA1 Summary of the Employment Situation
IA2 Number of People in Job Stress
IA3 Long-term and Cyclical Comparison of Employment
IA4 Job Creation
IB Stagnating Real Wages
II Stagnating Real Disposable Income and Consumption Expenditures and Financial Repression
IIA Stagnating Real Disposable Income and Consumption Expenditures
IIB Financial Repression
III World Financial Turbulence
IIIA Financial Risks
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
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
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 IMF revised some of the projections in its World Economic Outlook Update released on Jul 16, 2012 (http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm). Table V-1 incorporates these revisions with lines “Rev” where appropriate. 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 3.9 percent in 2013 instead of 4.1 percent in the earlier projection, 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, 2.0 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole, incorporating the revisions. While the world would grow 17.3 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.4 percent. The difference in dollars of 2011 is rather high: growing by 17.3 percent would add $12.1 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.4 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 26.3 percent or at the average yearly rate of 6.0 percent, contributing $6.6 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 Rev | 69,660 | 3.5 | 4.1 3.9 | 4.4 | 4.5 |
| G7 Rev | 33,670 | 1.5 1.4 | 1.9 1.9 | 2.3 | 2.5 |
| Canada | 1,737 | 2.1 | 2.2 | 2.4 | 2.4 |
| France Rev | 2,776 | 0.5 0.3 | 1.1 0.8 | 1.9 | 1.9 |
| DE Rev | 3,577 | 0.6 1.0 | 1.5 1.4 | 1.3 | 1.3 |
| Italy | 2,199 | -1.9 | -0.3 | 0.5 | 1.0 |
| Japan Rev | 5,869 | 2.0 2.4 | 1.7 1.5 | 1.5 | 1.3 |
| UK | 2,418 | 0.8 | 2.0 | 2.5 | 2.6 |
| US Rev | 15,094 | 2.1 0.2 | 2.4 1.4 | 2.9 | 3.3 |
| Euro Area Rev | 13,115 | -0.3 | 0.9 0.7 | 1.4 | 1.6 |
| DE Rev | 3,577 | 0.6 1.0 | 1.5 1.4 | 1.3 | 1.3 |
| France Rev | 2,776 | 0.5 0.3 | 1.1 0.8 | 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 Rev | 1,494 | -1.8 -1.5 | 0.1 -0.6 | 1.6 | 1.6 |
| EMDE Rev | 25,237 | 5.7 5.6 | 6.0 5.9 | 6.2 | 6.3 |
| Brazil Rev | 2,493 | 3.0 2.5 | 4.2 4.6 | 4.0 | 4.1 |
| Russia | 1,850 | 4.0 | 3.9 | 3.9 | 3.9 |
| India Rev | 1,676 | 6.9 6.1 | 7.3 6.5 | 7.5 | 7.7 |
| China Rev | 7,298 | 8.2 8.0 | 8.8 8.5 | 8.7 | 8.7 |
Notes: Rev: Revision of July 19, 2012; 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
http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm
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 IIQ2012, 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). China’s GDP grew 7.6 percent in IIQ2012 relative to IQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. 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 0.4 percent in IIQ2012 and 2.2 percent relative to a year earlier (Section I Mediocre and Decelerating United States Economic Growth http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html) but with substantial underemployment and underemployment (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I http://cmpassocregulationblog.blogspot.com/2012/07/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 | QOQ: 0.5 SAAR: 2.0 | 2.4 |
| Japan | 1.2 | 2.8 |
| China | 1.8 | 8.1 |
| Euro Area | 0.0 | -0.1 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.3 |
| Italy | -0.8 | -1.4 |
| United Kingdom | -0.3 | -0.2 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| United States | QOQ: 0.4 SAAR: 1.5 | 2.2 |
| China | 1.8 | 7.6 |
| United Kingdom | -0.7 | -0.8 |
QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate
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/
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, increased from 50.3 in Jun to 51.7 in Jul, indicating expansion at a moderate rate, which is one of the lowest in the current expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9928). This index has remained above the contraction territory of 50.0 during 35 months. Both global manufacturing and services have slowed down considerably with services increasing marginally because of activity in the US while manufacturing deepened its decline. The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell to 48.4 in Jul from 49.1 in Jun, for the lowest reading in three years in two consecutive months below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9899). David Hensley, Director of Global Economics Coordination at JPMorgan, finds that inventory adjustment is the driver of deeper contraction in the beginning of IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9899). The HSBC Brazil Composite Output Index, compiled by Markit, fell from moderate expansion at 51.5 in Jun to moderate contraction at 48.9 in Jul, in the weakest reading in ten months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9912). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the decline of the HSBC Brazil Services Business Activity Index from 53.0 in Jun to 48.9 in Jul withdraws important support present in the first half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9912). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) increased slightly to 48.7 in Jul from 48.5 in Jun, indicating modest deterioration of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9876). Andre Loes, Chief Economist, Brazil at HSBC, finds that moderate improvement in the index suggests that drivers of the drop of activity are moderating (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9876).
VA United States. The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 0.1 percentage points from 49.7 in Jun to 49.8 in Jun, for a second monthly contraction, which are the first since Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 0.2 percentage points from 47.8 in Jun to 48.0 in Jul, for a second consectuvie contraction interrupting growth in 37 months since Apr 2009. The Non-Manufacturing ISM Report on Business® PMI increased 0.5 percentage points from 52.1 in Jun to 52.6 in Jul while the index of new orders increased 1.0 percentage points from 53.3 in Jun to 54.3 in Jul (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Jun 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.2 Jun month ∆%: 0.0; ex food and energy ∆%: 0.2 |
| Producer Price Index | Jun 12-month NSA ∆%: 0.7; ex food and energy ∆% 2.6 |
| PCE Inflation | Jun 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.8 |
| Employment Situation | Household Survey: Jul Unemployment Rate SA 8.3% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.2 J]IQ2011 SAAR 2.0 IIQ2012 SAAR 1.5 |
| Personal Income and Consumption | Jun month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.3 |
| Quarterly Services Report | IQ12/IQ11 SA ∆%: |
| Employment Cost Index | IIQ2012 SA ∆%: 0.5 |
| Industrial Production | Jun month SA ∆%: 0.4 Manufacturing Jun SA ∆% 0.7 Jun 12 months SA ∆% 5.6, NSA 5.5 |
| 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 Jun 2.29 to Jul 7.39 |
| Philadelphia Fed Business Outlook Index | General Index from Jun minus 16.6 to Jul minus 12.9 |
| Manufacturing Shipments and Orders | Jun New Orders SA ∆%: -0.5; ex transport ∆%: -1.8 |
| Durable Goods | Jun New Orders SA ∆%: 1.6; ex transport ∆%: 1.1 |
| Sales of New Motor Vehicles | Jul 2012 8,425,842; Jun 2011 7,392,167. Jul SAAR 14.09 million, Jun SAAR 14.38 million, Jun 2011 SAAR 12.40 million Blog 8/5/12 |
| Sales of Merchant Wholesalers | Jan-May 2012/Jan-May 2011 NSA ∆%: Total 8.4; Durable Goods: 10.6; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | May 12/May 11 NSA ∆%: Sales Total Business 7.2; Manufacturers 6.2 |
| Sales for Retail and Food Services | Jan-Jun 2012/Jan-Jun 2011 ∆%: Retail and Food Services 6.4; Retail ∆% 6.1 |
| Value of Construction Put in Place | Jun SAAR month SA ∆%: 0.4 Jun 12-month NSA: 6.5 |
| Case-Shiller Home Prices | May 2012/Apr 2011 ∆% NSA: 10 Cities minus 2.3; 20 Cities: minus 0.7 |
| FHFA House Price Index Purchases Only | May SA ∆% 0.8; |
| New House Sales | Jun 2012 month SAAR ∆%: |
| Housing Starts and Permits | Jun Starts month SA ∆%: 6.9 ; Permits ∆%: -3.7 |
| Trade Balance | Balance May SA -$48684 million versus Apr -$50597 million |
| Export and Import Prices | Jun 12-month NSA ∆%: Imports -2.1; Exports -2.6 |
| Consumer Credit | May ∆% annual rate: 8.0 |
| Net Foreign Purchases of Long-term Treasury Securities | May Net Foreign Purchases of Long-term Treasury Securities: $55.0 billion |
| Treasury Budget | Fiscal Year Oct-Jun 2012/2011 ∆%: Receipts 5.2; Outlays 0.9; Individual Income Taxes 3.1 Deficit Fiscal Year 2012 Oct-Jun $904,236 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 7/15/2012 |
| 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:
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the quarterly employment cost index (ECI). The ECI is highly useful in several ways including: (1) how costs of employees may affect hiring decisions and thus the overall economy; (2) impact of employment costs on inflation and thus monetary policy; and (3) relation of employee costs to inflation on issues such as welfare of the working population and their ability to consume that could affect economic growth. The BLS estimates total compensation composed of wages and salaries, which are about 70 percent of total compensation, and benefits, accounting for the remaining 30 percent (http://www.bls.gov/news.release/pdf/eci.pdf 1). There is vast theoretical and empirical literature on how benefits interact with wage determination. The ECI is considered initially with current data in Table VA-1 and subsequently with charts of the BLS on evolution over the past decade. The BLS provides data for the entire civilian population, the private sector and state/local government. The data are available quarterly and for the 12 months of the ending month of the quarter. Total compensation 12-month percentage changes have moderated for the entire civilian population, the private sector and state and local government. In the 12 months ending in Jun, wages and salaries increased 1.8 percent for the private sector, which is about the same as inflation of 1.7 percent, 1.7 percent for the entire civilian population and 1.1 percent for state and local government. Wages and salaries in the 12 months ending in Mar 2012 increased at relatively subdued rates of 1.9 percent for the private sector, 1.7 percent for the entire civilian population and only 1.0 percent for state/local workers. Wages have been losing relative to headline CPI inflation of 2.7 percent in the 12 months ending in Mar (http://www.bls.gov/cpi/). Compensation benefits of the private sector increased at 1.8 percent in the 12 months ending in Jun, which is the same as 1.8 percent for wages and salaries.
Table VA-1, Employment Cost Index Quarterly and 12 Months Changes %
| IQ11 SA | IIQ12 SA | 12 M | 12 M Sep 11 | 12 M | 12 M | 12 M | |
| Civilian | |||||||
| Comp | 0.4 | 0.5 | 2.2 | 2.0 | 2.0 | 1.9 | 1.7 |
| Wages/ | 0.5 | 0.4 | 1.6 | 1.6 | 1.4 | 1.7 | 1.7 |
| Benefits | 0.5 | 0.6 | 3.6 | 3.2 | 3.2 | 2.7 | 2.1 |
| Private | |||||||
| Comp | 0.4 | 0.5 | 2.3 | 2.1 | 2.2 | 2.1 | 1.8 |
| Wages/ | 0.5 | 0.4 | 1.7 | 1.7 | 1.6 | 1.9 | 1.8 |
| Benefits | 0.3 | 0.6 | 4.0 | 3.3 | 3.6 | 2.8 | 1.9 |
| State local | |||||||
| Comp | 0.7 | 0.5 | 1.7 | 1.5 | 1.3 | 1.5 | 1.6 |
| Wages/ | 0.4 | 0.3 | 1.2 | 1.0 | 1.0 | 1.0 | 1.1 |
| Benefits | 1.1 | 0.9 | 3.0 | 2.5 | 2.1 | 2.3 | 2.7 |
Notes: Civilian includes private industry plus state and local government; SA: seasonally adjusted; NSA: not seasonally adjusted; Comp: compensation; Govt: government
Source: US Bureau of Labor Statistics http://www.bls.gov/news.release/eci.toc.htm
A series of charts of the BLS provides evolution of the ECI during the past decade. Percentage changes in 12 months of total civilian compensation in Chart VA-1 were in a range of around 3 to 4 percent before the global recession, declining to less than 2 percent with the contraction and increasing above 2 percent in the expansion. Recently, rates have fallen, stagnated and then fell again.
Chart VA-1, US, ECI, Total Compensation, All Civilian, 12-Month Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
Chart VA-2 provides the 12 months percentage rates of change of wages and salaries for the entire civilian population. The rates collapsed with the global recession and have flattened around 1.5 percent since 2010 while inflation has accelerated and decelerated following world inflation waves (http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html).
Chart VA-2, US, ECI, Wages and Salaries, All Civilian 12-Month Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
Percentage 12-month changes of benefits of the total civilian population in Chart VA-3 were much higher in the first part of the 2000s, surpassing relatively subdued inflation but declined to less than 2 percent with the global recession. After 2010, there is a clear rising trend of benefit above 3 percent with decline in recent months of 2011 and then stagnation followed by decline in the first half of 2012.
Chart VA-3, US, ECI, Total Benefits, All Civilian 12 Months Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
ECI total compensation 12-months percentage changes from 2001 to 2011 for the private sector are shown in Chart VA-4. Behavior is similar as for total compensation. Private-sector compensation had stabilized somewhat above 2 percent with inflation rising to 2.7 percent in the 12 months ending in Mar but fell to 1.8 percent in Jun that is almost equal to 1.7 percent consumer price inflation.
