Historically Sharper Recoveries from Deeper Contractions and Financial Crises and Current Mediocre, Decelerating Economic Growth, Stagnating Real Disposable Income, World Financial Turbulence and Economic Slowdown with Increasing Global Recession Risk: Part II

 

Historically Sharper Recoveries from Deeper Contractions and Financial Crises and Current Mediocre, Decelerating Economic Growth, Stagnating Real Disposable Income, World Financial Turbulence and Economic Slowdown with Increasing Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

IA Mediocre and Decelerating United States Economic Growth

IB Stagnating Real Disposable Income and Consumption Expenditures, Collapse of United States Dynamism of Income Growth and Employment Creation and Financial Repression

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Collapse of United States Dynamism of Income Growth and Employment Creation

IB3 Financial Repression

II United States Housing Collapse and Commercial Banks Assets and Liabilities

IIA United States Housing Collapse

IIA1 United States New House Sales

IIA2 United States House Prices

IIA3 Factors of United States Housing Collapse

IIB United States Commercial Banks Assets and Liabilities

IIB1 Transmission of Monetary Policy

IIB2 Functions of Banks

IIB3 United States Commercial Banks Assets and Liabilities

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

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

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

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

 

III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings reduction in the US with high unemployment/underemployment, falling wages and hiring collapse; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.

IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Sep 21 and daily values throughout the week ending on Sep 21 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Sep 21 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Sep 21, 2012”, first row “USD/EUR 1.2981 1.1%,” provides the information that the US dollar (USD) appreciated 1.1 percent to USD 1.2981/EUR in the week ending on Fri Sep 21 relative to the exchange rate on Fri Sep 14. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).

The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.2981/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Sep 21, appreciating to USD 1.2929/EUR on Mon Sep 24, or by 0.4 percent. The dollar appreciated because fewer dollars, $1.2929, were required on Mon Sep 24 to buy one euro than $1.2981 on Sep 21. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.2981/EUR on Sep 21; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Sep 21, to the last business day of the current week, in this case Fri Sep 28, such as appreciation by 0.9 percent to USD 1.2859/EUR by Sep 28; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 0.9 percent from the rate of USD 1.2981/EUR on Fri Sep 21 to the rate of USD 1.2859/EUR on Fri Sep 28 {[(1.2859/1.2981) – 1]100 = -0.9%} and appreciated (denoted by negative sign) by 0.4 percent from the rate of USD 1.2912 on Thu Sep 27 to USD 1.2859/EUR on Fri Sep 28 {[(1.2859/1.2912) -1]100 = 0.4%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.

Table III-I, Weekly Financial Risk Assets Sep 21 to Sep 28, 2012

Fri Sep 21, 2012	M 24	Tue 25	W 26	Thu 27	Fr 28
USD/EUR 1.2981 1.1%	1.2929 0.4% 0.4%	1.2906 0.6% 0.2%	1.2869 0.9% 0.3%	1.2912 0.5% -0.3%	1.2859 0.9% 0.4%
JPY/  USD 78.16 0.3%	77.85 0.4% 0.4%	77.80 0.5% 0.1%	77.72 0.6% 0.1%	77.61 0.7% 0.1%	77.93 0.3% -0.4%
CHF/  USD 0.9330 -0.7%	0.9356 -0.3% -0.4%	0.9374 -0.5% -0.2%	0.9396 -0.7% -0.2%	0.9373 -0.5% 0.2%	0.9398 -0.7% -0.2%
CHF/ EUR 1.2111 0.5%	1.2100 0.1% 0.1%	1.2098 0.1% 0.0%	1.2092 0.2% 0.0%	1.2103 0.1% -0.1%	1.2086 0.2% 0.1%
USD/  AUD 1.0456 0.9564 -0.9%	1.0429 0.9589 -0.3% -0.3%	1.0390 0.9625 -0.6% -0.4%	1.0366 0.9647 -0.9% -0.2%	1.0446 0.9573 -0.1% 0.8%	1.0379 0.9635 -0.7% -0.6%
10 Year  T Note 1.753	1.71	1.67	1.61	1.65	1.631
2 Year     T Note 0.26	0.26	0.26	0.26	0.25	0.236
German Bond 2Y 0.04 10Y 1.60	2Y 0.04 10Y 1.56	2Y 0.07 10Y 1.58	2Y 0.04 10Y 1.46	2Y 0.04 10Y 1.46	2Y 0.02 10Y 1.44
DJIA 13579.47 -0.1%	13558.92 -0.2% -0.2%	13457.55 -0.9% -0.7%	13413.51 -1.2% -0.3%	13485.97 -0.7% 0.5%	13437.13 -1.0% -0.4%
DJ Global 1973.65 -0.8%	1962.49 -0.6% -0.6%	1959.26 -0.7% -0.2%	1924.28 -2.5% -1.8%	1937.46 -1.8% 0.7%	1921.70 -2.6% -0.8%
DJ Asia Pacific 1258.36 0.1%	1255.49 -0.2% -0.2%	1257.40 -0.1% 0.2%	1241.03 -1.4% -1.3%	1250.67 -0.6% 0.8%	1250.32 -0.6% 0.0%
Nikkei 9110.00 -0.5%	9069.29 -0.5% -0.5%	9091.54 -0.2% 0.3%	8906.70 -2.2% -2.0%	8949.87 -1.8% 0.5%	8870.16 -2.6% -0.9%
Shanghai 2026.69 -4.6%	2033.19 0.3% 0.3%	2029.29 0.1% -0.2%	2004.17 -1.1% -1.2%	2056.32 1.5% 2.6%	2086.17 2.9% 1.5%
DAX 7451.62 0.5%	7413.16 -0.5% -0.5%	7425.11 -0.4% 0.2%	7276.51 -2.4% -2.0%	7290.02 -2.2% 0.2%	7216.15 -3.2% -1.0%
DJ UBS Comm. 147.65 -2.9%	146.33 -0.9% -0.9%	146.89 -0.5% 0.4%	145.55 -1.4% -0.9%	146.92 -0.5% 0.9%	148.51 0.6% 1.1%
WTI $ B 93.09 -5.9%	92.08 -1.1% -1.1%	90.79 -2.5% -1.4%	90.02 -3.3% -0.8%	92.29 -0.9% 2.5%	92.03 -1.1% -0.3%
Brent    $/B 111.52 -4.3%	109.82 -1.5% -1.5%	109.97 -1.4% 0.1%	109.93 -1.4% 0.0%	112.47 0.9% 2.3%	112.11 0.5% -0.3%
Gold  $/OZ 1775.7 0.2%	1766.5 -0.5% -0.5%	1763.2 -0.7% -0.2%	1754.9 -1.2% -0.5%	1779.6 0.2% 1.4%	1774.0 -0.1% -0.3%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources: http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate.

First, Risk-Determining Events. There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):

“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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.

(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):

“6 September 2012 - Technical features of Outright Monetary Transactions

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

Conditionality

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

Coverage

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

Sterilisation

The liquidity created through Outright Monetary Transactions will be fully sterilised.

Transparency

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Securities Markets Programme

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”

Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.

Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”

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. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. 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).

Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24. On Aug 31, the yield of the 10-year sovereign bond of Italy rose to 5.787 percent and that of Spain to 6.832 percent. The announcement of the OMT of bond-buying by the ECB together with weak employment creation in the US created risk appetite with the yield of the ten-year government bond of Spain collapsing to 5.708 percent on Sep 7 and the yield of the ten-year government bond of Italy to 5.008 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The yield of the ten-year government bond of Spain traded at 5.770 percent on Sep 14 and at 5.739 percent on Sep 21 and ten-year government of Italy traded at 4.953 percent on Sep 14 and 4.982 on Sep 21. The imminence of a bailout of Spain drove the yield of the ten-year sovereign bond of Spain to 5.979 percent on Fri Sep 28 and that of Italy to 5.031 percent but both traded higher during the day. Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. Under increasing risk appetite, the yield of the ten-year Treasury rose to 1.544 on Jul 27, 2012 and 1.569 percent on Aug 3, 2012, while the yield of the ten-year Government bond of Germany rose to 1.40 percent on Jul 27 and 1.42 percent on Aug 3. Yields moved on an increasing trend with the US ten-year note at 1.814 percent on Aug 17 and the German ten-year bond at 1.50 percent with sharp decline on Aug 24 to 1.684 percent for the yield of the US ten-year note and 1.35 for the yield of the German ten-year bond. The trend was interrupted with decline of the yield of the ten-year Treasury note to 1.543 percent on Aug 31, 2012, and of the ten-year German bond to 1.33 percent. The US dollar strengthened significantly from USD 1.450/EUR on Aug 26, 2011, to USD 1.2158 on Jul 20, 2012, or by 16.2 percent, but depreciated to USD 1.2320/EUR on Jul 27, 2012 and 1.2387 on Aug 3, 2012 in expectation of massive support of highly indebted euro zone members. Doubts returned at the end of the week of Aug 10, 2012 with appreciation to USD 1.2290/EUR and decline of the yields of the two-year government bond of Germany to -0.07 percent and of the ten-year to 1.38 percent. On Aug 17, the US dollar depreciated by 0.4 percent to USD 1.2335/EUR and the ten-year bond of Germany yielded -0.04 percent. Risk appetite returned in the week of Aug 24 with depreciation by 1.4 percent to USD 1.2512/EUR and lower yield of the German two-year bond to -0.01 percent and of the US two-year note to 0.266 percent. Further risk aversion is captured by decline of yield of the two-year Treasury note to 0.225 percent on Aug 31, 2012, and to -0.03 percent for the two-year sovereign bond of Germany while the USD moved in opposite direction, depreciating to USD 1.2575/EUR. The almost simultaneous announcement of the bond-buying OMT of the ECB on Sep 6 and the weak employment report on Sep 7 suggesting further easing by the FOMC caused risk appetite shown by the increase in yields of government bonds of the US on Sep 7 to 1.668 percent for the ten-year note and 0.252 percent for the two-year while the two-year yield of Germany rose from -0.03 percent to 0.03 percent and the ten-year yield from 1.33 percent to 1.52 percent. Risk aversion retreated again on Sep 14, 2012 because of the open-ended monetary policy of the FOMC with the dollar devaluing to USD 1.3130 and the ten-year yield of the US Treasury note increasing to 1.863 percent (also in part because of bond buying by the Fed at shorter maturities) and the yield of the ten-year German bond increasing to 1.71 percent. Risk aversions returned because of weak flash purchasing managers indices with appreciation to USD1.2981 in the week of Sep 21 and declines of the yield of the ten-year Treasury note to 1.753 percent and of the yield of the ten-year government bond to 1.60 percent. Risk aversion because of the potential bailout of Spain drove down the US ten-year yield to 1.631 and the ten-year yield of Germany to 1.44 percent while the dollar appreciated to USD 1.2859/EUR. Under zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is still around consumer price inflation of 1.7 percent in the 12 months ending in Aug (see subsection IIB United States Inflation http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.

Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate

	US 2Y	US 10Y	DE 2Y	DE 10Y	USD/ EUR
9/28/12	0.236	1.631	0.02	1.44	1.2859
9/21/12	0.26	1.753	0.04	1.60	1.2981
9/14/12	0.252	1.863	0.10	1.71	1.3130
9/7/12	0.252	1.668	0.03	1.52	1.2816
8/31/12	0.225	1.543	-0.03	1.33	1.2575
8/24/12	0.266	1.684	-0.01	1.35	1.2512
8/17/12	0.288	1.814	-0.04	1.50	1.2335
8/10/12	0.267	1.658	-0.07	1.38	1.2290
8/3/12	0.242	1.569	-0.02	1.42	1.2387
7/27/12	0.244	1.544	-0.03	1.40	1.2320
7/20/12	0.207	1.459	-0.07	1.17	1.2158
7/13/12	0.24	1.49	-0.04	1.26	1.2248
7/6/12	0.272	1.548	-0.01	1.33	1.2288
6/29/12	0.305	1.648	0.12	1.58	1.2661
6/22/12	0.309	1.676	0.14	1.58	1.2570
6/15/12	0.272	1.584	0.07	1.44	1.2640
6/8/12	0.268	1.635	0.04	1.33	1.2517
6/1/12	0.248	1.454	0.01	1.17	1.2435
5/25/12	0.291	1.738	0.05	1.37	1.2518
5/18/12	0.292	1.714	0.05	1.43	1.2780
5/11/12	0.248	1.845	0.09	1.52	1.2917
5/4/12	0.256	1.876	0.08	1.58	1.3084
4/6/12	0.31	2.058	0.14	1.74	1.3096
3/30/12	0.335	2.214	0.21	1.79	1.3340
3/2/12	0.29	1.977	0.16	1.80	1.3190
2/24/12	0.307	1.977	0.24	1.88	1.3449
1/6/12	0.256	1.957	0.17	1.85	1.2720
12/30/11	0.239	1.871	0.14	1.83	1.2944
8/26/11	0.20	2.202	0.65	2.16	1.450
8/19/11	0.192	2.066	0.65	2.11	1.4390
6/7/10	0.74	3.17	0.49	2.56	1.192
3/5/09	0.89	2.83	1.19	3.01	1.254
12/17/08	0.73	2.20	1.94	3.00	1.442
10/27/08	1.57	3.79	2.61	3.76	1.246
7/14/08	2.47	3.88	4.38	4.40	1.5914
6/26/03	1.41	3.55	NA	3.62	1.1423

Note: DE: Germany

Source:

http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

http://www.federalreserve.gov/releases/h15/data.htm

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/macro_economic_time_series_node.html?anker=GELDZINS

http://www.ecb.int/stats/money/long/html/index.en.html

Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year and two-year Treasury constant maturity yields. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe.

Chart III-1A, US, Ten-Year and Two-Year Treasury Constant Maturity Yields Jul 31, 2001-Sep 27, 2012

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Equity indexes in Table III-1 weakened in the week ending on Sep 28, 2012. Quantitative easing by the Fed and the Bank of Japan and Outright Monetary Transactions by the European Central Bank were not sufficient to mitigate concerns about world economic growth and risks of the euro zone. DJIA decreased 0.4 percent on Sep 28 and 1.0 percent in the week. Germany’s Dax decreased 1.0 percent on Fri Sep 28 and decreased 3.2 percent in the week. Dow Global decreased 0.8 percent on Sep 28 and 2.6 percent in the week. Japan’s Nikkei Average decreased 0.9 percent on Fri Sep 28 and decreased 2.6 percent in the week. Dow Asia Pacific TSM ws unchanged on Sep 28 and decreased 0.6 percent in the week while Shanghai Composite increased 2.9 percent in the week on expectations of government measures to stimulate growth. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations.

Commodities were mixed in the week of Sep 28, 2012. The DJ UBS Commodities Index increased 1.1 percent on Fri Sep 28 and increased 0.6 percent in the week, as shown in Table III-1. WTI decreased 1.1 percent in the week of Sep 28 while Brent increased 0.5 percent in the week. Gold decreased 0.3 percent on Fri Sep 28 and decreased 0.1 percent in the week.

Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,187,200 million on Sep 21, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,784,841 million in the statement of Sep 14. There is high credit risk in these transactions with capital of only €85,749 million as analyzed by Cochrane (2012Aug31).

Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Sep 21, 2012
1 Gold and other Receivables	367,402	419,822	433,779
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	261,479
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	42,001
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	17,865
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,187,200
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	213,426
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	597,641
8 General Government Debt Denominated in Euro	34,954	33,928	30,042
9 Other Assets	278,719	336,574	266,107
TOTAL ASSETS	2,004, 432	2,733,235	3,049,539
Memo Items
Sum of 5 and  7	1,004,174	1,489,759	1,784,841
Capital and Reserves	78,143	85,748	85,749

Source: European Central Bank

http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html

http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html

http://www.ecb.int/press/pr/wfs/2012/html/fs120925.en.html

IIIE Appendix Euro Zone survival risk. European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 42.7 percent of the total. Exports to the non-European Union area are growing at 9.8 percent in Jan-Jul 2012 relative to Jan-Jul 2011 while those to EMU are falling at 1.2 percent.

Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

Jul 2012	Exports % Share	∆% Jan-Jul 2012/ Jan-Jul 2011	Imports % Share	Imports ∆% Jan-Jul 2012/ Jan-Jul 2011
EU	56.0	0.0	53.3	-7.0
EMU 17	42.7	-1.2	43.2	-6.6
France	11.6	0.1	8.3	-4.5
Germany	13.1	0.9	15.6	-10.5
Spain	5.3	-8.6	4.5	-7.2
UK	4.7	10.3	2.7	-13.7
Non EU	44.0	9.8	46.7	-3.9
Europe non EU	13.3	11.0	11.1	-6.8
USA	6.1	18.7	3.3	3.4
China	2.7	-12.4	7.3	-15.4
OPEC	4.7	23.5	8.6	24.9
Total	100.0	4.2	100.0	-5.6

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/70437

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade surplus of €910 million with the 17 countries of the euro zone (EMU 17) in Jul 2012 and deficit of €711 million in Jan-Jul 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €6594 million in Jan-Jul with Europe non European Union and of €8071 million with the US. There is significant rigidity in the trade deficits in Jan-Jul of €10,032 million with China and €12,672 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.

Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro 

Regions and Countries	Trade Balance Jul 2012 Millions of Euro	Trade Balance Cumulative Jan-Jul 2012 Millions of Euro
EU	2,653	7,782
EMU 17	910	-711
France	1,385	7,286
Germany	19	-3,151
Spain	211	1,162
UK	1,035	5,612
Non EU	1,836	-3,379
Europe non EU	1,630	6,594
USA	1,461	8,071
China	-1,728	-10,032
OPEC	-1,596	-12,672
Total	4.490	4,403

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/70437

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Jul 2012 relative to Jan-Jul 2011. Growth rates of imports are negative with the exception of energy. The higher rate of growth of exports of 5.5 percent in Jan-Jul 2012/Jan-Jul 2011 relative to imports of minus 2.5 percent may reflect weak demand in Italy with GDP declining during four consecutive quarters from IIIQ2011 through IIQ2012.

Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Jul 2012/ Jan-Jul 2011	Imports Share %	Imports ∆% Jan-Jul 2012/ Jan-Jul 2011
Consumer Goods	28.9	5.5	25.0	-2.5
Durable	5.9	1.5	3.0	-7.2
Non Durable	23.0	6.6	22.0	-1.9
Capital Goods	32.2	2.7	20.8	-11.5
Inter- mediate Goods	34.3	2.8	34.5	-11.6
Energy	4.7	17.8	19.7	8.6
Total ex Energy	95.3	3.5	80.3	-8.9
Total	100.0	4.2	100.0	-4.3

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/70437

Table III-6 provides Italy’s trade balance by product categories in Jul 2012 and cumulative Jan-Jul 2012. Italy’s trade balance excluding energy generated surplus of €9335 million in Jul 2012 and €41,928 million in Jan-Jul 2012 but the energy trade balance created deficit of €4845 million in Jul 2012 and €37,525 million in Jan-Jul 2012. The overall surplus in Jul 2012 was €4403 million and €4403 million in Jan-Jul 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

Table III-6, Italy, Trade Balance by Product Categories, € Millions

	Jul 2012	Cumulative Jan-Jul 2012
Consumer Goods	2,654	9,670
Durable	1,242	6,843
Nondurable	1,411	2,827
Capital Goods	5,459	28,954
Intermediate Goods	1,222	3,304
Energy	-4,845	-37,525
Total ex Energy	9,335	41,928
Total	4,490	4,403

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/70437

Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the following Subsection IIID Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table III-7, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2012 USD Billions	Primary Net Lending Borrowing % GDP 2012	General Government Net Debt % GDP 2012
World	69,660
Euro Zone	12,586	-0.5	70.3
Portugal	221	0.1	110.9
Ireland	210	-4.4	102.9
Greece	271	-1.0	153.2
Spain	1,398	-3.6	67.0
Major Advanced Economies G7	34,106	-4.8	88.3
United States	15,610	-6.1	83.7
UK	2,453	-5.3	84.2
Germany	3,479	1.0	54.1
France	2,712.0	-2.2	83.2
Japan	5,981	-8.9	135.2
Canada	1,805	-3.1	35.4
Italy	2,067	2.9	102.3
China	7992	-1.3*	22.0**

*Net Lending/borrowing**Gross Debt

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

The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4138.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3927.8 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8066.3 billion, which would be equivalent to 130.3 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 231.9 percent if including debt of France and 167.0 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,847.9
B Germany	1,882.1		$8066.3 as % of $3479 =231.9% $5809.9 as % of $3479 =167.0%
C France	2,256.4
B+C	4,138.5	GDP $6,191.0 Total Debt $8066.3 Debt/GDP: 130.3%
D Italy	2,114.5
E Spain	936.7
F Portugal	245.3
G Greece	415.2
H Ireland	216.1
Subtotal D+E+F+G+H	3,927.8

Source: calculation with IMF data http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Jul 2012. German exports to other European Union (EU) members are 55.3 percent of total exports in Jul 2012 and 57.6 percent in Jan-Jul 2012. Exports to the euro area are 36.4 percent in Jul and 38.2 percent in Jan-Jul. Exports to third countries are 44.7 percent of the total in Jul and 42.4 percent in Jan-Jul. There is similar distribution for imports. Exports to non-euro countries are growing at 6.9 percent in Jul 2012 and 4.8 percent in Jan-Jul 2012 while exports to the euro area are growing 3.2 percent in Jul and decreasing 0.6 percent in Jan-Jul 2012. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of its high share in exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.

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

	Jul 2012  € Billions	Jul 12-Month ∆%	Jan–Jul 2012 € Billions	Jan-Jul 2012/ Jan-Jul 2011 ∆%
Total Exports	93.6	9.2	644.1	5.4
A. EU Members	51.8 % 55.3	4.4	370.9 % 57.6	1.2
Euro Area	34.1 % 36.4	3.2	246.0 % 38.2	-0.6
Non-euro Area	17.6 % 18.8	6.9	124.9 % 19.4	4.8
B. Third Countries	41.8 % 44.7	15.9	273.2 % 42.4	11.8
Total Imports	76.7	1.9	533.8	2.3
C. EU Members	49.3 % 64.3	5.6	340.0 % 63.7	2.5
Euro Area	34.7 % 45.2	6.7	239.5 % 44.9	2.2
Non-euro Area	14.6 % 19.0	3.3	100.5 % 18.8	3.3
D. Third Countries	27.4 % 35.7	-4.2	193.8 % 36.3	1.9

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

Source:

Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/09/PE12_303_51.html;jsessionid=807581660CF67FED0FC729A83F38D5FB.cae2 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section  as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.3	1.7	2.0	8.1
Japan	3.5	-0.4	-1.8	4.2
China	8.9	2.0	-3.5
UK	-0.5	2.5* RPI 2.9	2.2* output 1.2** input 1.4*	8.1
Euro Zone	-0.5	2.6	1.8	11.3
Germany	1.0 CA	2.2	0.9	5.5
France	0.3	2.4	1.3	10.3
Nether-lands	-0.5	2.5	2.5	5.3
Finland	0.3	3.3	0.9	7.6
Belgium	-0.4	2.6	2.7	7.2
Portugal	-3.3	3.2	3.0	15.7
Ireland	NA	2.6	1.6	14.9
Italy	-2.5	3.3	2.4	10.7
Greece	-6.2	1.2	4.1	NA
Spain	-1.3	2.7	2.6	25.1

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/august-2012/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/august-2012/index.html Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.1 percent in IIQ2012 relative to IIQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_3rd.pdf See I Mediocre and Decelerating United States Economic Growth). Japan’s GDP fell 0.7 percent in IVQ2011 relative to IVQ2010 and contracted 1.8 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 6.9 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, 5.3 percent in IQ2012 and 0.7 percent in IIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html); the UK grew at minus 0.4 percent in IIQ2012 relative to IQ2012 and GDP fell 0.5 percent in IIQ2012 relative to IIQ2011 (see Section VH); and the Euro Zone grew at minus 0.2 percent in IIQ2012, 0.0 percent in IQ2012 relative to IVQ2011 and fell 0.5 percent in IIQ2012 relative to IIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.1 percent in the US but 17.4 percent for unemployment/underemployment or job stress of 28.1 million (see Table I-4 at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html), 4.2 percent for Japan (see Section VB and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or_3778.html), 8.1 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_17.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html) and 11.3 percent in the Euro Zone (section VD at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or_3778.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, -0.4 percent for Japan, 2.0 percent for China, 2.6 percent for the Euro Zone and 2.5 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see IB and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html), weak hiring with the loss of 10 million full-time jobs (see Section I at http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html and earlier IV Budget/Debt Quagmire in 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/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.

Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.

Jon Hilsenrath, writing on “Bernanke letter defends Fed actions,” on Aug 24, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444358404577609231770784446.html?mod=WSJ_hp_LEFTWhatsNewsCollection#project%3Dissaletter082412%26articleTabs%3Darticle), finds support for FOMC policies and possible further actions in a letter by Chairman Bernanke (2012Aug22) in reply to inquiry by Representative Darrell Issa (2012Aug1), which were obtained and published by the WSJ on Aug 22, 2012 (http://online.wsj.com/public/resources/documents/Bernankeletter0812.pdf http://s3.documentcloud.org/documents/413447/issaletter0812.pdf). Issa (2012Aug1) inquired from Chairman Bernanke about analysis of monetary policy of various types, including by distinguished Professor Allan Meltzer (http://www.amazon.com/Allan-H.-Meltzer/e/B001H6MWPC/ref=ntt_dp_epwbk_0), the author of three scholarly analytical volumes on the history of the Federal Reserve (Meltzer 2004, 2010a, 2010b), who has emphasized the short-term nature of economic policy that could be more effective if focused on the long term. Chairman Bernanke (2012Aug22), who is also an eminent scholar, provided detailed answers to the queries by Issa (2012Aug1). The first sentence of the reply ignited positive risk taking in financial markets operating with low holiday volumes: “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.”

The statement of the FOMC at the conclusion of its meeting on Sep 13, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):

“Release Date: September 13, 2012

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.”

There are several important issues in this statement.

1. Mandate. The FOMC 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”

2. Open-ended Quantitative Easing. Earlier programs are continued with an additional open-ended $40 billion of bond purchases per months: “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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

3. Advance Guidance on Accommodative Policy after Recovery Strengthening. Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm): “The [Federal Open Market] Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the recovery strengthens.” The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Sep 13, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html) and the PCE inflation data from the report on personal income and outlays (Section IV and earlier at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html). The Bureau of Economic Analysis (BEA) provides the third estimate of IIQ2012 GDP with the first estimate of IIIQ2012 to be released on Oct 26 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in sections IB and IV in this blog for Aug 2012. The next report on “Personal Income and Outlays” for Sep will be released at 8:30 AM on Oct 29, 2012 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Aug report is in Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Sep will be released on Fri Oct 5, 2012 (http://www.bls.gov/ces/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf).

It is instructive to focus on 2012 and 2013 as 2014 and 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Sep 13, 2012 and the second row “PR” the projection of the Jun 20, 2012 meeting. There are three major changes in the view.

1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting and further to 1.7 to 2.0 percent at the Sep 13, 2012 meeting. GDP growth in 2013 has been increased to 2.5 to 3.0 percent at the meeting on Sep 13

2012 from 2.2 to 2.8 percent at the meeting on Jun 20, 2012. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting and did not change it at 8.0 to 8.2 at the meeting on Sep 13, 2012. The rate of unemployment for 2013 has been changed to 7.6 to 7.9 percent at the Sep 13 meeting compared with 7.5 to 8.0 percent at the Jun 20 meeting.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting. The interval was increased to 1.7 to 1.8 percent at the Sep 13, 2012 meeting.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting. The projection was virtually unchanged at 1.7 to 1.9 percent at the Sep 13 meeting. For 2013, the projection for core inflation was changed from 1.6 to 2.0 percent at the Jun 20, 2012 meeting to 1.7 to 2.0 percent at the Sep 13, 2012 meeting.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and Sep 2012 

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2012  Jun PR	1.7 to 2.0 1.9 to 2.4	8.0 to 8.2 8.0 to 8.2	1.7 to 1.8 1.2 to 1.7	1.7 to 1.9 1.7 to 2.0
2013  Jun PR	2.5 to 3.0 2.2 to 2.8	7.6 to 7.9 7.5 to 8.0	1.6 to 2.0 1.5 to 2.0	1.7 to 2.0 1.6 to 2.0
2014  Jun PR	3.0 to 3.8 3.0 to 3.5	6.7 to 7.3 7.0 to 7.7	1.6 to 2.0 1.5 to 2.0	1.8 to 2.0 1.6 to 2.0
2015 Jun	3.0 to 3.8 NA	6.0 to 6.8 NA	1.8 to 2.0 NA	1.9 to 2.0 NA
Longer Run Jun PR	2.3 to 2.5 2.3 to 2.5	5.2 to 6.0 5.2 to 6.0	2.0 2.0
Range
2012 Jun PR	1.6 to 2.0 1.6 to 2.5	8.0 to 8.3 7.8 to 8.4	1.5 to 1.9 1.2 to 2.0	1.6 to 2.0 1.7 to 2.0
2013 Jun PR	2.3 to 3.5 2.2 to 3.5	7.0 to 8.1 7.0 to 8.1	1.5 to 2.1 1.5 to 2.1	1.6 to 2.0 1.4 to 2.1
2014 Jun PR	2.7 to 4.1 2.8 to 4.0	6.3 to 7.5 6.3 to 7.7	1.6 to 2.2 1.5 to 2.2	1.6 to 2.2 1.5 to 2.2
2015 Jun PR	2.5 to 4.2 NA	5.7 to 6.9 NA	1.8 to 2.3 NA	1.8 to 2.3 NA
Longer Run Jun PR	2.2 to 3.0 2.2 to 3.0	5.0 to 6.3 4.9 to 6.3	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary.  However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; 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). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf). There are 18 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only one to be higher. Not much change is expected in 2013 either with 15 participants anticipating the rate at the current target of 0 to ¼ percent and only four expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 13 participants with four expecting the rate to be in the range of 1.0 to 2.0 percent and two participants expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, ten participants expect rates to be below 1.0 percent while four expect rates from 3.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

	0 to 0.25	0.5 to 1.0	1.0 to 1.5	1.0 to 2.0	2.0 to 3.0	3.0 to 4.5
2012	18	1
2013	15	3		1
2014	13			4	2
2015	1	9		3	2	4
Longer Run						19

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2012	1
2013	3
2014	2
2015	12
2016	1

Source:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf

The Bureau of Economic Analysis (BEA) provides the annual revision of the national income and product accounts since Jan 2009 through May 2009 in the report on personal income and outlays for Jun 2012 released on Jul 31, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf), including prices of personal consumption expenditures (PCE) and for Jul 2012 released on Aug 30 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0712.pdf). There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr 2011 when headline PCE inflation grew at the average annual equivalent rate of 4.0 percent and PCE inflation excluding food and energy (PCEX) at 2.1 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 7.4 percent and of energy prices (PCEE) at 29.8 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 2.4 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.4 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 13.6 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.6 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 13.5 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 3.2 percent and 2.4 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 21.3 percent because of the jump of 3.6 percent in Feb followed by 1.0 percent in Mar. In the sixth wave, renewed risk average caused reversal of carry trades with headline PCE inflation falling at the annual equivalent rate of 1.2 percent in Apr-May 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.2 percent. In the seventh wave, further shocks of risk aversion resulted in headline PCE annual equivalent inflation at 0.6 percent with core PCE excluding food and energy at 1.2 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 4.9 percent annual equivalent with PCEX excluding food and energy at 1.2 percent while PCEE energy jumped at 5.6 percent in Aug that is equivalent to 96.7 percent in a year.

Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2012
Aug	0.4	0.8	-0.2	0.2	0.1	0.1	5.8
∆% AE Aug	4.9	10.0	-2.4	2.4	1.2	1.2	96.7
Jul	0.0	0.0	-0.3	0.0	0.1	0.0	-0.3
Jun	0.1	-0.1	-0.1	0.2	0.2	0.2	-1.5
∆% AE Jun-Jul	0.6	-0.6	-2.4	1.2	1.8	1.2	-10.3
May	-0.2	-0.8	0.0	0.1	0.1	-0.1	-4.7
Apr	0.0	-0.3	-0.2	0.2	0.1	0.1	-1.8
∆% AE Apr- May	-1.2	-6.4	-1.2	1.8	1.2	0.0	-32.8
Mar	0.2	0.3	-0.1	0.2	0.2	0.1	1.0
Feb	0.3	0.6	0.0	0.2	0.1	0.0	3.6
Jan	0.3	0.3	0.1	0.2	0.3	0.1	0.3
∆% AE Jan- Mar	3.2	4.9	0.0	2.4	2.4	0.8	21.3
2011
Dec	0.1	-0.2	-0.2	0.2	0.2	0.2	-1.4
Nov	0.1	-0.1	-0.3	0.1	0.1	0.0	-0.5
Oct	0.0	-0.2	-0.1	0.1	0.1	0.2	-1.7
∆% AE Oct- Dec	0.8	-2.0	-2.4	1.6	1.6	1.6	-13.5
Sep	0.2	0.2	-0.4	0.1	0.0	0.5	1.5
Aug	0.2	0.3	-0.2	0.2	0.2	0.6	0.8
Jul	0.2	0.3	-0.1	0.2	0.2	0.4	0.9
∆% AE Jul-Sep	2.4	3.3	-2.8	2.0	1.6	6.2	13.6
Jun	0.1	0.1	0.2	0.1	0.2	0.3	-1.2
May	0.2	0.2	0.1	0.2	0.2	0.4	0.1
∆% AE May-Jun	1.8	1.8	1.8	1.8	2.4	4.3	-6.4
Apr	0.3	0.5	0.2	0.2	0.2	0.3	1.9
Mar	0.4	0.8	0.0	0.2	0.1	0.8	3.5
Feb	0.3	0.6	0.2	0.2	0.2	0.7	2.5
Jan	0.3	0.5	0.1	0.1	0.2	0.6	0.9
∆% AE Jan-Apr	4.0	7.4	1.5	2.1	2.1	7.4	29.8
2010
Dec	0.2	0.6	-0.4	0.0	0.0	0.2	4.2
Nov	0.1	0.2	-0.2	0.1	0.1	0.1	0.8
Oct	0.2	0.5	-0.2	0.1	0.1	0.2	3.1
Sep	0.1	0.2	-0.1	0.1	0.1	0.2	0.8
Aug	0.2	0.3	0.1	0.1	0.1	0.1	1.5
Jul	0.2	0.2	-0.3	0.1	0.1	0.1	1.8
Jun	0.0	-0.2	-0.3	0.1	0.1	-0.1	-1.0
May	0.0	-0.4	-0.2	0.2	0.1	0.0	-2.1
Apr	0.0	-0.3	-0.2	0.1	0.1	0.2	-0.8
Mar	0.2	-0.1	0.1	0.3	0.2	0.2	-0.6
Feb	0.1	-0.2	-0.3	0.2	0.1	0.1	-1.0
Jan	0.2	0.3	-0.1	0.2	0.1	0.1	1.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2012 around 0.2 percent per month.

Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart IV-2. The exclusion of commodity components does not eliminate negative changes. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding a few outliers.

Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As with all commodity prices, oscillations of the PCE price index of food in Chart IV-3 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010 with interruptions by events of risk aversion.

Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes.

Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IV-6 provides 12-month rates of PCE inflation. Headline PCE inflation has increased from 1.5 percent in Jan 2011 to 2.8 percent in Aug 2011 and 2.9 percent in Sep 2012, declining to 1.5 percent in Aug 2012. PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.1 percent in Jan 2011 to 1.9 percent in Dec 2011 and 1.6 percent in Aug 2012, which is still below or at the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2012
Aug	1.5	0.6	-1.8	2.0	1.6	1.5	0.0
Jul	1.3	0.1	-1.8	1.9	1.6	2.0	-4.7
Jun	1.5	0.4	-1.6	2.1	1.8	2.4	-3.6
May	1.5	0.6	-1.3	2.0	1.7	2.4	-3.3
Apr	1.9	1.6	-1.2	2.1	1.9	2.9	1.5
Mar	2.2	2.5	-0.8	2.1	2.0	3.2	5.4
Feb	2.4	2.9	-0.7	2.2	1.9	3.9	8.0
Jan	2.4	3.0	-0.5	2.2	1.9	4.6	6.8
2011
Dec	2.4	3.1	-0.5	2.1	1.9	5.1	7.4
Nov	2.6	4.0	-0.6	1.9	1.7	5.0	13.5
Oct	2.6	4.2	-0.5	1.8	1.6	5.2	15.1
Sep	2.9	4.9	-0.7	1.9	1.6	5.1	20.7
Aug	2.8	4.9	-0.4	1.8	1.6	4.8	19.8
Jul	2.8	4.8	-0.2	1.8	1.5	4.3	20.6
Jun	2.7	4.7	-0.4	1.7	1.4	4.0	21.6
May	2.6	4.5	-0.9	1.7	1.4	3.6	22.0
Apr	2.4	3.8	-1.2	1.6	1.2	3.2	19.4
Mar	2.1	3.0	-1.6	1.6	1.1	3.0	16.1
Feb	1.8	2.1	-1.6	1.7	1.2	2.4	11.5
Jan	1.5	1.3	-2.0	1.7	1.1	1.8	7.7
2010
Dec	1.5	1.1	-2.2	1.7	1.1	1.3	8.6
Nov	1.4	0.6	-2.0	1.7	1.2	1.3	4.4
Oct	1.5	0.8	-1.7	1.8	1.2	1.3	6.3
Sep	1.6	0.5	-1.3	2.1	1.5	1.2	4.1
Aug	1.7	0.6	-0.9	2.2	1.6	0.7	4.0

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The headline PCE index is shown in Chart IV-5 from 1999 to 2012. There is an evident upward trend with the bump of the global recession after IVQ2008.

Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

The headline consumer price index is shown in Chart IV-6. There is also an upward trend but with fluctuations and the 2008 bump.

Chart IV-6, US, Consumer Price Index, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index excluding food and energy is shown in Chart IV-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.

Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.

Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.

Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and in 2012.

Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion and increases during risk appetite.

Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. Prices collapsed in the flight to government obligations. Risk appetite with zero interest rates resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.

Chart IV-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

Source: Energy Information Administration

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

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-7 provides the consumer price index of Japan, with inflation of minus 0.4 percent in 12 months ending in Aug, increase of 0.1 percent NSA (not-seasonally-adjusted) in Aug and decrease of 0.2 percent SA (seasonally-adjusted) in the month of Aug. Inflation of consumer prices in the first four months of 2012 annualizes at 2.8 percent SA and 3.0 percent NSA. Annual equivalent inflation in the first three months of 2012 is 2.1 percent SA and 3.0 percent NSA. There are negative percentage changes in most of the 12-month rates in 2011 with the exception of Jul and Aug both with 0.2 percent and stability in Sep. All monthly and 12-month rates of inflation are nonnegative in the first four months of 2012. There are eight years of deflation and one of zero inflation in the 12-month rate of inflation in Dec from 1995 to 2010. This experience is entirely different from that of the US that shows long-term inflation. It is difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan.

Table IV-7, Japan, Consumer Price Index, All Items ∆%

	∆% Month   SA	∆% Month  NSA	∆% 12-Month NSA
Aug 2012	-0.2	0.1	-0.4
Jul	0.0	-0.3	-0.4
Jun	-0.4	-0.5	-0.2
May	-0.4	-0.3	0.2
Apr	0.0	0.1	0.4
Mar	0.1	0.5	0.5
Feb	0.3	0.2	0.3
Jan	0.3	0.2	0.1
Dec 2011	0.1	0.0	-0.2
Nov	-0.1	-0.6	-0.5
Oct	0.0	0.1	-0.2
Sep	-0.1	0.0	0.0
Aug	-0.2	0.1	0.2
Jul	0.3	0.0	0.2
Jun	-0.1	-0.2	-0.4
May	-0.1	0.0	-0.4
Apr	-0.1	0.1	-0.4
Mar	0.0	0.3	-0.5
Feb	0.1	0.0	-0.5
Jan	0.0	-0.1	-0.6
Dec 2010	-0.2	–0.3	0.0
Dec 2009			-1.7
Dec 2008			0.4
Dec 2007			0.7
Dec 2006			0.3
Dec 2005			-0.1
Dec 2004			0.2
Dec 2003			-0.4
Dec 2002			-0.3
Dec 2001			-1.2
Dec 2000			-0.2
Dec 1999			-1.1
Dec 1998			0.6
Dec 1997			1.8
Dec 1996			0.6
Dec 1995			-0.3
Dec 1994			0.7
Dec 1993			1.0
Dec 1992			1.2
Dec 1991			2.7
Dec 1990			3.8
Dec 1989			2.6
Dec 1988			1.0
Dec 1987			0.8
Dec 1986			-0.3
Dec 1985			1.9
Dec 1984			2.6
Dec 1983			1.7
Dec 1982			2.0
Dec 1981			4.3
Dec 1980			6.9
Dec 1979			5.6
Dec 1978			3.9
Dec 1977			5.0
Dec 1976			10.5
Dec 1975			7.8
Dec 1974			21.0
Dec 1973			18.3
Dec 1972			5.7
Dec 1971			4.8

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

Chart IV-14 provides the US consumer price index NSA from 1913 to 2012. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart IV-14, US, Consumer Price Index, All Items, NSA, 1913-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-15 provides 12-month percentage changes of the US consumer price index from 1914 to 2012. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Table IV-15 provides similar inflation waves in the economy of Japan with 18.3 percent in 1973 and 21.0 percent in 1974. Inflation rates then stabilized in the US in a range with only two episodes above 5 percent. There are isolated cases of deflation concentrated over extended periods only during the 1930s.

Chart IV-15, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1914-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-16 provides the US consumer price index excluding food and energy from 1957 (when it first becomes available) to 2012. There is long-term inflation in the US without episodes of deflation.

IV-16, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-17 provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 (when it first becomes avaible) to 2012. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.

Chart IV-17, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

More detail on the consumer price index of Japan in Jul is shown in Table IV-8. Inflation in the 12 months ending in Aug 2012 has been driven by items rich in commodities such as 3.2 percent in fuel, light and water charges with increase of 0.8 percent in the month of Aug. There is similar behavior in the preliminary estimate for Sep for the Ku Area of Tokyo with increase of 3.8 percent of fuel, light and water charges and increase of 8.1 percent in 12 months. There is increase in most items in the consumer price index in Aug. There is mild deflation in the CPI excluding food, alcoholic beverages and energy with minus 0.5 percent in the 12 months ending in Aug and increase of 0.1 percent in the month of Aug. The CPI excluding imputed rent increased 0.2 percent in Aug and decreased 0.4 percent in 12 months. The all-items CPI estimate for Jul of the Ku-Area of Tokyo increased 0.1 percent in Aug and declined 0.7 percent in 12 months.

Table IV-8, Japan, Consumer Price Index, ∆%

2012	Aug 2012/Jul 2012 ∆%	Year ∆%
CPI All Items	0.1	-0.4
CPI Excluding Fresh Food	0.2	-0.3
CPI Excluding Food, Alcoholic Beverages and Energy	0.1	-0.5
CPI Goods	-0.3	-0.9
CPI Services	0.5	0.0
CPI Excluding Imputed Rent	0.2	-0.4
CPI Fuel, Light, Water Charges	0.8	3.2
CPI Transport & Communications	0.6	-1.1
CPI Ku-Area Tokyo All Items	0.1	-0.7
Fuel, Light, Water Charges Ku Area Tokyo	3.8	8.1

Note: Ku-area Tokyo CPI data preliminary for Sep 2012

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html), as shown in Table IV-9. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trades from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 11.7 percent. In the second wave, producer prices fell 0.5 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun of minus 3.5 percent. In the third wave from Jul to Sep, annual equivalent producer price inflation was 2.8 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.4 percent. In the fifth wave Jan-Mar 2012, average annual inflation rose to 8.3 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 7.7 percent during unwinding of carry trades because of increasing risk aversion. In the seventh wave, carry trades returned under more relaxed risk aversion with producer price inflation in France at 10.0 percent in annual equivalent in Jul-Aug 2012. The bottom part of Table IV-11 shows producer price inflation at 3.5 percent in the 12 months ending in Dec 2005 and again at 5.2 percent in the 12 months ending in Dec 2007. Producer prices fell in 2008 and 2009 during the global contraction and decline of commodity prices but returned at 5.4 percent in the 12 months ending in Dec 2010.