Chart VA-4, US, ECI, Total Compensation, Private Industry 12 Months Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
There is different behavior of 12 months percentage rates of private-sector wages and salaries in Chart VA-5. Rates fell in the first part of the decade and then rose into 2007. Rates of change in 12 months of wages and salaries in the private sector fell during the global contraction to barely above 1 percent and have not rebounded while inflation has returned.
Chart VA-5, US, ECI, Wages and Salaries, Private Industry, 12 Months Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
Chart VA-6 provides 12-month rates of change of the consumer price index of the US. Inflation has risen sharply into 2011 with 3.0 percent in the 12 months ending in Dec while wage and salary increases in the private sector have risen by 1.6 percent in the 12 months ending in Dec. Wages and salaries rose 1.9 percent in the 12 months ending in Mar while inflation was 2.7 percent in the 12 months ending in Mar. Wage and salaries of the private sector increased 1.8 percent in the 12 months ending in Jun, which is almost equal to inflation of 1.7 percent.
Chart VA-6, US, Consumer Price Index, 12-Month Percentage Change, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Growth of benefits has been more dynamic than total compensation and wages and salaries, as shown in Chart VA-7. In 2004, the 12 month rate of change exceeded 7 percent. Rates of increase of benefits costs then fell even before the global recession, touching 1 percent in late 2010, rose sharply above 3 percent in 2011 and have fallen in recent months.
Chart VA-7, US, ECI, Total Benefits, Private Industry, 12 Months Percent Change, 2001-2012
Source: US Bureau of Labor Statistics
Behavior at the margin is provided by rates of change in a quarter relative to the prior quarter, as shown in Chart VA-8. Quarterly rates of change of total civilian compensation were high in the early 2000s, fell sharply with the global recession and collapsed in recent quarters.
Chart VA-8, US, Employment Cost Index All Civilian Total Compensation Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
Chart VA-9 provides the quarterly rates of change of wages and salaries of the entire civilian population. The rates of change sank below 0.5 percent per quarter and have remained subdued since the global recession.
Chart VA-9, US, ECI, Wages and Salaries, All Civilian, Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
Quarterly rates of change of benefits of the total civilian population in Chart VA-10 had declined before the global recession. The rate collapsed in recent quarters.
Chart VA-10, US, ECI, Total Benefits, All Civilian, Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
Quarterly rates of change of total compensation of the private sector in Chart VA-11 have not returned to the levels before the contraction except with sporadic jump in 2011 followed by contraction and stagnation in recent quarters.
Chart VA-11, US, ECI, Total Compensation, Private Industry, Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
Quarterly rates of change of wages and salaries of the private sector in Chart VA-12 show significant fluctuation. Quarterly rates of change have fallen below 0.5 percent in the current expansion.
Chart VA-12, US, ECI, Wages and Salaries, Private Industry, Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
The 12-month rates of change of benefits of private industry in Chart VA-13 have fluctuated widely with the only negative change in 2007. The 12-month rate of private-sector benefits fell in past months.
VA-13, US, ECI, Total Benefits, Private Industry, Three-Month % Change, 2001-2012
Source: US Bureau of Labor Statistics
Motor vehicle sales and production in the US have been in long-term structural change. Table VA-2 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan-Jul 2012, light vehicle sales accumulated to 8,425,842, which is higher by 14.0 percent relative to 7,392,167 a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 14.09 million in Jul 2012, lower than 14.38 million in Jun 2012 and higher than 12.40 million in Jul 2011 (http://www.motorintelligence.com/m_frameset.html).
Table VA-2, US, New Motor Vehicle Sales and Car Production, Thousand Units
| New Motor Vehicle Sales | New Car Sales and Leases | New Truck Sales and Leases | Domestic Car Production | |
| 1990 | 14,137 | 9,300 | 4,837 | 6,231 |
| 1991 | 12,725 | 8,589 | 4,136 | 5,454 |
| 1992 | 13,093 | 8,215 | 4,878 | 5,979 |
| 1993 | 14,172 | 8,518 | 5,654 | 5,979 |
| 1994 | 15,397 | 8,990 | 6,407 | 6,614 |
| 1995 | 15,106 | 8,536 | 6,470 | 6,340 |
| 1996 | 15,449 | 8,527 | 6,922 | 6,081 |
| 1997 | 15,490 | 8,273 | 7,218 | 5,934 |
| 1998 | 15,958 | 8,142 | 7,816 | 5,554 |
| 1999 | 17,401 | 8,697 | 8,704 | 5,638 |
| 2000 | 17,806 | 8,852 | 8,954 | 5,542 |
| 2001 | 17,468 | 8,422 | 9,046 | 4,878 |
| 2002 | 17,144 | 8,109 | 9,036 | 5,019 |
| 2003 | 16,968 | 7,611 | 9,357 | 4,510 |
| 2004 | 17,298 | 7,545 | 9,753 | 4,230 |
| 2005 | 17,445 | 7,720 | 9,725 | 4,321 |
| 2006 | 17,049 | 7,821 | 9,228 | 4,367 |
| 2007 | 16,460 | 7,618 | 8,683 | 3,924 |
| 2008 | 13,494 | 6,814 | 6.680 | 3,777 |
| 2009 | 10,601 | 5,456 | 5,154 | 2,247 |
| 2010 | 11,772 | 5,729 | 6,044 | 2,840 |
Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html
Manufacturers’ shipments fell 1.1 percent in Jun 2012 after increasing 0.3 percent in May. New orders fell 0.5 percent in Jun following increase by 0.5 percent in May, as shown in Table VA-3. These data are very volatile. Volatility is illustrated by increase of 88.1 percent of new orders of nondefense aircraft in Nov and revised 21.0 percent in Dec followed by decline of 17.2 percent in Jan and revised increase by 2.7 percent in Feb but sharp decline of 46.6 percent in Mar with increases of 7.6 percent in May and 14.2 percent in Jun. New orders excluding transportation equipment fell 1.8 percent in Jun. Capital goods new orders, indicating investment, decreased 10.7 percent in Jun but increased 2.3 percent in May after decreasing 3.4 percent in Apr. New orders of nondefense capital goods decreased 12.2 percent in Jun. Excluding more volatile aircraft, capital goods orders decreased 2.3 percent in Jun.
Table VA-3, US, Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%
| Jun 2012 | May 2012 ∆% | Apr 2012 | |
| Total | |||
| S | -1.1 | 0.3 | -0.2 |
| NO | -0.5 | 0.5 | -0.7 |
| Excluding | |||
| S | -1.1 | 0.2 | -0.8 |
| NO | -1.8 | 0.0 | -0.9 |
| Excluding | |||
| S | -1.2 | 0.1 | 0.0 |
| NO | -1.5 | 0.2 | -0.2 |
| Durable Goods | |||
| S | -0.1 | 1.1 | 0.7 |
| NO | 1.3 | 1.5 | -0.3 |
| Machinery | |||
| S | 3.0 | 1.2 | -3.2 |
| NO | -2.1 | 5.0 | -3.4 |
| Computers & Electronic Products | |||
| S | -0.1 | 3.8 | 1.4 |
| NO | -4.4 | -0.4 | 1.6 |
| Computers | |||
| S | -9.2 | 2.1 | -1.0 |
| NO | -11.8 | 6.7 | -4.6 |
| Transport | |||
| S | -1.1 | 1.4 | 3.5 |
| NO | 8.0 | 3.6 | 0.8 |
| Automobiles | |||
| S | -1.2 | 0.8 | 8.5 |
| Motor Vehicles | |||
| S | -1.2 | 1.0 | -0.1 |
| NO | -0.7 | 1.2 | -0.9 |
| Nondefense | |||
| S | -4.5 | 2.2 | 5.8 |
| NO | 14.2 | 7.6 | 0.1 |
| Capital Goods | |||
| S | 2.0 | 1.5 | -1.5 |
| NO | -10.7 | 2.3 | -3.4 |
| Nondefense Capital Goods | |||
| S | 1.3 | 0.6 | -0.6 |
| NO | -12.2 | 1.8 | -0.9 |
| Capital Goods ex Aircraft | |||
| S | 1.8 | 0.6 | -1.5 |
| NO | -2.3 | 2.1 | -1.5 |
| Nondurable Goods | |||
| S | -2.0 | -0.4 | -1.0 |
| NO | -2.0 | -0.4 | -1.0 |
Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation
Source: US Census Bureau http://www.census.gov/manufacturing/m3/
Chart VA-14 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.
Chart VA-14, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr022.html
Chart VA-15 of the US Bureau of the Census provides total value of manufacturers’ new orders, seasonally adjusted, from 1992 to 2012. Seasonal adjustment reduces sharp oscillations. The series dropped nearly vertically during the global recession but rose along a path even steeper than in the high-growth period before the recession. The final segment suggests deceleration but similar segments are found in earlier periods followed with continuing growth.
Chart VA-15, US, Value of Total Manufacturers’ New Orders, Seasonally Adjusted, 1992-2012
Source: US Census Bureau http://www.census.gov/manufacturing/m3/
Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-14. Values are cumulative millions of dollars in Jan-Jun 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Jun 2012 total $2856.6 billion and new orders total $2839.9 billion, growing respectively by 5.8 percent and 5.2 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 4.9 percent and new orders increased 4.3 percent. Excluding defense, shipments grew 6.1 percent and new orders grew 5.8 percent. Durable goods shipments reached $1343.4 billion in Jan-Jun 2012, or 47.0 percent of the total, growing by 9.1 percent, and new orders $1326.8 billion, or 46.7 percent of the total, growing by 7.7 percent. Important information in Table VA-8 is the large share of nondurable goods: with shipments of $1513.1 billion or 54.2 percent of the total, growing by 3.0 percent. Capital goods have relatively high value of $466.8 billion for shipments, growing 7.4 percent, and new orders $488.7 billion, growing 4.5 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $381.8 billion, growing by 7.8 percent, and new orders $393.9 billion, growing 5.3 percent. There is no suggestion in these data that the US economy is close to recession but manufacturing accounts for 10.4 percent of US national income.
Table VA-4, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars
| Jan-Jun 2012 | Shipments | ∆% 2012/ | New Orders | ∆% 2012/ |
| Total | 2,856,552 | 5.8 | 2,839,948 | 5.2 |
| Excluding Transport | 2,472,392 | 4.9 | 2,449,347 | 4.3 |
| Excluding Defense | 2,792,338 | 6.1 | 2,773,825 | 5.8 |
| Durable Goods | 1,343,426 | 9.1 | 1,326,822 | 7.7 |
| Machinery | 193,231 | 11.2 | 197,330 | 1.4 |
| Computers & Electronic Products | 165,951 | -0.5 | 133,133 | 4.2 |
| Computers | 7,019 | -15.4 | 7,057 | -14.5 |
| Transport Equipment | 384,160 | 12.1 | 390,601 | 10.9 |
| Automobiles | 52,612 | 27.2 | ||
| Motor Vehicles | 114,882 | 6.2 | 114,016 | 5.9 |
| Nondefense Aircraft | 55,179 | 26.2 | 64,326 | 30.0 |
| Capital Goods | 466,807 | 7.4 | 488,727 | 4.5 |
| Nondefense Capital Goods | 417,043 | 10.1 | 437,436 | 8.4 |
| Capital Goods ex Aircraft | 381,805 | 7.8 | 393,931 | 5.3 |
| Nondurable Goods | 1,513,126 | 3.0 | 1,513,126 | 3.0 |
| Food Products | 356,368 | 3.6 | ||
| Petroleum Refineries | 404,498 | 5.2 | ||
| Chemical Products | 386,689 | -0.1 |
Note: Transport: transportation Source: US Census Bureau http://www.census.gov/manufacturing/m3
Table VA-16 of the US Census Bureau provides value of manufacturer’s new orders not seasonally adjusted from Jan 1992 to Jun 2012. Fluctuations are evident that are smoothed by seasonal adjustment in the earlier Chart VA-15. The series drops nearly vertically during the global contraction and then resumes growth in a steep upward trend.
Chart VA-16, US, Value of Total Manufacturers’ New Orders, Not Seasonally Adjusted, 1992-2012
Source: US Census Bureau http://www.census.gov/manufacturing/m3/
Construction spending at seasonally-adjusted annualized rate (SAAR) reached $842.1 billion in Jun, which was higher by 0.4 percent than in the prior month of May, as shown in Table VA-5. Residential investment, with $272.1 billion accounting for 32.3 percent of total value of construction, increased 1.3 percent in Jun and nonresidential investment, with $570.0 billion accounting for 67.7 percent of the total, was unchanged. Public was flat while private construction increased 0.7 percent. Data in Table VA-5 show that nonresidential construction at $570.0 billion is much higher in value than residential construction at $272.1 billion while total private construction at $567.9 billion is much higher than public construction at $274.2 billion, all in SAAR. Residential and nonresidential construction contributed positively to growth of GDP in the US in IQ2012 and IIQ2012 (http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html).