Table IV-9, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Aug	1.2	2.5
Jul	0.4	1.3
AE ∆% Jul-Aug	10.0
Jun	-0.8	1.3
May	-1.1	2.1
Apr	-0.1	2.7
AE ∆% Apr-Jun	-7.7
Mar	0.5	3.8
Feb	0.8	4.2
Jan	0.7	4.2
AE ∆% Jan-Mar	8.3
Dec 2011	-0.2	4.6
Nov	0.4	5.6
Oct	0.4	5.7
AE ∆% Oct-Dec	2.4
Sep	0.3	6.1
Aug	0.0	6.2
Jul	0.4	6.3
AE ∆% Jul-Sep	2.8
Jun	-0.1	6.1
May	-0.5	6.2
AE ∆% May-Jun	-3.5
Apr	1.0	6.7
Mar	0.9	6.7
Feb	0.8	6.3
Jan	1.0	5.6
AE ∆% Jan-Apr	11.7
Dec 2010	0.8	5.4
Dec 2009	0.1	-2.9
Dec 2008	-1.5	-0.2
Dec 2007	0.6	5.2
Dec 2006	-0.2	2.9
Dec 2005	0.2	3.5

Source: Institut National de la Statistique et des Études Économiques http://www.bdm.insee.fr/bdm2/affichageSeries.action?bouton=OK&idbank=001569919&codeGroupe=966

Chart IV-18 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components exhibit the rise to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec 2011 and then renewed inflation in the first quarter of 2012 with a new pause in Apr 2012, decline in May-Jun 2012 and the jump in Jul-Aug 2012.

Chart IV-18, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques

http://www.bdm.insee.fr/bdm2/affichageSeries.action?bouton=OK&idbank=001569919&codeGroupe=966

France’s producer price index for the domestic market is shown in Table IV-10 for Jun 2012. The segment of prices of coke and refined petroleum increased 7.8 percent Aug 2012 and increased 16.1 percent in 12 months. Manufacturing prices, with the highest weight in the index, increased 1.3 percent in Aug and rose 2.4 percent in 12 months. Mining prices increased 1.1 percent in Aug and increased 3.9 percent in 12 months.

Table IV-10, France, Producer Price Index for the Domestic Market, %

Aug 2012	Weight	Month ∆%	12 Months ∆%
Total	1000	1.2	2.6
Mining	130	1.1	3.9
Mfg	870	1.3	2.4
Food Products, Beverages, Tobacco	188	0.8	2.9
Coke and Refined Petroleum	70	7.8	16.1
Electrical, Electronic	92	0.2	1.6
Transport	79	0.1	0.7
Other Mfg	441	0.4	-0.4

Source:  Institut National de la Statistique et des Études Économiques

http://www.bdm.insee.fr/bdm2/affichageSeries.action?bouton=OK&idbank=001569919&codeGroupe=966

Italy’s producer price inflation in Table IV-11 also has the same waves in 2011 and into 2012 observed for many countries (http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html). The annual equivalent producer price inflation in the first wave Jan-Apr 2011 was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was minus 0.2 percent in May and flat in Jun for annual equivalent inflation rate in May-Jun of minus 1.2 percent. In the third wave, annual equivalent inflation was 2.4 percent in Jul-Sep in a pause of risk aversion. With the return of risk aversion in the fourth wave coinciding with worsening sovereign debt crisis in Europe, annual equivalent inflation was 0.4 percent in Oct-Dec. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 7.4 percent and annual equivalent of 6.6 percent in Jan-Mar. In the sixth wave, annual equivalent inflation in Mar-Apr was at 4.3 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 2.4 percent in May-Jun 2012. In the eighth wave, more aggressive carry trades into commodity futures exposures resulted in increase of inflation at annual equivalent 6.2 percent in Jul-Aug 2012.

Table IV-11, Italy, Industrial Prices, Internal Market

	Month ∆%	12-Month ∆%
Aug 2012	0.8	3.0
Jul	0.2	2.2
AE ∆% Jul-Aug	6.2
Jun	-0.1	2.2
May	-0.3	2.3
AE ∆% May-Jun	-2.4
Apr	0.3	2.5
Mar	0.4	2.8
AE ∆% Mar-Apr	4.3
Feb	0.4	3.2
Jan	0.8	3.5
AE ∆% Jan-Feb	7.4
Dec 2011	0.0	3.9
Nov	0.3	4.7
Oct	-0.2	4.7
AE ∆% Oct-Dec	0.4
Sep	0.2	4.7
Aug	0.1	4.8
Jul	0.3	4.9
AE ∆% Jul-Sep	2.4
Jun	0.0	4.6
May	-0.2	4.8
AE ∆% May-Jun	-1.2
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Dec 2010	0.7	4.7
Year
2011		5.0
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71460

Chart IV-20 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Jan 2012 with increases of 0.8 percent in the month of Jan 2012 and 0.4 percent in Feb. Inflation was 0.4 percent in Mar 2012 and 2.8 percent in 12 months. The decline of annual equivalent inflation from 7.4 percent in Jan-Feb 2012 to 4.3 percent in Mar-Apr pulled down 12-month inflation to 2.8 percent in Mar and 2.5 percent in Apr. Percentage declines of inflation of 0.3 percent in May and 0.1 percent in Jun pulled down the 12-month rate of inflation to 2.2 percent in Jun 2012. Renewed inflation of 0.2 percent in Jul 2012 and 0.8 percent in Aug 2012 pulled up the 12-month rate to 3.0 percent.

Chart IV-19, Italy, Producer Price Index 12-Month Percentage Changes

Source:  Istituto Nazionale di Statistica

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

Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table IV-12. Energy prices increased 2.8 percent in Aug 2012 and rose 12.8 percent in 12 months. Producer-price inflation is positive for all components in the month of Aug with the exception of no change in durable goods and capital goods. There is higher inflation in 12 months of 2.3 percent for nondurable goods than 1.4 percent for durable goods

Table IV-12, Italy, Industrial Prices, Internal Market, ∆%

	Aug 2012/         Jul 2012	Aug 2012/         Aug 2011
Total	0.8	3.0
Consumer Goods	0.4	2.2
Durable Goods	0.0	1.4
Nondurable	0.5	2.3
Capital Goods	0.0	0.4
Intermediate	0.4	-0.1
Energy	2.8	12.8

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71460

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-13. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012 and 2.0 percent in Jul-Sep. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion.

Table IV-13, Italy, Consumer Price Index

	Month	12 Months
Sep 2012	0.0	3.2
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Sep	2.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71486

Consumer price inflation in Italy by segments in the estimate by ISTAT for Sep 2012 is provided in Table IV-14. Total consumer price inflation in Sep was unchanged and 3.2 percent in 12 months. Inflation of goods was 0.7 percent and 4.1 percent in 12 months. Prices of durable goods increased 0.1 percent in Sep and increased only 0.4 percent in 12 months, as typical in most countries. Prices of energy increased 2.0 percent in Sep and increased 15.9 percent in 12 months. Food prices increased 0.6 percent in Sep and increased 2.9 percent in 12 months. Prices of services fell 0.8 percent in Sep and rose 1.9 percent in 12 months. Transport prices, also influenced by commodity prices, decreased 4.3 percent in Sep and increased 3.3 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion.

Table IV-14, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Sep 2012	Month ∆%	12-Month ∆%
General Index	0.0	3.2
I Goods	0.7	4.1
Food	0.6	2.9
Energy	2.0	15.9
Durable	0.1	0.4
Nondurable	0.3	0.7
II Services	-0.8	1.9
Housing	0.3	2.8
Communications	0.1	1.4
Transport	-4.3	3.3

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71486

Chart IV-21 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase.

Chart, IV-20, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

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

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 ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
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 for IQ2012 and IIQ2012. Growth is weak throughout most of the world. Japan’s GDP increased 1.3 percent in IQ2012 and 2.9 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. Japan’s GDP grew 0.2 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of 0.7 percent, which is much lower than 5.3 percent in IQ2012. Growth of 3.2 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. 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 IIQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier. GDP was flat in the euro area in IQ2012 and also in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.5 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.3 percent at SAAR and 2.1 percent relative to a year earlier (Section IA Mediocre and Decelerating United States Economic Growth) but with substantial underemployment and underemployment (Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html). UK GDP fell 0.4 percent in IIQ2012, declining 0.5 percent relative to IIQ2011. In IQ2011, UK GDP fell 0.3 percent, declining 0.1 percent relative to a year earlier. UK GDP fell 0.5 percent in IIQ2012 and 0.5 percent relative to a year earlier. Italy has experienced decline of GDP in four consecutive quarters from IIIQ2011 to IIQ2012. Italy’s GDP fell 0.8 percent in IIQ2012 and declined 2.6 percent relative to IIQ2011. France’s GDP stagnated in both IQ2012 and IIQ2012 and increased 0.3 percent relative to a year earlier in IIQ2012.