Table VA-5, US, Value of Construction Put in Place in the United States Seasonally Adjusted Annual Rate Billion Dollars and Month and 12-Month ∆%
| Jun 2012 SAAR $ Billions | Month ∆% | 12-Month ∆% | |
| Total | 842.1 | 0.4 | 7.0 |
| Residential | 272.1 | 1.3 | 10.7 |
| Nonresidential | 570.0 | 0.0 | 5.4 |
| Total Private | 567.9 | 0.7 | 13.1 |
| Private Residential | 265.6 | 1.3 | 12.1 |
| New Single Family | 125.9 | 3.0 | 18.6 |
| New Multi-Family | 21.7 | 3.4 | 48.8 |
| Private Nonresidential | 302.3 | 0.1 | 14.0 |
| Total Public | 274.2 | 0.0 | -3.7 |
| Public Residential | 6.5 | 0.8 | -27.5 |
| Public Nonresidential | 267.8 | 0.0 | -2.9 |
SAAR: seasonally adjusted annual rate; B: billions
Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html
Further information on construction spending is provided in Table VA-6. The original monthly estimates not-seasonally adjusted (NSA) and their 12-month rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011 but another bump in early 2012. On a monthly basis, construction fell three consecutive months from Dec 2010 to Feb 2011, increasing in ten of the eleven months from Mar 2011 to Jan 2012, with sole decline of 4.2 percent in Jul. Improvement was interrupted in 2012 with decline of 0.5 percent in Feb 2012, further decline of 0.3 percent in Mar and recovery of 0.6 percent in Apr, 1.6 percent in May and 0.4 percent in Jun. The 12 months rates of change improved from minus 8.6 percent in Apr 2011 to the first positive 12-month percentage change of 0.7 percent in Nov and further improvement with 6.5 percent in Jun 2012.
Table VA-6, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%
| Value NSA | 12-Month ∆% NSA | Value | Month ∆% SA* | |
| Jun 2012 | 75,908 | 6.5 | 842,082 | 0.4 |
| May | 71,634 | 8.4 | 838,327 | 1.6 |
| Apr | 66,201 | 9.1 | 825,133 | 0.6 |
| Mar | 60,939 | 8.6 | 817,842 | -0.3 |
| Feb | 56,108 | 11.8 | 820,677 | -0.5 |
| Jan | 56,535 | 10.9 | 824,687 | 0.5 |
| Dec 2011 | 62,825 | 4.4 | 820,614 | 2.1 |
| Nov | 68,476 | 0.7 | 804,046 | 1.0 |
| Oct | 73,282 | -0.3 | 795,733 | 0.7 |
| Sep | 73,515 | -1.7 | 790,294 | 0.5 |
| Aug | 75,101 | -1.0 | 786,308 | 3.0 |
| Jul | 69,929 | -4.3 | 763,468 | -4.2 |
| Jun | 71,297 | -3.7 | 796,784 | 2.7 |
| May | 65,845 | -4.4 | 775,837 | 2.7 |
| Apr | 60,682 | -8.6 | 755,420 | 0.3 |
| Mar | 56,130 | -6.8 | 753,433 | 1.0 |
| Feb | 50,184 | -7.1 | 746,056 | -0.9 |
| Jan | 50,971 | -8.3 | 752,638 | -3.5 |
| Dec 2010 | 60,202 | -6.1 | 779,895 | -2.3 |
SAAR: Seasonally-adjusted Annual Rate
*Percentages are calculated with values without numbers and may differ from rounded numbers
Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html
The strong contraction of the value of construction in the US is revealed by Table VA-7. Construction spending in Jan-Jun 2012, not seasonally adjusted, reached $387.1 billion, which is higher by 9.0 percent than $355.1 billion in the same period in 2011. The depth of the contraction is shown by the decline of construction spending from $570.1 billion in Jan-Jun 2006 to only $387.1 billion in the same period in 2012, or decline by minus 32.1 percent. The comparable decline from Jan-Jun 2005 to Jan-Jun 2012 is minus 26.2 percent. Construction spending in Jan-Jun 2012 fell by 8.1 percent relative to the same period in 2003. Construction spending is lower by 11.8 percent in Jan-Jun 2012 relative to the same period in 2009. Construction has been weaker than the economy as a whole.
Table VA-7, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%
| Jan-Jun 2012 $ B | 387,055 |
| Jan-Jun 2011 $ B | 355,108 |
| ∆% to 2012 | 9.0 |
| Jan-Jun 2010 | 377,859 |
| ∆% to 2012 | 2.4 |
| Jan-Jun 2009 | 438,747 |
| ∆% to 2012 | -11.8 |
| Jan-Jun 2006 $ B | 570,117 |
| ∆% to 2012 | -32.1 |
| Jan-Jun 2005 $ B | 524,757 |
| ∆% to 2012 | -26.2 |
| Jan-Jun 2003 | 421,220 |
| ∆% to 2012 | -8.1 |
Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html
Chart VA-17 of the US Census Bureau provides value of construction spending in the US not seasonally adjusted from Jan 2002 to Jun 2012. There are wide oscillations requiring seasonal adjustment to compare adjacent data. There was sharp decline during the global recession followed in recent periods by a stationary series that may be moving upward again.
Chart VA-17, Value of Construction Spending not Seasonally Adjusted, Millions of Dollars, 2002-2012
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Monthly construction spending in the US in the six months Jan-Jun not seasonally adjusted is shown in Table VA-8 for the years between 2002 and 2012. The values of $75.9 billion in Jun 2012 and $71.3 billion in Jun 2011 are lower than $77.2 billion in Jun 2002. Construction in Jun 2012 fell by 29.5 percent from the peak of $107.6 billion in Jun 2006 to $75.9 billion in Jun 2012. The data are not adjusted for inflation or changes in quality.
Table VA-8, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars
| Year | Jan | Feb | Mar | Apr | May | Jun |
| 2002 | 59,516 | 58,588 | 63,782 | 69,504 | 73,384 | 77,182 |
| 2003 | 59,877 | 58,526 | 64,506 | 69,638 | 74,473 | 80,377 |
| 2004 | 64,934 | 64,138 | 73,238 | 78,354 | 83,736 | 89,932 |
| 2005 | 71,474 | 72,048 | 81,345 | 85,485 | 92,959 | 99,632 |
| 2006 | 81,058 | 81,478 | 92,855 | 95,324 | 102,495 | 107,607 |
| 2007 | 79,406 | 79,177 | 88,905 | 93,375 | 100,534 | 105,399 |
| 2008 | 77,349 | 77,227 | 82,779 | 87,743 | 92,781 | 96,338 |
| 2009 | 66,944 | 66,296 | 71,624 | 75,187 | 76,808 | 81,429 |
| 2010 | 55,586 | 54,019 | 60,228 | 66,422 | 68,906 | 74,035 |
| 2011 | 50,971 | 50,184 | 56,130 | 60,682 | 65,845 | 71,297 |
| 2012 | 56,535 | 56,108 | 60,939 | 66,201 | 71,364 | 75,908 |
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Chart VA-18 of the US Census Bureau shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages defaulted with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession. Chart VA-18 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained.
Chart VA-18, US, Construction Expenditures SAAR 1993-2012
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr050.html
Construction spending at SAARs in the five months Feb to Jun is shown in Table VA-8 for the years between 2002 and 2012. There is a peak in 2005 to 2006 with subsequent collapse of SAARs and rebound in 2012.
Table VA-9, US, Value of Construction Spending NSA Millions of Dollars
| Year | Feb | Mar | Apr | May | Jun |
| 2002 | 862,338 | 844,551 | 858,240 | 850,935 | 846,777 |
| 2003 | 859,225 | 851,132 | 859,459 | 866,814 | 880,865 |
| 2004 | 938,656 | 960,946 | 967,761 | 974,158 | 983,072 |
| 2005 | 1,056,492 | 1,065,262 | 1,058,365 | 1,078,586 | 1,089,505 |
| 2006 | 1,199,767 | 1,213,270 | 1,183,485 | 1,180,059 | 1,172,932 |
| 2007 | 1,156,008 | 1,167,402 | 1,159,124 | 1,168,195 | 1,166,892 |
| 2008 | 1,092,331 | 1,094,910 | 1,091,142 | 1,091,008 | 1,074,637 |
| 2009 | 959,907 | 954,984 | 929,593 | 911,241 | 901,987 |
| 2010 | 795,808 | 805,985 | 824,008 | 816,318 | 816,302 |
| 2011 | 746,056 | 753,433 | 755,420 | 775,837 | 786,784 |
| 2012 | 820,677 | 817,842 | 825,133 | 838,327 | 842,082 |
Source: US Census Bureau http://www.census.gov/const/www/c30index.html
Annual available data for the value of construction put in place in the US between 1993 and
2011 are provided in Table VA-10. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 60.3 percent between 1993 and 2011 but most of the growth, 65.3 percent, was concentrated in 1993 to 2000 with decline of 3.1 percent between 2000 and 2011. Total value of construction fell 8.2 percent between 2002 and 2011 with value of nonresidential construction increasing 19.4 percent while value of residential construction fell 38.9 percent. Value of total construction fell 31.7 percent between 2005 and 2011, with value of residential construction declining 60.2 percent while value of nonresidential construction rose 9.4 percent. Value of total construction fell 33.3 percent between 2006 and 2011, with value of nonresidential construction decreasing 2.7 percent while value of residential construction fell 60.4 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2011, the share of nonresidential construction in total value rose to 68.4 percent while that of residential construction fell to 31.6 percent.
Table VA-10, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars and ∆%
| Total | Private Nonresidential | Private Residential | |
| 1993 | 485,548 | 150,006 | 208,180 |
| 1994 | 531,892 | 160,438 | 241,033 |
| 1995 | 548,666 | 180,534 | 228,121 |
| 1996 | 599,693 | 195,523 | 257,495 |
| 1997 | 631,853 | 213,720 | 264,696 |
| 1998 | 688,515 | 237,394 | 296,343 |
| 1999 | 744,551 | 249,167 | 326,302 |
| 2000 | 802,756 | 275,293 | 346,138 |
| 2001 | 840,249 | 273,922 | 364,414 |
| Total | Total Nonresidential | Total Private Residential | |
| 2002 | 847,874 | 445,914 | 401,960 |
| 2003 | 891,497 | 440,246 | 451,251 |
| 2004 | 991,356 | 452,948 | 538,408 |
| 2005 | 1,140,136 | 486,629 | 617,507 |
| 2006 | 1,167,222 | 547,408 | 619,814 |
| 2007 | 1,152,351 | 651,883 | 500,468 |
| 2008 | 1,067,564 | 709,818 | 357,746 |
| 2009 | 903,201 | 649,273 | 253,928 |
| 2010 | 804,561 | 555,449 | 249,112 |
| 2011 | 778,238 | 532,552 | 245,686 |
| ∆% 1993-2011 | 60.3 | ||
| ∆% 1993-2000 | 65.3 | ||
| ∆% 2000-2011 | -3.1 | ||
| ∆% 2002-2011 | -8.2 | 19.4 | -38.9 |
| ∆% 2005-2011 | -31.7 | 9.4 | -60.2 |
| ∆% 2006-2011 | -33.3 | -2.7 | -60.4 |
Source: http://www.census.gov/const/www/c30index.html
Table VA-11 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 94.1 percent in the 10-city composite of the Case-Shiller home price index and 77.9 percent in the 20-city composite between May 2000 and May 2005. Prices rose around 100 percent from May 2000 to May 2006, increasing 113.2 percent for the 10-city composite and 95.7 percent for the 20-city composite. House prices rose 38.9 percent between May 2003 and May 2005 for the 10-city composite and 33.7 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC) until Jun 2006. Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with resulting decrease in mortgage rates. Similarly, between May 2003 and May 2006 the 10-city index gained 52.5 percent and the 20-city index increased 47.0 percent. House prices have fallen from May 2006 to May 2012 by 32.8 percent for the 10-city composite and 32.5 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in May 2012, house prices fell 2.3 percent in the 10-city composite and fell 0.7 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US. Table II-10 also shows that house prices increased 43.2 percent between May 2000 and May 2012 for the 10-city composite and increased 32.1 percent for the 20-city composite. House prices are close the lowest level since peaks during the boom before the financial crisis and global recession. The 10-city composite fell 32.9 percent from the peak in Jun 2006 to May 2012 and the 20-city composite fell 32.7 percent from the peak in Jul 2006 to the trough in May 2012.
Table VA-11, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| ∆% May 2000 to May 2003 | 39.8 | 33.1 |
| ∆% May 2000 to May 2005 | 94.1 | 77.9 |
| ∆% May 2003 to May 2005 | 38.9 | 33.7 |
| ∆% May 2000 to May 2006 | 113.2 | 95.7 |
| ∆% May 2003 to May 2006 | 52.5 | 47.0 |
| ∆% May 2005 to May 2012 | -26.2 | -25.8 |
| ∆% May 2006 to May 2012 | -32.8 | -32.5 |
| ∆% May 2009 to May 2012 | 0.4 | -0.7 |
| ∆% May 2010 to May 2012 | -4.8 | -5.1 |
| ∆% May 2011 to May 2012 | -2.3 | -0.7 |
| ∆% May 2000 to May 2012 | 43.2 | 32.1 |
| ∆% Peak Jun 2006 May 2012 | -32.9 | |
| ∆% Peak Jul 2006 May 2012 | -32.7 |
With the exception of Apr 2011 and Feb through May 2012, house prices seasonally-adjusted declined in every month for both the 10-city and 20-city Case-Shiller composites from Dec 2010 to Jan 2012, as shown in Table II-9. The most important seasonal factor in house prices is school changes for wealthier homeowners with more expensive houses. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug 2011 but fell in every month from Sep 2011 to Feb 2012. The not seasonally adjusted index registers decline in Mar of 0.1 percent for the 10-city composite and is flat for the 20-city composite. House prices seasonally-adjusted increased 0.7 percent in both Mar and Apr 2012 for both the 10-city and 20-city indexes. Not seasonally adjusted house prices increased 1.3 percent in Apr 2012. In May, house prices SA increased 0.9 percent and 2.2 percent NSA. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.