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	QOQ: 1.3 SAAR: 5.3	2.9
China	1.8	8.1
Euro Area	0.0	0.0
Germany	0.5	1.7
France	0.0	0.4
Italy	-0.8	-1.5
United Kingdom	-0.3	-0.1
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3         SAAR: 1.3	2.1
Japan	QOQ: 0.2 SAAR: 0.7	3.2
China	1.8	7.6
Euro Area	-0.2	-0.5
Germany	0.3	0.5 1.0 CA
France	0.0	0.3
Italy	-0.8	-2.6
United Kingdom	-0.4	-0.5

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/

There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB at http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of_23.html and for GDP http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html). Japan’s exports decreased 5.8 percent in the 12 months ending in Aug and 8.1 percent in 12 months ending in Jul while imports decreased 5.4 percent in the 12 months ending in Aug and increased 2.1 percent in the 12 months ending in Jul. The second part of Table V-4 shows that net trade deducted 0.3 percentage points from Japan’s growth of GDP in IIQ2012. China’s exports fell 1.8 percent in the month of Jul and increased 1.0 percent in 12 months. In Aug 2012, China’s exports increased 0.6 percent and increased 2.7 percent in 12 months. Germany’s exports increased 0.5 percent in the month of Jul and increased 9.2 percent in the 12 months ending in Jul while imports increased 0.9 percent in the month of Jul and increased 1.9 percent in the 12 months ending in Jul. Net trade contributed 1.1 percentage points to growth of Germany’s GDP in IIQ2012. The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, increased from 47.0 in Aug to 49.7 in Sep, which is the highest reading in five months resulting from slower rate of decline of manufacturing and improvement in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10075). The pace of decline of new export orders for manufacturing was more moderate than the 40-month record of decline in Aug. UK’s exports fell 4.6 percent in Jun and decreased 1.4 percent in Apr-Jun 2012 relative to Apr-Jun 2011 while imports fell 0.7 percent in Jun and increased 2.2 percent in Apr-Jun 2012 relative to Apr-Jun 2011. UK exports increased 5.2 percent in Jul and decreased 0.7 percent in May-Jul relative to a year earlier while imports fell 1.7 percent in Jul and decreased 0.4 percent in May-Jul relative to a year earlier. Net trade deducted 1.0 percentage points from UK GDP growth in IIQ2012. France’s exports increased 0.8 percent in Jul and net trade deducted 0.4 percentage points from GDP growth in IIQ2012. US exports decreased 1.0 percent in Jul 2012 and increased 6.2 percent in Jan-Jul relative to a year earlier but net trade added 0.23 percentage points to GDP growth in IIQ2012. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted was unchanged at 51.5 in Sep from 51.5 in Aug, indicating the third weakest reading since Oct 2009 in the beginning of the current recovery with the lowest in Dec 2010; the PMI average in the three months ending in Sep was 51.5, which is lower than 54.2 in the three months ending in Jun and the lowest quarterly reading since IIIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10081). New export orders registered 47.9 in Sep still in contraction territory with 48.8 in Aug, which is the fastest decline in new export orders since Oct 2011. In the six months ending in Aug, United States national industrial production accumulated decline of 0.4 percent at the annual equivalent rate of decline of 0.8 percent, which is substantially lower than 2.8 percent growth in 12 months. Capacity utilization for total industry in the United States fell 1.0 percentage point in Aug to 78.2 percent, which is 2.1 percentage points lower than the long-run average from 1972 to 2011. Manufacturing decreased 0.7 percent in Aug seasonally adjusted, increasing 4.1 percent not seasonally adjusted in 12 months, and fell 0.5 percent in the six months ending in Aug or at the annual equivalent rate of 1.0 percent (http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html). Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.

Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points

	Exports M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	-1.0	6.2 Jan-Jul	-0.8 Jun	5.5 Jan-Jul
Japan Aug Jul		-5.8 -8.1		-5.4 2.1
China	-1.8 Jul 0.6 Aug	1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug	2.2 Jul -0.3 Aug	4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug
Euro Area	0.3 Jul	8.8 Jan-Jul	-1.0 Jul	2.5 Jan-Jul
Germany	0.5 Jul CSA	9.2 Jul	0.9 Jul CSA	1.9 Jul
France Jul	0.8	3.6	-3.5	1.9
Italy Jul	0.3	4.3	2.9	-4.3
UK	-4.6 Jun 5.2 Jul	-1.4 Apr-Jun -0.7 May-Jul	-0.7 Jun -1.7	2.2 Apr-Jun -0.4 May-Jul
Net Trade % Points GDP Growth	% Points
USA IIQ2012	0.23
Japan IIQ2012	-0.3
Germany IIQ2012	1.1
France IIQ2012	-0.4
UK IIQ2012	-1.0

Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm

http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html

http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp

http://www.insee.fr/en/

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

http://www.statistics.gov.uk/hub/index.html

The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table V-5 for Aug 2012. The share of Asia in Japan’s trade is more than one half, 56.3 percent of exports and 43.6 percent of imports. Within Asia, exports to China are 19.2 percent of total exports and imports from China 20.8 percent of total imports. The second largest export market for Japan in Aug 2012 is the US with share of 17.6 percent of total exports and share of imports from the US of 8.7 percent in total imports. Western Europe has share of 9.6 percent in Japan’s exports and of 10.8 percent in imports. Rates of growth of exports of Japan in Aug are sharply negative for most countries and regions with the exception of 10.3 percent for exports to the US, 18.7 percent to Canada, 6.5 percent for exports to Mexico and 0.3 percent to Brazil. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 5.8 percent in Aug 2012 while imports decreased by 5.4 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Aug are sharply higher with exception of declines in imports mostly of raw materials: minus 9.3 percent for Middle East, minus 13.2 percent for Australia and minus 27.3 percent for Brazil. Imports from Asia decreased 5.8 percent in the 12 months ending in Aug while imports from China decreased 7.3 percent.

Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Aug 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,045,868	-5.8	5,799,995	-5.4
Asia	2,839,710	-6.7	2,526,870	-5.8
China	966,299	-9.9	1,208,214	-7.3
USA	886,922	10.3	503,962	-0.1
Canada	62,393	18.7	80,017	-17.3
Brazil	42,396	0.3	67,127	-27.3
Mexico	68,528	6.5	26,944	9.1
Western Europe	484,858	-28.3	624,333	2.9
Germany	125,729	-17.8	174,050	8.7
France	36,868	-29.8	85,122	10.3
UK	72,065	-42.1	48,348	-5.1
Middle East	167,393	-1.2	1,083,162	-9.3
Australia	117,080	-1.6	408,332	-13.2

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

Table V-6 of the World Trade Organization provides actual volume of world trade from 2008 to 2011 and projections of the World Trade Organization Secretariat for 2012 and 2013. Trade was weak during the global recession, increasing 2.3 percent in 2008 and decreasing 12.5 percent in 2009. Trade growth was 13.8 percent in 2010 and 5.0 percent in 2011. The World Trade Organization has reduced its projection of growth of world trade in 2012 to 2.5 percent.