Table VA-12, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted and Not Seasonally Adjusted, ∆%
| 10-City Composite SA | 10-City Composite NSA | 20-City Composite SA | 20-City Composite NSA | |
| May 2012 | 0.9 | 2.2 | 0.9 | 2.2 |
| Apr | 0.7 | 1.3 | 0.7 | 1.3 |
| Mar | 0.8 | -0.1 | 0.8 | 0.0 |
| Feb | 0.0 | -0.9 | 0.1 | -0.8 |
| Jan | -0.3 | -1.0 | -0.1 | -1.0 |
| Dec 2011 | -0.6 | -1.2 | -0.5 | -1.1 |
| Nov | -0.8 | -1.4 | -0.7 | -1.3 |
| Oct | -0.7 | -1.3 | -0.7 | -1.3 |
| Sep | -0.6 | 0.1 | -0.6 | -0.7 |
| Aug | -0.4 | 0.1 | -0.8 | 0.1 |
| Jul | -0.1 | 0.9 | 0.3 | 1.0 |
| Jun | -0.1 | 1.0 | -0.1 | 1.2 |
| May | -0.2 | 1.0 | -0.2 | 1.0 |
| Apr | 0.0 | 0.6 | 0.0 | 0.6 |
| Mar | -0.1 | -1.0 | -0.2 | -1.0 |
| Feb | -0.4 | -1.3 | -0.3 | -1.2 |
| Jan | -0.3 | -1.1 | -0.3 | -1.1 |
| Dec 2010 | -0.3 | -0.9 | -0.3 | -0.9 |
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 contracted at a moderate rate with the Markit Composite Output PMI™ Index declining from 49.1 in Jun to 47.4 in Jul for the sharpest reduction in private-sector activity since Sep 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). Alex Hamilton, economist at Markit and author of the report, finds deceleration of the economy in the beginning of the second half of 2012 in both manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). The Markit Business Activity Index of Services decreased from 49.3 in Jun to 47.5 in Jul, also showing slower pace and the lowest reading in ten months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, fell from 49.9 in Jun to 47.9 in Jul, indicating moderate reducuction of private-sector manufacturing activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9858). Alex Hamilton, economist at Markit and author of the report, finds deterioration in all segments of output, new orders and exports (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9858).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 | Jun ∆% -0.6 |
| Consumer Price Index | Jun NSA ∆% -0.5; Jun 12 months NSA ∆% -0.2 |
| Real GDP Growth | IQ2012 ∆%: 1.2 on IVQ2011; IQ2012 SAAR 4.7; |
| Employment Report | Jun Unemployed 2.88 million Change in unemployed since last year: minus 260 thousand |
| All Industry Indices | May month SA ∆% -0.3 Blog 7/22/12 |
| Industrial Production | Jun SA month ∆%: -0.1 |
| Machine Orders | Total May ∆% -14.5 Private ∆%: -21.0 |
| Tertiary Index | May month SA ∆% 0.7 |
| Wholesale and Retail Sales | Jun 12 months: |
| Family Income and Expenditure Survey | Jun 12-month ∆% total nominal consumption 1.5, real 1.6 Blog 8/5/12 |
| Trade Balance | Exports Jun 12 months ∆%: -2.3 Imports Jun 12 months ∆% -2.2 Blog 7/29/12 |
Links to blog comments in Table JPY:
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
In Jun 2012, industrial production in Japan decreased 0.1 percent and decreased 2.0 percent in the 12 months ending in Jun 2012, as shown in Table VB-1. In the quarter Apr-Jun 2012, industrial production fell cumulative 3.7 or at the annual equivalent rate of 14.0 percent. As a result, growth of industrial production in 12 months fell from 14.2 percent in Mar 2012 to minus 2.0 percent in Jun 2012. Japan’s industrial production increased during two consecutive months by revised 2.3 percent in Dec 2011 and revised 0.9 percent in Jan 2012, reducing the percentage decline in 12 months from minus 3.0 percent in Dec to minus 1.6 percent in Jan 2012 and positive 1.5 percent in Feb. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep but fell again in Nov by 1.7 percent. Industrial production was higher in 12 months for the first month in Aug 2011 by 1.6 percent and again in Oct by 0.9 percent but fell 2.9 percent in Nov and 3.0 percent in Dec 2011 relative to a year earlier. Industrial production fell 21.9 percent in 2009 after falling 3.4 percent in 2008 but recovered 16.4 percent in 2010. The annual average in calendar year 2011 fell 2.3 percent largely because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011.
Table VB-1, Japan, Industrial Production ∆%
| ∆% Month SA | ∆% 12 Months NSA | |
| Jun 2012 | -0.1 | -2.0 |
| May | -3.4 | 6.0 |
| Apr | -0.2 | 12.9 |
| Mar | 1.3 | 14.2 |
| Feb | -1.6 | 1.5 |
| Jan | 0.9 | -1.6 |
| Dec 2011 | 2.3 | -3.0 |
| Nov | -1.7 | -2.9 |
| Oct | 1.8 | 0.9 |
| Sep | -1.9 | -2.4 |
| Aug | 0.9 | 1.6 |
| Jul | 1.1 | -1.7 |
| Jun | 3.8 | -0.6 |
| May | 5.8 | -4.6 |
| Apr | 2.4 | -12.7 |
| Mar | -16.2 | -12.4 |
| Feb | 1.1 | 4.5 |
| Jan | 1.2 | 6.1 |
| Dec 2010 | 2.4 | 5.9 |
| Calendar Year | ||
| 2011 | -2.3 | |
| 2010 | 16.4 | |
| 2009 | -21.9 | |
| 2008 | -3.4 |
Source: http://www.meti.go.jp/english/statistics/tyo/iip/index.html
The employment report for Japan in Jun 2012 is in Table VB-2. The rate of unemployment seasonally adjusted decreased to 4.3 percent in Jun 2012 from 4.4 percent in May 2012. The rate of unemployment not seasonally adjusted fell to 4.4 in Jun 2012 from 4.7 percent a year earlier. The employment rate increased to 56.8 percent in Jun 2012 from 56.7 percent a year earlier.
Table VB-2, Japan, Employment Report Jun 2012
| Unemployed | 2.88 million |
| Change since last year | -260 thousand; ∆% –8.3 |
| Unemployment rate | 4.3% SA -0.1; NSA 4.4%, -0.3 from earlier year |
| Population ≥ 15 years | 110.96 million |
| Change since last year | ∆% –0.2 |
| Labor Force | 65.91 million |
| Change since last year | ∆% –0.5 |
| Employed | 63.04 million |
| Change since last year | % -0.1 |
| Labor force participation rate | 59.4 |
| Change since last year | -0.1 |
| Employment rate | 56.8% |
| Change since last year | 0.1 |
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/roudou/154.htm
Chart VB-1 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2012. The sharp decline in Sep was the best reading in 2011 but the rate increased in the final quarter of the year, declining in Feb 2012 and stabilizing in Mar 2012 but increasing to 4.6 percent in Apr 2012 and declining again to 4.4 percent in May 2012 and 4.3 percent in Jun 2012.
Chart VB-1, Japan, Unemployment Rate
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/roudou/154.htm
During the “lost decade” of the 1990s from 1991 to 2002 (Pelaez and Pelaez, The Global Recession Risk (2007), 82-3), Japan’s GDP grew at the average yearly rate of 1.0 percent, the CPI at 0.1 percent and the implicit deflator at minus 0.8 percent. Japan’s growth rate from the mid 1970s to 1992 was 4 percent (Ito 2004). Table VB-3 provides Japan’s rates of unemployment, participation in labor force and employment for 1968, 1975, 1980 and 1985 and yearly from 1990 to 2011. The rate of unemployment jumped from 2.1 percent in 1991 to 5.4 percent in 2002, which was a year of global economic weakness. The participation rate dropped from 64.0 percent in 1992 to 61.2 percent in 2002 and the employment rate fell from 62.4 percent in 1992 to 57.9 percent in 2002. The rate of unemployment rose from 3.9 percent in 2007 to 5.1 percent in 2010, falling to 4.6 percent in 2011, while the participation rate fell from 60.4 percent to 59.6 percent, falling to 59.3 percent in 2011, and the employment rate fell from 58.1 percent to 56.6 percent in 2010 and 56.5 percent in 2011. The global recession adversely affected labor markets in advanced economies.
Table VB-3, Japan, Rates of Unemployment, Participation in Labor Force and Employment, %
| Unemployment Rate | Participation | Employment Rate | |
| 1968 | 1.2 | 65.9 | 65.1 |
| 1975 | 1.9 | 63.0 | 61.9 |
| 1980 | 2.0 | 63.3 | 62.0 |
| 1985 | 2.6 | 63.0 | 61.4 |
| 1990 | 2.1 | 63.3 | 61.9 |
| 1991 | 2.1 | 63.8 | 62.4 |
| 1992 | 2.2 | 64.0 | 62.6 |
| 1993 | 2.5 | 63.8 | 62.2 |
| 1994 | 2.9 | 63.8 | 61.8 |
| 1995 | 3.2 | 63.4 | 61.4 |
| 1996 | 3.4 | 63.5 | 61.4 |
| 1997 | 3.4 | 63.7 | 61.5 |
| 1998 | 4.1 | 63.3 | 60.7 |
| 1999 | 4.7 | 62.9 | 59.9 |
| 2000 | 4.7 | 62.4 | 59.5 |
| 2001 | 5.0 | 62.0 | 58.9 |
| 2002 | 5.4 | 61.2 | 57.9 |
| 2003 | 5.3 | 60.8 | 57.6 |
| 2004 | 4.7 | 60.4 | 57.6 |
| 2005 | 4.4 | 60.4 | 57.7 |
| 2006 | 4.1 | 60.4 | 57.9 |
| 2007 | 3.9 | 60.4 | 58.1 |
| 2008 | 4.0 | 60.2 | 57.8 |
| 2009 | 5.1 | 59.9 | 56.9 |
| 2010 | 5.1 | 59.6 | 56.6 |
| 2011 | 4.6 | 59.3 | 56.5 |
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/roudou/154.htm
The survey of household income and consumption of Japan in Table VB-4 is showing noticeable improvement in recent months relative to earlier months, which can be appreciated in the chart in the link in parentheses but followed by decline in Nov, renewed strength in Dec, another decline in Jan 2012 and increase in Feb and Mar 2012 with stabilization in Apr and May 2012 but sharp decline into Jun 2012 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 1.6 percent in real terms in Jun 2012 and increased 1.5 percent in nominal terms Jun. There are several segments of decreasing real consumption: clothing and footwear declining 1.4 percent in real terms and 1.5 percent in nominal terms, fuel, light and water charges declining 2.6 percent in real terms but increasing 0.8 percent in nominal terms, culture and recreation declining 6.1 in real terms and 7.5 percent in nominal terms and other consumption expenditures declining 5.3 percent in real terms and 5.4 percent in nominal terms. Real household income increased 3.8 percent; real disposable income increased 3.7 percent; and real consumption expenditures increased 2.5 percent.
Table VB-4, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier
| Jun 2012 | Nominal | Real |
| Households of Two or More Persons | ||
| Total Consumption | 1.5 | 1.6 |
| Excluding Housing, Vehicles & Remittance | -0.4 | |
| Food | 0.4 | 0.3 |
| Housing | 15.3 | 15.5 |
| Fuel, Light & Water Charges | 0.8 | -2.6 |
| Furniture & Household Utensils | -3.1 | 0.3 |
| Clothing & Footwear | -1.5 | -1.4 |
| Medical Care | 0.4 | 1.6 |
| Transport and Communications | 19.5 | 19.9 |
| Education | 2.2 | 1.8 |
| Culture & Recreation | -7.5 | -6.1 |
| Other Consumption Expenditures | -5.4 | -5.3* |
| Workers’ Households | ||
| Income | 3.7 | 3.8 |
| Disposable Income | 3.6 | 3.7 |
| Consumption Expenditures | 2.4 | 2.5 |
*Real: nominal deflated by CPI excluding imputed rent
Source: http://www.stat.go.jp/english/data/kakei/156.htm
Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VB-5. There was sharp decline in nominal consumption of 8.8 percent in Mar 2011 and 8.2 percent in real consumption because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Dec was the first month in 2011 with increases in 12 months in both nominal and real consumption expenditures followed by Feb 2012 through Jun 2012. Consumption was an important driver of GDP growth in Japan in IQ2012. Real GDP grew at the seasonally adjusted annual rate (SAAR) of 4.7 percent in IQ2012 with private consumption growing at 2.9 for the highest contribution to growth (Table VB-2 at http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html). Nominal consumption increased 4.3 percent in May 2012 but at a lower 1.5 percent in Jun 2012 and real consumption expenditures increased 4.0 percent in May 2012 but at a lower 1.6 percent in Jun 2012. Both nominal and real consumption expenditures increased in 2009, 0.3 percent and 2.1 percent, respectively.
Table VB-5, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier
| Nominal Consumption Expenditures | Real Consumption Expenditures | |
| Jun 2012 | 1.5 | 1.6 |
| May | 4.3 | 4.0 |
| Apr | 3.2 | 2.6 |
| Mar | 4.1 | 3.4 |
| Feb | 2.7 | 2.3 |
| Jan | -2.1 | -2.3 |
| Dec 2011 | 0.3 | 0.5 |
| Nov | -3.8 | -3.2 |
| Oct | -0.6 | -0.4 |
| Sep | -1.9 | -1.9 |
| Aug | -3.9 | -4.1 |
| Jul | -1.8 | -2.1 |
| Jun | -3.9 | -3.5 |
| May | -1.6 | -1.2 |
| Apr | -2.5 | -2.0 |
| Mar | -8.8 | -8.2 |
| Feb | -0.1 | 0.5 |
| Jan | -0.9 | -0.3 |
| Dec 2010 | -3.2 | -3.3 |
| Dec 2009 | 0.3 | 2.1 |
Source: http://www.stat.go.jp/english/data/kakei/156.htm
VC China. 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/t20120704_402815668.htm). Table CIPMNM provides this index and components from Jan to Jun 2012. The index fell from 57.3 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012.
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| Jun | 56.7 | 53.7 | 52.1 | 48.6 | 65.5 |
| 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/t20120704_402815668.htm
Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Jun 2011 to Jun 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 but increase to 56.7 in Jun 2012.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm
Table CIPMNMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul. The index of employment also fell from 51.0 in Apr to 49.5 in Jul.
Table CIPMNMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| IPM | PI | NOI | INV | EMP | SDEL | |
| Jul | 50.1 | 51.8 | 49.0 | 48.5 | 49.5 | 49.0 |
| Jun | 50.2 | 52.0 | 49.2 | 48.2 | 49.7 | 49.1 |
| May | 50.4 | 52.9 | 49.8 | 45.1 | 50.5 | 49.0 |
| Apr | 53.3 | 57.2 | 54.5 | 48.5 | 51.0 | 49.6 |
| Mar | 53.1 | 55.2 | 55.1 | 49.5 | 51.0 | 48.9 |
| Feb | 51.0 | 53.8 | 51.0 | 48.8 | 49.5 | 50.3 |
| Jan | 50.5 | 53.6 | 50.4 | 49.7 | 47.1 | 49.7 |
IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120801_402823727.htm
China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm). Chart CIPMM provides the index from Jul 2011 to Jul 2012. There is deceleration from 51.2 in Sep 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 and 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011.
Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120801_402823727.htm
The HSBC China Services PMI™, compiled by Markit, shows improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 50.6 in Jun to 51.9 in Jul with both manufacturing and services growing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilizing economy in China, suggesting that with lower inflation there is room for further stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). The HSBC Business Activity index increased from 52.3 in Jun to 53.1 with improving activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, increased to 49.3 in Jul from 49.3 in May, indicating moderate reduction of activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9882). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that improving economic slowdown in China still requires further easing of policy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721).
Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy. Xinhuanet, writing on “China announces surprise rate cuts amid economic downshift,” on Jun 5, 2012 (http://news.xinhuanet.com/english/china/2012-07/05/c_131697843.htm), informs that the central bank of China People’s Bank of China reduced the one year deposit rate by 25 basis points and the one year lending rate by 31 basis points effective Jun 6, 2012. The People’s Bank of China posts the new rates (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Jun 12-month ∆%: minus 2.1 Jun month ∆%: minus 0.7 |
| Consumer Price Index | Jun month ∆%: -0.6 Jun 12 months ∆%: 2.2 |
| Value Added of Industry | Jun month ∆%: 0.76 Jan-Jun 2012/Jan-Jun 2011 ∆%: 10.5 |
| GDP Growth Rate | Year IIQ2012 ∆%: 7.6 |
| Investment in Fixed Assets | Total Jan-Jun 2012 ∆%: 20.4 Real estate development: 16.6 |
| Retail Sales | Jun month ∆%: 1.08 Jan-Jun ∆%: 14.4 |
| Trade Balance | Jun balance $31.7 billion Cumulative Jun: $69.4 billion |
Links to blog comments in Table CNY:
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_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, Unemployment Rate and GDP, ∆%
| 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 Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.4 in Jun to 46.5 in Jul, which is the tenth contraction in the past eleven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9888) in the deepest contraction in three years. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.6 percent IIQ2012, which could result in a consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9888). The Markit Eurozone Manufacturing PMI® fell from 45.1 in Jun to 44.0 in Jul, which indicates the sharpest deteriorating activity in 37 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9854). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of about 1 percent, exerting pressure on GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9854). 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 | Jun 2012: 11.2% unemployment rate Jun 2012: 17.801 million unemployed Blog 8/5/12 |
| HICP | Jun month ∆%: -0.1 12 months Jun ∆%: 2.4 |
| Producer Prices | Euro Zone industrial producer prices Jun ∆%: -0.5 |
| Industrial Production | May month ∆%: 0.6; May 12 months ∆%: -2.8 |
| Retail Sales | Jun month ∆%: 0.1 |
| Confidence and Economic Sentiment Indicator | Sentiment 87.9 Jul 2012 Confidence minus 21.5 Jul 2012 Blog 8/5/12 |
| Trade | Jan-May 2012/Jan-May 2011 Exports ∆%: 7.4 May 2012 12-month Exports ∆% 5.6 Imports ∆% 0.2 |
Links to blog comments in Table EUR:
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
Eurostat estimates the rate of unemployment in the euro area as 11.2 percent in Jun 2012, as shown in Table VD-1. The number of unemployed in Jun 2012 was 17.801 million, which was 2.024 million higher than 15.777 million in Jun 2011. The rate of unemployment jumped from 10.0 percent in Jun 2011 to 11.2 percent in Jun 2012.
Table VD-1, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions, SA
| Unemployment Rate % | Number Unemployed | |
| Jun 2012 | 11.2 | 17.801 |
| May | 11.2 | 17.678 |
| Apr | 11.0 | 17.583 |
| Mar | 11.0 | 17.402 |
| Feb | 10.9 | 17.206 |
| Jan | 10.8 | 17.050 |
| Dec 2011 | 10.7 | 16.881 |
| Nov | 10.6 | 16.797 |
| Oct | 10.5 | 16.558 |
| Sep | 10.3 | 16.363 |
| Aug | 10.2 | 16.109 |
| Jul | 10.1 | 15.987 |
| Jun | 10.0 | 15.777 |
| May | 9.9 | 15.682 |
| Apr | 9.9 | 15.553 |
| Mar | 9.9 | 15.574 |
| Feb | 9.9 | 15.591 |
| Jan | 10.0 | 15.654 |
| Dec 2010 | 10.0 | 15.754 |
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Table VD-2 shows the disparity in rates of unemployment in the euro area with 11.2 percent for the region as a whole and 17.801 million unemployed but 5.4 percent in Germany and 2.271 million unemployed. At the other extreme is Spain with rate of unemployment of 24.8 percent and 5.731 million unemployed. The rate of unemployment of the European Union in Jun is 10.4 percent with 25.112 million unemployed.
Table VD-2, Unemployed and Unemployment Rate in Countries and Regions, Millions and %
| Jun 2012 | Unemployment Rate % | Unemployed Millions |
| Euro Zone | 11.2 | 17.801 |
| Germany | 5.4 | 2.271 |
| France | 10.1 | 2.951 |
| Netherlands | 5.1 | 0.455 |
| Finland | 7.5 | 0.203 |
| Portugal | 15.4 | 0.830 |
| Ireland | 14.8 | 0.309 |
| Italy | 10.8 | 2.792 |
| Greece | NA | NA |
| Spain | 24.8 | 5.731 |
| Belgium | 7.2 | 0.353 |
| European Union | 10.4 | 25.112 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Chart VD-1 provides Eurosat estimates of unemployment rates in the European Union. There is significant diversity in the rates of unemployment in members of the euro zone and the European Union.
Chart VD-1, Unemployment Rate in Various Countries and Regions
Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Advanced economies are experiencing weak demand. Table VD-3 provides month and 12-month percentage changes of the volume of retail sales in the euro zone from Jan 2011 to Jun 2012. Retail sales increased 0.1 percent in Jun 2012 but fell 1.2 percent in 12 months. The 12-month rates of growth have become negative since Mar 2011 with exception of 1.0 percent in Apr 2011 and stability in Aug 2011. The lower part of Table VD-3 provides annual percentage changes of inflation-adjusted retail sales in the euro zone since 1990. Retail sales fell 2.4 percent in 2009 after falling 0.8 percent in 2008 and fell again by 0.6 percent in 2011. The average yearly rate of increase of retail sales from 1999 to 2007 was 2.0 percent but growth has not recovered. The average yearly rate of increase for the entire period 1999 to 2011 is lower at 1.1 percent.
Table VD-3, Euro Zone, Volume of Retail Sales, Deflated ∆%
| Month ∆% | 12-Month ∆% | |
| Jun 2011 | 0.1 | -1.2 |
| May | 0.8 | -0.8 |
| Apr | -1.3 | -3.4 |
| Mar | 0.1 | -0.1 |
| Feb | -0.1 | -2.0 |
| Jan | 1.2 | -1.1 |
| Dec 2011 | -1.4 | -1.7 |
| Nov | -0.3 | -1.4 |
| Oct | -0.1 | -0.7 |
| Sep | -0.6 | -1.1 |
| Aug | 0.0 | 0.0 |
| Jul | 0.4 | -0.4 |
| Jun | 0.9 | -0.8 |
| May | -1.6 | -1.8 |
| Apr | 1.2 | 1.0 |
| Mar | -1.4 | -1.4 |
| Feb | 0.4 | 1.1 |
| Jan | 0.3 | 0.9 |
| Annual ∆% | ||
| 2011 | -0.6 | |
| 2010 | 0.9 | |
| 2009 | -2.4 | |
| 2008 | -0.8 | |
| 2007 | 1.6 | |
| 2006 | 2.2 | |
| 2005 | 2.0 | |
| 2004 | 1.5 | |
| 2003 | 0.9 | |
| 2002 | 1.2 | |
| 2001 | 2.1 | |
| 2000 | 2.5 | |
| 1999 | 2.3 | |
| Average ∆% 1999-2007 | 2.0 | |
| Average ∆% 1999-2011 | 1.1 |
Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Growth rates of retail sales of the euro zone by major segments are in Table VD-4. Total sales in increased 0.1 percent in Jun 2012 and declined 1.2 percent in the 12 months ending in Jun 2012. All 12-month percentage changes are negative with improvement in all monthly rates except for decline of 0.7 percent for nonfood products excluding automotive fuel.
Table VD-4, Euro Zone, Volume of Retail Sales by Products, ∆%
| May 2012 | Month ∆% | 12-Month ∆% |
| Total | 0.1 | -1.2 |
| Food, Drinks, Tobacco | 0.4 | -1.0 |
| Nonfood Products ex Automotive Fuel | -0.7 | -1.4 |
Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Month and 12-month percentage rates of change of retail sales by member countries of the euro zone are shown in Table VD-5 for Jun 2012. Retail sales are weak throughout the euro zone. The 12-month percentage changes are negative for all members in Table VD-5 with the exception of 0.9 percent for France and 3.8 percent for Belgium. The 12-month percentage change for the UK, which is not a member of the euro zone, was 0.6 percent. The European Union’s 12-month percentage change was also negative by 0.7 percent.
Table VD-5, Euro Zone, Volume of Retail Sales by Member Countries, ∆%
| Jun 2012 | Month ∆% | 12-Month ∆% |
| Euro Zone | 0.1 | -1.2 |
| Germany | -0.1 | -0.4 |
| France | 0.7 | 0.9 |
| Netherlands | NA | NA |
| Finland | -0.9 | 0.9 |
| Belgium | 0.5 | 3.8 |
| Portugal | 0.2 | -5.3 |
| Ireland | -2.2 | -1.3 |
| Italy | NA | NA |
| Greece | NA | NA |
| Spain | -0.1 | -5.1 |
| UK | -1.7 | 0.6 |
| European Union | -0.3 | -0.7 |
Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 and 2012 that has punctured the historical average of 100 and resumed downward trend in 2012 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table VD-6 with the index falling from 102.5 in Jul 2011 to 87.9 in Jul 2012. There is downward trend in 2012 with the index still above the minimum value of 69.1 reached in Mar 2009 but still below the average of 100.
Table VD-6, Euro Area, Indicators of Confidence and Economic Sentiment SA
| ESI | IND | SERV | CON | RET | CONS | |
| Historical Average | 100.0 | -6.7 | 10.6 | -12.8 | -9.0 | -17.6 |
| Maximum | 117.9 | 7.8 | 35.3 | 2.5 | 5.3 | 6.1 |
| Minimum | 69.1 | -38.2 | -27.3 | -34.3 | -24.9 | -46.3 |
| Jul 2012 | 87.9 | -15.0 | -8.5 | -21.5 | -15.0 | -28.4 |
| Jun | 89.9 | -12.8 | -7.4 | -19.8 | -14.4 | -28.1 |
| May | 90.5 | -11.4 | -5.2 | -19.3 | -18.1 | -30.2 |
| Apr | 92.9 | -9.0 | -2.4 | -19.9 | -11.1 | -27.5 |
| Mar | 94.5 | -7.1 | -0.3 | -19.1 | -12.0 | -26.7 |
| Feb | 94.5 | -5.7 | -0.9 | -20.3 | -14.0 | -24.6 |
| Jan | 93.4 | -7.0 | -0.7 | -20.7 | -15.5 | -28.1 |
| Dec 2011 | 92.8 | -7.2 | -2.6 | -21.3 | -12.2 | -28.9 |
| Nov | 93.5 | -7.3 | -2.0 | -20.5 | -11.2 | -26.0 |
| Oct | 94.4 | -6.6 | -0.2 | -20.1 | -9.9 | -27.3 |
| Sep | 94.6 | -6.0 | -0.3 | -19.3 | -9.9 | -29.8 |
| Aug | 98.1 | -2.9 | 3.4 | -16.8 | -8.8 | -26.0 |
| Jul | 102.5 | 0.5 | 7.5 | -11.5 | -3.7 | -27.2 |
| Jun | 104.9 | 3.1 | 9.7 | -10.0 | -2.7 | -26.8 |
ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction
Source: European Commission Services
ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction
Source: European Commission Services http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm
VE Germany. 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 Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, fell from 48.1 in Jun to 47.5 in Jul, which is the lowest level since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). Tim Moore, Senior Economist at Markit and author of the report, finds that the economy of Germany is beginning the third quarter from a weaker base since the global recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). There was marginal improvement in the Germany Services Business Activity Index from 49.9 in Jun to 50.3 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 45.0 in Jun to 43.0 in Jul, which is the weakest reading since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9890). 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 and lack of new work (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9890 ).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 | Jun month SA ∆%: -0.1 |
| Producer Price Index | May month ∆%: -0.3 |
| Industrial Production | Mfg May month SA ∆%: 1.9 |
| Machine Orders | May month ∆%: 0.6 |
| Retail Sales | Jun Month ∆% -0.1 12-Month ∆% 2.9 Blog 8/5/12 |
| Employment Report | Unemployment Rate Jun 5.2% |
| Trade Balance | Exports May 12-month NSA ∆%: 0.5 Blog 7/15/12 |
Links to blog comments in Table DE:
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html
5/27 http://cmpassocregulationblog.blogspot.com/2012_05_01_archive.html
Germany’s labor market continues to show strength not found in most of the advanced economies, as shown in Table VE-1. The number unemployed, not seasonally adjusted, fell from 2.51 million in Jun 2011 to 2.19 million in Jun 2012, or 12.7 percent, while the unemployment rate fell from 6.0 percent in Jun 2011 to 5.2 percent in Jun 2012. The number of persons in employment, not seasonally adjusted, increased from 35.53 million in Jun 2011 to 39.54 million in Jun 2012, or 11.3 percent, while the employment rate was unchanged from 62.8 percent in Jun 2011 to 62.8 percent in Jun 2012. The number unemployed, seasonally adjusted, fell from 2.29 million in May 2012 to 2.27 million in Jun 2012, while the unemployment rate fell from 5.5 percent in May 2012 to 5.4 percent in Jun 2012. The number of persons in employment, seasonally adjusted, decreased from 39.61 million in May 2012 to 39.57 million in Jun 2012, or minus 0.1 percent.
Table VE-1, Germany, Unemployment Labor Force Survey
| Jun 2012 | May 2012 | Jun 2011 | |
| NSA | |||
| Number | 2.19 ∆% Jun 2012/May 2012: -5.6 ∆% Jun 2012/Jun 2011: -12.7 | 2.32 | 2.51 |
| % Rate Unemployed | 5.2 | 5.5 | 6.0 |
| Persons in Employment Millions | 39.54 ∆% Jun 2012/May 2012: -0.6 ∆% Jun 2012/Jun 2011: 11.3 | 39.78 | 35.53 |
| Employment Rate | 62.8 | 69.5 | 62.8 |
| SA | |||
| Number | 2.27 ∆% Jun 2012/May 2012: -0.9 ∆% Jun 2012/Jun 2011: –9.6 | 2.29 | 2.51 |
| % Rate Unemployed | 5.4 | 5.5 | 6.0 |
| Persons in Employment Millions | 39.57 ∆% Jun 2012/May 2012: –0.1 ∆% Jun 2012/Jun 2011: -0.1 | 39.61 | 39.60 |
NSA: not seasonally adjusted; SA: seasonally adjusted
Source: Statistiche Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/07/PE12_264_132.html;jsessionid=3080F9CBA957361928839039D21028AF.cae2
The unemployment rate in Germany as percent of the labor force in Table VE-2 stood at 6.8 percent in Jul 2012. The rate is much lower than 11.1 percent in 2005 and 9.6 percent in 2006.
Table VE-2, Germany, Unemployment Rate in Percent of Labor Force
| Percent of Labor Force | |
| Jul 2012 | 6.8 |
| Jun | 6.6 |
| May | 6.7 |
| Apr | 7.0 |
| Mar | 7.2 |
| Feb | 7.4 |
| Jan | 7.3 |
| Dec 2011 | 6.6 |
| Nov | 6.4 |
| Oct | 6.5 |
| Sep | 6.6 |
| Aug | 7.0 |
| Jul | 7.0 |
| Jun | 6.9 |
| May | 7.0 |
| Apr | 7.3 |
| Mar | 7.6 |
| Feb | 7.9 |
| Jan | 7.9 |
| Dec 2010 | 7.1 |
| Dec 2009 | 7.8 |
| Dec 2008 | 7.4 |
| Dec 2007 | 8.1 |
| Dec 2006 | 9.6 |
| Dec 2005 | 11.1 |
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-1 of Statistisches Bundesamt Deutschland, or Federal Statistical Office of Germany, shows the long-term decline of the rate of unemployment in Germany from more than 12 percent in early 2005 to 6.6 percent in Dec 2011, 6.6 percent in May 2012 and 6.8 percent in Jun 2012.
Chart VE-1, Germany, Unemployment Rate, Unadjusted, Percent
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Retail sales in Germany adjusted for inflation are provided in Table VE-3. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales fell 0.1 percent in Jun 2012 after decreases of 0.3 percent in May and 0.1 percent in Apr but the 12-month percentage change is 2.9 percent in Jun 2012.
Table VE-3, Retail Sales in Germany Adjusted for Inflation
| 12-Month ∆% NSA | Month ∆% SA and Calendar Adjusted | |
| Jun 2012 | 2.9 | -0.1 |
| May | -1.1 | -0.3 |
| Apr | -4.7 | -0.1 |
| Mar | 3.6 | 0.8 |
| Feb | 2.2 | -0.3 |
| Jan | 1.8 | -1.1 |
| Dec 2011 | 1.3 | 0.6 |
| Nov | 1.4 | -0.3 |
| Oct | -0.3 | -0.1 |
| Sep | 1.6 | 0.4 |
| Aug | 3.6 | -0.5 |
| Jul | -1.9 | 0.3 |
| Jun | -2.3 | 2.9 |
| May | 4.7 | -2.0 |
| Apr | 5.0 | 0.7 |
| Mar | -2.6 | -2.4 |
| Feb | 2.5 | 0.6 |
| Jan | 3.0 | 1.2 |
| Dec 2010 | 0.6 | 0.6 |
| Dec 2009 | -2.2 | |
| Dec 2008 | 3.3 | |
| Dec 2007 | -6.2 | |
| Dec 2006 | 1.3 |
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-2 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at constant prices from 2007 to 2012. There appear to be fluctuations without trend.
Chart VE-2, Germany, Turnover in Retail Trade at Constant Prices 2005=100
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-3 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at current prices from 2007 to 2011. There are also sharp fluctuations but without trend.
Chart VE-3, Germany, Turnover in Retail Sales at Current Prices, Original Values, 2005=100
Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 47.3 in Jun to 47.9 in Jun, indicating contraction of private sector activity at a more moderate rate and the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that improving activity in services was compensated by deeper decline in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). The Markit France Services Activity index rose from 47.9 in Jun to 50.0 in Jul for the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). The Markit France Manufacturing Purchasing Managers’ Index® fell to 43.4 in Jul from 45.2 in Jun, which was the sharpest decline of the manufacturing economy since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing deterioration in manufacturing with weakening new orders and adversities at home and abroad (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Jun month ∆% -0.9 |
| PPI | Jun month ∆%: -1.1 Blog 8/5/12 |
| GDP Growth | IQ2012/IVQ2011 ∆%: 0.0 |
| Industrial Production | May SA ∆%: |
| Consumer Spending | Jun Manufactured Goods |
| Employment | IQ2012 Unemployed 2.746 million |
| Trade Balance | May Exports ∆%: month 1.3, 12 months 7.8 Apr Imports ∆%: month 0.1, 12 months 3.2 Blog 7/8/12 |
| Confidence Indicators | Historical averages 100 Jul Mfg Business Climate 90 Blog 7/29/12 |
Links to blog comments in Table FR:
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html
7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
The Jun monthly report of household expenditures in consumption goods for France is in Table VF-1. Total consumption increased 0.1 percent in Jun 2012. Consumption of manufactured products increased 0.5 percent in Jun after increasing 1.5 percent in May. Total consumption increased 0.2 percent in Jun 2012 relative to Jun 2011 and consumption of manufactured goods increased 0.3 percent in Jun 2012 relative to Jun 2011. Internal demand is weak throughout most advanced economies.
Table VF-1, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading-Days SA
| Total | Food | Eng. Goods | Energy | Mfg | |
| Jun 2012 | 0.1 | 1.0 | 0.0 | -1.3 | 0.5 |
| Jun 2012/ Jun 2011 | 0.2 | 0.3 | -0.4 | 1.4 | 0.3 |
| May | 0.5 | 0.1 | 2.2 | -2.9 | 1.5 |
| Apr | 0.5 | -0.7 | -2.3 | 10.1 | -1.4 |
| Mar | -2.6 | -2.1 | 0.8 | -11.5 | -0.5 |
| Feb | 2.1 | 1.2 | -0.8 | 11.6 | 0.5 |
| Jan | -0.3 | 1.4 | -2.5 | 2.2 | -0.8 |
| Dec 2011 | -0.2 | -0.9 | 1.2 | -2.5 | 0.0 |
| Nov | -0.1 | 0.0 | 0.3 | -1.4 | 0.0 |
| Oct | 0.0 | -0.6 | 0.7 | -0.7 | 0.1 |
| Sep | 0.0 | 0.4 | 0.7 | -2.6 | 0.1 |
| Aug | 0.5 | 0.3 | -0.1 | 2.4 | 0.5 |
| Jul | -0.2 | 0.3 | -0.5 | -0.3 | -0.2 |
| Jun | 0.5 | -1.0 | 0.7 | 3.1 | 0.4 |
| May | 0.2 | -0.5 | -0.4 | 3.4 | -0.6 |
| Apr | -1.6 | 1.0 | -2.0 | -6.2 | -1.0 |
| Mar | -0.6 | -0.3 | -1.0 | -0.3 | -0.8 |
| Feb | 0.3 | 0.4 | 1.1 | -2.2 | 0.8 |
| Jan | -1.2 | -0.4 | -0.5 | -4.4 | -0.5 |
| Dec 2010 | 0.7 | 0.3 | 0.4 | 2.1 | 0.3 |
Eng. Goods: Engineered Goods
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120731
Chart VF-2 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth. Two-thirds of the increase of consumption in Feb 2012 is attributed to higher consumption of energy during bitter cold weather and the drop in Mar reversed expenditures in energy under milder weather. There is negative trend of monthly consumption.
Chart VF-1, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120731
VG Italy. The Markit/ADACI Business Activity Index was virtually unchanged at 43.0 in Jul relative to 43.1 in Jun, indicating sharp contraction of output of Italy’s services sector in 14 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9921). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the rate of contraction in services was only sharpest in four other readings in the history of the index, which occurred during the global recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9921). The Markit/ADACI Purchasing Managers’ Index® (PMI®), fell from 45.2 in Jun to 43.4 in Jul for ten consecutive months of contraction of Italy’s manufacturing quite sharp relative to the history of the index with the weakest reading since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds continuing sharp contraction of new orders of manufacturing in Italy both at home and abroad (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Jul month ∆%: 0.0 |
| Producer Price Index | Jun month ∆%: -0.1 Blog 8/5/12 |
| GDP Growth | IQ2012/IVQ2011 SA ∆%: minus 0.8 |
| Labor Report | Jun 2012 Participation rate 63.9% Employment ratio 56.9% Unemployment rate 10.8% Blog 8/5/12 |
| Industrial Production | May month ∆%: 0.8 |
| Retail Sales | May month ∆%: -0.2 May 12-month ∆%: -2.0 Blog 7/29/12 |
| Business Confidence | Mfg Jul 87.1, Mar 90.9 Construction Jul 84.0, Mar 82.6 Blog 7/29/12 |
| Trade Balance | Balance May SA €90 million versus Apr -€59 |
Links to blog comments in Table IT:
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html
Data on Italy’s labor market since 2004 are provided in Table VG-1. The unemployment rate has risen from 6.1 percent in Dec 2006 to 10.8 percent in Jun 2012. As in other advanced economies, unemployment has reached high levels.
Table VG-1, Italy, Labor Report
| Participation Rate % | Employment Ratio % | Unemployment Rate % | |
| Jun 2012 | 63.9 | 56.9 | 10.8 |
| May | 63.8 | 57.0 | 10.6 |
| Apr | 63.7 | 56.9 | 10.6 |
| Mar | 63.5 | 56.9 | 10.4 |
| Feb | 63.4 | 57.0 | 9.9 |
| Jan | 63.1 | 57.0 | 9.6 |
| Dec 2011 | 62.9 | 56.9 | 9.4 |
| Nov | 62.7 | 56.7 | 9.3 |
| Oct | 62.6 | 56.9 | 8.9 |
| Sep | 62.3 | 56.8 | 8.9 |
| Aug | 62.4 | 57.0 | 8.5 |
| Jul | 62.4 | 57.1 | 8.3 |
| Jun | 62.0 | 56.9 | 8.1 |
| May | 62.1 | 56.9 | 8.1 |
| Apr | 61.9 | 56.9 | 7.9 |
| Mar | 62.2 | 57.2 | 7.9 |
| Feb | 61.9 | 56.9 | 7.9 |
| Jan | 61.9 | 56.9 | 8.1 |
| Dec 2010 | 62.1 | 56.9 | 8.2 |
| Dec 2009 | 62.3 | 57.0 | 8.3 |
| Dec 2008 | 62.5 | 58.1 | 7.0 |
| Dec 2007 | 63.1 | 58.9 | 6.5 |
| Dec 2006 | 62.5 | 58.6 | 6.1 |
| Dec 2005 | 62.5 | 57.8 | 7.5 |
| Dec 2004 | 62.5 | 57.4 | 7.9 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/68149
Table VG-2 provides more detail on the labor report for Italy in Jun 2012. The level of employment decreased 29,000 from May to Jun 2012 and increased 11,000 from Jun 2011 to Jun 2012. Unemployment increased 73,000 in Jun 2012 and 761,000 from a year earlier. A dramatic aspect found in most advanced economies is the high rate of unemployment of youth at 34.3 percent in Jun 2012 for ages 15 to 24
Table VG-2, Italy, Labor Report
| Jun 2012 | 1000s | Change from Prior Month 1000s | ∆% from Prior Month | Change from Prior Year 1000s | ∆% from Prior Year |
| EMP | 22.970 | -29 | -0.1 | 11 | 0.0 |
| UNE | 2.792 | 73 | 2.7 | 761 | 37.5 |
| INA 15-64 | 14.307 | -52 | -0.4 | -752 | -5.0 |
| EMP % | 56.9 | -0.1 | 0.0 | ||
| UNE % | 10.8 | 0.3 | 2.7 | ||
| Youth UNE % 15-24 | 34.3 | -1.0 | 6.6 | ||
| INA % 15-64 | 36.1 | -0.1 | -1.8 |
Notes: EMP: Employed; UNE: Unemployed; INA 15-64: Inactive aged 15 to 64; EMP %: Employment Rate; UNE %: Unemployment Rate; Youth UNE % 15-24: Youth Unemployment Rate aged 15 to 24; INA % 15-64: Inactive Rate aged 15 to 64.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/68149
Chart VG-1 of the Istituto Nazionale di Statistica provides the rate of unemployment in Italy. The rate stabilized in 2011 at around 8 percent until mid year and then climbed to 10.8 percent in Jun 2012.
Chart VG-1, Italy, Rate of Unemployment, %
Source: Istituto Nazionale di Statistica
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 4.0 percent in 2009 after dropping revised 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 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 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.
Table VH-UK, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.5 |
| 1999 | 3.2 |
| 2000 | 4.2 |
| 2001 | 2.9 |
| 2002 | 2.4 |
| 2003 | 3.8 |
| 2004 | 2.9 |
| 2005 | 2.8 |
| 2006 | 2.6 |
| 2007 | 3.6 |
| 2008 | -1.0 |
| 2009 | -4.0 |
| 2010 | 1.8 |
| 2011 | 0.8 |
| Average ∆% per Year | |
| 1948-2011 | 2.7 |
| 1948-1959 | 2.9 |
| 1960-1969 | 3.3 |
| 1970-1979 | 2.5 |
| 1980-1989 | 3.2 |
| 1990-1999 | 2.6 |
| 2000-2011 | 1.7 |
| 2000-2007 | 3.0 |
| 2009-2011 | 1.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html
The Business Activity Index of the Markit/CIPS UK Services PMI® fell from 51.3 in Jun to 51.0 in Jul with growth during 19 consecutive months but at the weakest level in that period (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9922). Paul Smith, Senior Economist at Markit, finds that weather and the Olympics preparations restrained activity but that combining the index with that of construction the index fell below 50.0 for the first time in 39 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9922). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell from 48.4 in Jun to 45.4 in July, which is the lowest reading since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9893). 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 weakness in output to the sharpest level since Mar 2009 with lack of demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9893).
Table UK provides the country data table for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | May month ∆%: -0.1 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IIQ2012 prior quarter ∆% minus 0.7; year earlier same quarter ∆%: minus 0.8 |
| Industrial Production | May 2012/May 2011 NSA ∆%: Production Industries minus 1.6; Manufacturing minus 1.7 |
| Retail Sales | Jun month ∆%: 0.1 |
| Labor Market | Mar-May Unemployment Rate: 8.1%; Claimant Count 4.9%; Earnings Growth 1.5% |
| Trade Balance | Balance May minus ₤2717 million |
Links to blog comments in Table UK:
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.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 3.9 percent by Fri Aug 3, 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 | 8/3/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2387 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 8/3/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3726 |
| 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 1.2387/EUR on Aug 3, 2012 or by 3.4 percent {[(1.2387/1.192)-1]100 = 3.9%}. 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 6.3818/USD on Fri Aug 3, 2012, or by an additional 6.6 percent, for cumulative revaluation of 23.0 percent. The final row of Table VI-2 shows that depreciation of the CNY in three of the past four weeks.
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 | 8/3/ |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2387 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 8/3/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3726 |
| Weekly Rates | 7/6/2012 | 7/13/2012 | 7/20/2012 | 8/3/ 2012 |
| CNY/USD | 6.3868 | 6.3750 | 6.3818 | 6.3726 |
| ∆% from Earlier Week* | -0.3 | 0.2 | -0.1 | 0.1 |
*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). Bob Davis and Lingling Wei, writing on “China shifts course, lets Yuan drop,” on Jul 25, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444840104577548610131107868.html?mod=WSJPRO_hpp_LEFTTopStories), find that China is depreciating the CNY relative to the USD in an effort to diminish the impact of appreciation of the CNY relative to the EUR. Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Aug 3, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. The CNY devalued 0.2 percent relative to the USD by Aug 3, 2012 to CNY 6.3726/USD from the rate of CNY 6.3588/USD on Oct 28, 2011. 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 | |
| 8/3/12 | 6.3726 | -0.2 |
| 7/27/12 | 6.3818 | -0.4 |
| 7/20/12 | 6.3750 | -0.3 |
| 7/13/12 | 6.3868 | -0.4 |
| 7/6/12 | 6.3658 | -0.1 |
| 6/29/12 | 6.3552 | 0.1 |
| 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
Chart VI-1 of the Board of Governors of the Federal Reserve System provides the CNY/USD exchange rate from Aug 3, 2003 to Jul 27, 2012 together with US recession dates in shaded areas. China fixed the CNY/USD date for a long period as shown in the horizontal segment from 2000 to 2005. There was systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY 6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to avoid adverse effects on its economy from the global recession, which is shown as a horizontal segment from 2009 until mid 2010. China then continued the policy of appreciation of the CNY relative to the USD with oscillations until the beginning of 2012 when the rate began to move sideways followed by a final upward slope of devaluation that is measured in Table VI-2A. Revaluation of the CNY relative to the USD by 23.0 percent by Aug 3, 2012 has not reduced the trade surplus of China but reversal of the policy of revaluation could result in international confrontation. The upward slope in the final segment on the right of Chart VI-I is measured as depreciation of 0.2 percent in Table VI-2A, which can be reversed rapidly.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (US), Aug 3, 2003-Jul 27, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
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-3A 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 IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.5 percent, which is the lowest since the global recession (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html and earlier 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 is experiencing the first expansion from a recession after World War II without growth and without jobs. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2011 to cumulative growth of 0.87 percent in the first two quarters of 2012, which is equivalent to 1.75 percent (http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 26.8 million people. (ii) The labor market continues fractured with 28.8 million unemployed or underemployed (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). There are over 10 million fewer full-time jobs and hiring has collapsed (Section I http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.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 0.4 percent in IVQ2011, 0.3 percent in IQ2012 and 0.7 percent in IIQ2012 and declined 0.8 percent in IIQ2012 relative to IIQ2011. 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/2012/07/world-inflation-waves-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.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 35.2 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Jul 27, 2012, and the S&P 500 has gained 36.0 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 8/3/12,” 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, 2011, 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], which was repeated in IIQ2012. 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. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China but fiscal and banking uncertainties in Spain spread to Italy in the selloff of July 20, 2012. Mario Draghi (2012Jul26), president of the European Central Bank, stated: “But there is another message I want to tell you.
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This statement caused return of risk appetite, driving upward valuations of risk financial assets worldwide. Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html). Risk appetite continued in the week of Aug 3, 2012, in expectation of purchases of sovereign bonds by the ECB. The highest valuations in column “∆% Trough to 8/3/12” are by US equities indexes: DJIA 35.2 percent and S&P 500 36.0 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 8/3/12” 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 10.5 percent below the trough; Japan’s Nikkei Average is 3.0 percent below the trough; DJ Asia Pacific TSM is 4.0 percent above the trough; Dow Global is 8.3 percent above the trough; STOXX 50 of European equities is 10.1 percent above the trough; and NYSE Financial is 5.7 percent above the trough. DJ UBS Commodities is 15.3 percent above the trough. DAX is 21.1 percent above the trough. Japan’s Nikkei Average is 3.0 percent below the trough on Aug 31, 2010 and 24.9 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8555.11 on Fri Aug 3, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 16.6 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 3.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 8/3/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Aug 3, 2012 such as 2.6 percent for DAX, 2.9 percent for STOXX 50 of European equities, 0.5 percent for NYSE Financial, 0.8 percent DJ Asia Pacific TSM, 0.2 percent Shanghai Composite and 0.8 percent for Dow Global. DJ UBS Commodities fell 0.4 percent. Other valuations decreased such as 0.1 percent Nikkei Average. The DJIA increased 0.2 percent and S&P 500 increased 0.4 percent. The USD depreciated 0.5 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 8/3/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Aug 3, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 8/3/12” but also relative to the peak in column “∆% Peak to 8/3/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 16.9 percent, S&P 500 14.3 percent and DAX 8.4 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 15.8 percent, Nikkei Average by 24.9 percent, Shanghai Composite by 32.6 percent, DJ Asia Pacific by 8.9 percent, STOXX 50 by 6.7 percent and Dow Global by 11.7 percent. DJ UBS Commodities Index is now 1.5 percent below the peak. The US dollar strengthened 18.1 percent relative to 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 8/3/ /12 | ∆% Week 8/3/12 | ∆% Trough to 8/3/ 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 16.9 | 0.2 | 35.2 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 14.3 | 0.4 | 36.0 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -15.8 | 0.5 | 5.7 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -11.7 | 0.8 | 8.3 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -8.9 | 0.8 | 4.0 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -24.9 | -0.1 | -3.0 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -32.6 | 0.2 | -10.5 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -6.7 | 2.9 | 10.1 |
| DAX | 4/26/ | 5/25/ | -10.5 | 8.4 | 2.6 | 21.1 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 18.1 | -0.5 | -3.9 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -1.5 | -0.4 | 15.3 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.569 |
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 Aug 3, 2012, shows that the S&P 500 is now 14.8 percent above the Apr 26, 2010 level and the DJIA is 16.9 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 |
| Jun 29 | 1.9 | 14.9 | 2.0 | 12.4 |
| Jul 6 | -0.8 | 14.0 | -0.5 | 11.8 |
| Jul 13 | 0.0 | 14.0 | 0.2 | 11.9 |
| Jul 20 | 0.4 | 14.4 | 0.4 | 12.4 |
| Jul 27 | 2.0 | 16.7 | 1.7 | 14.3 |
| Aug 3 | 0.2 | 16.9 | 0.4 | 14.8 |
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, 2011 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 12.6 percent to ZAR 8.1499/USD on Aug 3, 2012, which is still 29.6 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.9 percent stronger at SGD 1.2420/USD on Aug 3, 2012 relative to the trough of depreciation but still stronger by 20.0 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 16.7 percent relative to the trough to BRL 2.0279/USD on Aug 3, 2012 but still stronger by 16.5 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC by 50 basis points for the seventh consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3613&IDPAI=NEWS):
“Copom reduces the Selic rate to 8.0 percent
11/07/2012 8:35:00 PM
Brasília - Continuing the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 8.00 percent.”
Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.
Table VI-6, Exchange Rates
| Peak | Trough | ∆% P/T | Aug 3, 2012 | ∆% T Aug 3, 2012 | ∆% P Aug 3, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 8/3/ 2012 | |||
| Rate | 1.59 | 1.192 | 1.2387 | |||
| ∆% | -33.4 | 3.8 | -28.4 | |||
| JPY USD | 8/18 | 9/15 | 8/3/ 2012 | |||
| Rate | 110.19 | 83.07 | 78.47 | |||
| ∆% | 24.6 | 5.5 | 28.8 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 8/3/ 2012 | |||
| Rate | 1.225 | 1.025 | 0.9702 | |||
| ∆% | 16.3 | 5.3 | 20.8 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 8/3/ 2012 | |||
| Rate | 2.006 | 1.388 | 1.5644 | |||
| ∆% | -44.5 | 11.3 | -28.2 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 8/3/ | |||
| Rate | 1.0215 | 1.6639 | 1.0568 | |||
| ∆% | -62.9 | 43.1 | 7.4 | |||
| ZAR USD | 10/22 2008 | 8/15 | 8/3/ 2012 | |||
| Rate | 11.578 | 7.238 | 8.1499 | |||
| ∆% | 37.5 | -12.6 | 29.6 | |||
| SGD USD | 3/3 | 8/9 | 8/3/ | |||
| Rate | 1.553 | 1.348 | 1.2420 | |||
| ∆% | 13.2 | 7.9 | 20.0 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 8/3/ | |||
| Rate | 7.813 | 7.752 | 7.7547 | |||
| ∆% | 0.8 | 0.0 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 8/3/ 2012 | |||
| Rate | 2.43 | 1.737 | 2.0279 | |||
| ∆% | 28.5 | -16.7 | 16.5 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 8/3/ | |||
| Rate | 22.19 | 18.693 | 20.374 | |||
| ∆% | 15.7 | -9.0 | 8.2 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 8/3/ 2012 | |||
| Rate | 9.313 | 7.108 | 6.7060 | |||
| ∆% | 23.7 | 5.7 | 28.0 | |||
| CNY USD | 7/20 2005 | 7/15 | 8/3/ | |||
| Rate | 8.2765 | 6.8211 | 6.3726 | |||
| ∆% | 17.6 | 6.6 | 23.0 |
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
There are major ongoing and unresolved realignments of exchange rates in the international financial system as countries and regions seek parities that can optimize their productive structures. Seeking exchange rate parity or exchange rate optimizing internal economic activities is complex in a world of unconventional monetary policy of zero interest rates and even negative nominal interest rates of government obligations such as yield of minus 0.02 percent for the two-year government bond of Germany. Regulation, trade and devaluation conflicts should have been expected from a global recession (Pelaez and Pelaez (2007), The Global Recession Risk, Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a)): “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” (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve System provides the key exchange rate of US dollars (USD) per euro (EUR) from Jun 28, 1999 to Jul 27, 2012. US recession dates are in shaded areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form of quantitative easing by suspension of auctions of the 30-year Treasury, which was equivalent to withdrawing supply from markets. Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the shaded area of the global recession. The flight to the USD and obligations of the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after stress tests showed sound US bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4 percent to USD 1.4875/USD on May 3, 2011. The rate appreciated 16.8 percent to USD 1.2370/EUR on Jul 27, 2012, which is the last point in Chart VI-2. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata
Chart VI-2, US Dollars (USD) per Euro (EUR), Jun 28, 1999 to Jul 27, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
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-3, US Dollar Currency Indexes
Source: Board of Governors of the Federal Reserve System
Chart VI-4 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-4, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Chart VI-5 of the Board of Governors of the Federal Reserve System provides the rate of Japanese yen (JPY) per US dollar (USD) from Jan 1,1971 to Jul 20, 2012. The first data point on the extreme left is JPY 358.0200/USD on Jan 1, 1971. The JPY has appreciated over the long-term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.48/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 79.2686/USD on Jul 20, 2012 for appreciation of 36.1 percent relative to JPY 124.0900/USD on Jun 22, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata)
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, 1971-2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL 1.7845/USD on Jul 27, 2000 to BRL 2.0791/USD on Jul 27, 2012. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 2.0791/USD on Jul 27, 2012 for depreciation of 35.2 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) Jul 27, 2000 to Jul 27, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.9723/USD on Jan 2, 1996. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880/USD on Sep 21, 2001 relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2, 1996 to Jul 2, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
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 1.569 percent at the close of market on Fri Aug 3, 2012 would be equivalent to price of 109.7380 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 8.4percent 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 Aug 1, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2834 billion, or $2.8 trillion, with portfolio of long-term securities of $2583 billion, or $2.6 trillion, consisting of $1570 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $91 billion Federal agency debt securities and $853 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1541 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 |
| 06/29/12 | 1.648 | 108.9734 | 7.6 |
| 07/06/12 | 1.548 | 109.9423 | 8.6 |
| 07/13/12 | 1.49 | 110.5086 | 9.1 |
| 07/20/12 | 1.459 | 110.8127 | 9.4 |
| 07/27/12 | 1.544 | 109.9812 | 8.6 |
| 08/03/12 | 1.569 | 109.7380 | 8.4 |
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
Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury from Feb 16, 1977 to Jul 25, 2012. The yield stood at 7.67 percent on Feb 16, 1977. A peak was reached at 15.21 percent on Oct 26, 1981 during the inflation control effort by the Fed. There is a second local peak in Chart VI-8 on May 3, 1984 at 13.94 percent followed by another local peak at 8.14 percent on Nov 21, 1994 during another inflation control effort (see Appendix I The Great Inflation). There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. Yields rose again to 4.89 percent on Jun 14, 2004 and 5.23 percent on Jul 5, 2006. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and collapsed to 1.43 percent on Jul 25, 2012, which is the last data point in Chart VI-8. There has been a trend of decline of yields with oscillations. During periods of risk aversion investor seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-8, US, Ten-Year Treasury Constant Maturity Yield, Feb 16,1977 to Jul 25, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
VII Economic Indicators. Crude oil input in refineries decreased 0.1 percent to 15,670 thousand barrels per day on average in the four weeks ending on Jul 27, 2012 from 15,685 thousand barrels per day in the four weeks ending on Jul 20, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 92.5 percent on Jul 27, 2012, which is higher than 89.0 percent on Jul 29, 2011 and almost equal to 92.4 percent on Jul 20, 2012. Imports of crude oil decreased 1.0 percent from 8,953 thousand barrels per day on average in the four weeks ending on Jul 20 to 8,861 thousand barrels per day in the week of Jul 27. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.4 million barrels per day last week, down by 1.2 barrels per day from the previous week [Jul 20]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Decreasing utilization in refineries with decreasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 6.5 million barrels from 380.1 million barrels on Jul 20 to 373.6 million barrels on Jul 27. Motor gasoline production fell 1.1 percent to 9,113 thousand barrels per day in the week of Jul 27 from 9,216 thousand barrels per day on average in the week of Jul 20. Gasoline stocks decreased 2.1 million barrels and stocks of fuel oil decreased 0.9 million barrels. Supply of gasoline decreased from 9,065 thousand barrels per day on Jul 29, 2011, to 8,756 thousand barrels per day on Jul 27, 2012, or by 3.4 percent, while fuel oil supply decreased 2.4 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 $90.13/barrel on Jul 27, 2012, decreasing 5.8 percent relative to $95.68/barrel on Jul 29, 2011. Gasoline prices fell 5.5 percent from Aug 1, 2011 to Jul 30, 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 | 7/27/12 | 7/20/12 | 7/29/11 |
| Crude Oil Refineries Input | 15,670 Week ∆%: -0.1 | 15,685 | 15,422 |
| Refinery Capacity Utilization % | 92.5 | 92.4 | 89.0 |
| Motor Gasoline Production | 9,113 Week ∆%: -1.1 | 9,216 | 9,119 |
| Distillate Fuel Oil Production | 4,686 Week ∆%: -0.5 | 4,710 | 4,565 |
| Crude Oil Imports | 8,861 Week ∆%: -1.0 | 8,953 | 9,294 |
| Motor Gasoline Supplied | 8,756 ∆% 2012/2011= -3.4% | 8,802 | 9,065 |
| Distillate Fuel Oil Supplied | 3,460 ∆% 2012/2011 = -2.4% | 3,485 | 3,546 |
| 7/27//12 | 7/20/12 | 7/29/11 | |
| Crude Oil Stocks | 373.6 ∆= -6.5 MB | 380.1 | 355.0 |
| Motor Gasoline Million B | 207.9 ∆= -2.1 MB | 210.0 | 215.2 |
| Distillate Fuel Oil Million B | 124.3 | 125.2 | 152.3 |
| WTI Crude Oil Price $/B | 90.13 ∆% 2012/2011 -5.8 | 91.56 | 95.68 |
| 7/30/12 | 7/23/12 | 8/1/11 | |
| Regular Motor Gasoline $/G | 3.508 ∆% 2012/2011 | 3.494 | 3.711 |
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 alternating with declines.
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 motor crude oil stocks in the US since 2011. There were oscillations around and downward trend in 2011 followed by sharp upward trend in 2012 until sharp declines and downward trend since Jun 2012.
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 at $145.29/barrel on Jul 3, 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 followed by some recovery.
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 increased 8,000 from 357,000 on Jul 21, 2012, to 365,000 on Jul 28. Claims not adjusted for seasonality decreased 30,083 from 340,575 on Jul 21, 2012 to 310,492 on Jul 28. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Jul 28, 2012 | 365,000 | 310,492 | 365,500 |
| Jul 21, 2012 | 357,000 | 340,575 | 368,250 |
| Change | +8,000 | -30,083 | -2,750 |
| Jul 14, 2012 | 388,000 | 455,260 | 376,000 |
| Prior Year | 402,000 | 341,103 | 408,000 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 516,351 on Jul 25, 2009 to 369,207 on Jul 23, 2011, and 310,492 on Jul 28, 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 weeks of Jun 9, 2012 and Jul 7, 2012. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_6867.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Jul 28, 2001 | 332,957 | 388,000 |
| Jul 27, 2002 | 338,441 | 390,00 |
| Jul 26, 2003 | 348,382 | 398,000 |
| Jul 24, 2004 | 313,225 | 348,000 |
| Jul 23, 2005 | 295,026 | 318,000 |
| Jul 22, 2006 | 288,875 | 306,000 |
| Jul 28, 2007 | 257,426 | 305,000 |
| Jul 26, 2008 | 374,182 | 434,000 |
| Jul 25, 2009 | 516,351 | 584,000 |
| Jul 24, 2010 | 413,679 | 459,000 |
| Jul 23, 2011 | 369,207 | 402,000 |
| Jul 28, 2012 | 310,492 | 365,000 |
Source: http://workforcesecurity.doleta.gov/unemploy/wkclaims/report.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 Jun 2012, CPI inflation for all items seasonally adjusted was 1.2 percent in annual equivalent, that is, compounding inflation in Jan-Jun 2012 and assuming it would be repeated for a full year. In the 12 months ending in Jun, CPI inflation of all items not seasonally adjusted was 1.7 percent. Inflation in Jun 2012 not seasonally adjusted was minus 0.1 percent relative to May 2012 and unchanged seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 2.2 percent in annual equivalent Jan-Jun 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, 0.13 percent for six months, 0.16 percent for 12 months, 0.24 percent for two years, 0.33 percent for three years, 0.66 percent for five years, 1.06 percent for seven years, 1.56 percent for ten years and 2.65 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 Jun 2012/Jun | ∆% Annual Equivalent Jan-Jun 2012 SA | |
| CPI All Items | 1.7 | 1.2 |
| CPI ex Food and Energy | 2.2 | 2.2 |
Source: US Bureau of Labor Statistics
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 12 quarters of the current cyclical expansion from IIIQ2009 to IIQ2012, GDP increased 6.75 percent at the annual equivalent rate of 2.2 percent; real disposable personal income (RDPI) increased 3.8 percent at the annual equivalent rate of 1.2 percent; RDPI per capita increased 1.4 percent at the annual equivalent rate of 0.5 percent; and population increased 2.3 percent at the annual equivalent rate of 0.8 percent. Third, since the beginning of the recession in IVQ2007 to IIQ2012, GDP increased 1.7 percent, or barely above the level before the recession; real disposable personal income increased 3.5 percent; population increased 3.7 percent; and real disposable personal income per capita is 0.2 percent lower than the level before the recession. 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 | 12 | ||
| GDP | 6.75 | 2.2 | |
| RDPI | 3.8 | 1.2 | |
| RDPI per Capita | 1.4 | 0.5 | |
| Population | 2.3 | 0.8 | |
| IVQ2007 to IIQ2012 | 19 | ||
| GDP | 1.7 | ||
| RDPI | 3.5 | ||
| RDPI per Capita | -0.2 | ||
| Population | 3.7 |
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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