Table V-6, World Trade Organization Projections of Growth of Volume of World Merchandise Trade and GDP, ∆%, 2008-2013

	2008	2009	2010	2011	2012*	2013*
World Trade Volume	2.3	-12.5	13.9	5.0	2.5	4.5
Exports
DE	0.9	-15.2	13.0	4.6	1.5	3.3
DINGE	4.3	-7.8	15.3	5.3	3.5	5.7
Imports
DE	-1.1	-14.4	11.0	2.9	0.4	3.4
DINGE	8.6	-10.5	18.3	8.3	5.4	6.1
Real GDP**	1.3	-2.4	3.8	2.4	2.1	2.4
DE	0.0	-3.8	2.7	1.5	1.2	1.5
DINGE	5.6	2.2	7.3	5.3	4.9	5.2

Notes: World Trade Volume: average of exports and imports; *Projections; **At market exchange rates; DE: Developed economies; DINGE: developing economies

Source: World Trade Organization Secretariat for trade, Consensus estimates of GDP forecasts

http://www.wto.org/english/news_e/pres12_e/pr676_e.htm

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted was unchanged at 51.5 in Sep from 51.5 in Aug, indicating the third weakest reading since Oct 2009 in the beginning of the current recovery with the lowest in Dec 2010; the PMI average in the three months ending in Sep was 51.5, which is lower than 54.2 in the three months ending in Jun and the lowest quarterly reading since IIIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10081). New export orders registered 47.9 in Sep still in contraction territory with 48.8 in Aug, which is the fastest decline in new export orders since Oct 2011. Chris Williams, Chief Economist at Markit, finds that manufacturing could have restrained the US economy in IIIQ2012 that coud possibly result in weaker growth than 1.7 percent at seasonally-adjusted annual rate in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10081). 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	Aug 12 months NSA ∆%: 1.7; ex food and energy ∆%: 1.9 Aug month ∆%: 0.6; ex food and energy ∆%: 0.1 Blog 9/16/12
Producer Price Index	Aug 12-month NSA ∆%: 2.0; ex food and energy ∆% 2.5 Aug month SA ∆% = 1.7; ex food and energy ∆%: 0.2 Blog 9/16/12
PCE Inflation	Aug 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.6 Blog 9/30/12
Employment Situation	Household Survey: Aug Unemployment Rate SA 8.1% Blog calculation People in Job Stress Aug: 28.1 million NSA Establishment Survey: Aug Nonfarm Jobs +96,000; Private +103,000 jobs created  Jul 12-month Average Hourly Earnings Inflation Adjusted ∆%: 1.0 Blog 9/9/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring Jul 2012 4.703 million lower by 1.266 million than 5.969 million in Jul 2006 Blog 9/16/12
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.1 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 Blog 9/30/12
Personal Income and Consumption	Aug month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% -0.3 Real Personal Consumption Expenditures (RPCE): 0.1 12-month Aug NSA ∆%: RDPI: 1.8; RPCE ∆%: 2.0 Blog 9/30/2012
Quarterly Services Report	IQ12/IQ11 SA ∆%: Information 3.8 Professional 10.3 Administrative 4.9 Hospitals 5.2 Blog 6/10/12
Employment Cost Index	IIQ2012 SA ∆%: 0.5 Jun 12 months ∆%: 1.7 Blog 8/5/12
Industrial Production	Aug month SA ∆%: -1.2 Aug 12 months SA ∆%: 2.8 Manufacturing Jul SA ∆% -0.7 Aug 12 months SA ∆% 3.8, NSA 4.1 Capacity Utilization: 78.2 Blog 9/16/12
Productivity and Costs	Nonfarm Business Productivity IIQ2012∆% SAAE 2.2; IIQ2012/IIQ2011 ∆% 1.2; Unit Labor Costs SAAE IIQ2012 ∆% 1.5; IIQ2012/IIQ2011 ∆%: 0.9 Blog 9/9/2012
New York Fed Manufacturing Index	General Business Conditions From Aug -5.85 to Sep -10.41 New Orders: From Aug -5.50 to Sep -14.03 Blog 9/23/12
Philadelphia Fed Business Outlook Index	General Index from Aug minus 7.1 to Sep -1.9 New Orders from Aug minus 5.5 to Sep 1.0 Blog 9/23/12
Manufacturing Shipments and Orders	Aug New Orders SA ∆%: -13.2; ex transport ∆%: -1.6 Jan-Aug New Orders NSA ∆%: 5.5; ex transport ∆% 4.5 Blog 9/30/12
Durable Goods	Jul New Orders SA ∆%: 4.2; ex transport ∆%: -0.4 Jan-Jul 12/Jan-Jul 11 NSA New Orders ∆%: 7.5; ex transport ∆% : 5.5 Blog 9/30/12
Sales of New Motor Vehicles	Aug 2012 9,711,044; Aug 2011 8,464,450. Aug SAAR 14.52 million, Jul SAAR 14.09 million, Aug 2011 SAAR 12.46 million Blog 9/2/12
Sales of Merchant Wholesalers	Jan-Jul 2012/Jan-Jul 2011 NSA ∆%: Total 6.8; Durable Goods: 8.7; Nondurable Goods: 5.3 Blog 9/16/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Jul 12/Jul 11 NSA ∆%: Sales Total Business 3.7; Manufacturers 2.9 Retailers 3.0; Merchant Wholesalers 5.4 Blog 9/16/12
Sales for Retail and Food Services	Jan-Aug 2012/Jan-Aug 2011 ∆%: Retail and Food Services 5.8; Retail ∆% 5.6 Blog 9/16/12
Value of Construction Put in Place	Jul SAAR month SA ∆%: -0.9 Jul 12-month NSA: 9.6 Blog 9/9/12
Case-Shiller Home Prices	Jul 2012/Jul 2011 ∆% NSA: 10 Cities 0.6; 20 Cities: 1.2 ∆% Jul SA: 10 Cities 0.4 ; 20 Cities: 0.4 Blog 9/30/12
FHFA House Price Index Purchases Only	Jul SA ∆% 0.2; 12 month ∆%: 3.8 Blog 9/30/12
New House Sales	Aug 2012 month SAAR ∆%: -0.3 Jan-Aug 2012/Jan-Aug 2011 NSA ∆%: 21.9 Blog 9/30/12
Housing Starts and Permits	Jul Starts month SA ∆%: 2.3 ; Permits ∆%: -1.0 Jan-Aug 2012/Jan-Aug 2011 NSA ∆% Starts 25.7; Permits  ∆% 30.5 Blog 9/23/12
Trade Balance	Balance Jul SA -$42002 million versus Jun -$41899 million Exports Jul SA ∆%: -1.0 Imports Jul SA ∆%: -0.8 Goods Exports Jan-Jul 2012/2011 NSA ∆%: 6.2 Goods Imports Jan-Jul 2012/2011 NSA ∆%: 5.5 Blog 9/16/12
Export and Import Prices	Aug 12-month NSA ∆%: Imports -2.2; Exports -0.9 Blog 9/16/12
Consumer Credit	Jul ∆% annual rate: -1.5 Blog 9/16/12
Net Foreign Purchases of Long-term Treasury Securities	Jul Net Foreign Purchases of Long-term Treasury Securities: $67.0 billion Major Holders of Treasury Securities: China $1164 billion; Japan $1149 billion; Total Foreign US Treasury Holdings Jun $5348 billion Blog 9/3/12
Treasury Budget	Fiscal Year Oct-Aug 2012/2011 ∆%: Receipts 6.1; Outlays 1.7; Individual Income Taxes 3.9 Deficit Fiscal Year 2011 $1,300 billion Deficit Fiscal Year 2012 Oct-Jul $973,172 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 9/16/2012
CBO Budget and Economic Outlook	2012 Deficit $1128 B 7.3% GDP Debt 11,318 B 72.8% GDP 2013 Deficit $614 B, Debt 12,064 B 76.1% GDP Blog 8/26/12
Commercial Banks Assets and Liabilities	Aug 2012 SAAR ∆%: Securities 2.8 Loans 2.9 Cash Assets 30.3 Deposits 5.4 Blog 9/30/12
Flow of Funds	IIQ2012 ∆ since 2007 Assets -$4193B Real estate -$4451B Financial $-157 MM Net Worth -$3389B Blog 9/23/12
Current Account Balance of Payments	IIQ2012 -$1285 B %GDP 3.0 Blog 9/23/12

Links to blog comments in Table USA:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

9/2/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html

Manufacturers’ shipments of durable goods decreased 3.0 percent in Aug 2012 after growing 1.9 percent in Jul and no growth in Jun. New orders decreased 13.2 percent in Aug after increasing 3.3 percent in Jul and 1.6 percent in Jun, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by decrease of orders for nondefense aircraft of 101.8 percent in Aug after increasing 51.1 percent in Jul and 32.5 percent in Jun. New orders excluding transportation equipment decreased 1.6 percent in Aug after decreasing 1.3 percent in Jul and decreasing 2.2 percent in Jun. Capital goods new orders, indicating investment, decreased 12.4 percent in Aug after increase of 4.7 percent in Jul and decrease of 0.7 percent in Jun. New orders of nondefense capital goods decreased 24.3 percent in Aug after increases of 4.8 percent in Jul and 2.4 percent in Jun. Excluding more volatile aircraft, capital goods orders increased 1.1 percent in After after declines of 5.2 percent in Jul and 2.7 percent in Jun.

Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Aug 2012  ∆%	Jul 2012  ∆%	Jun 2012 ∆%
Total
S	-3.0	1.9	0.0
NO	-13.2	3.3	1.6
Excluding Transport
S	-0.9	-0.5	0.4
NO	-1.6	-1.3	-2.2
Excluding Defense
S	-3.3	2.3	-0.2
NO	-12.4	4.7	-0.7
Machinery
S	-0.4	-1.4	4.2
NO	-4.7	-6.2	-2.5
Computers & Electronic Products
S	-4.0	-0.9	0.2
NO	-3.4	-0.8	-4.9
Computers
S	-7.7	3.6	-3.8
NO	-2.9	0.1	-5.0
Transport Equipment
S	-7.9	7.9	-1.0
NO	-34.9	13.1	10.8
Motor Vehicles
S	-11.2	11.9	-0.6
NO	-10.9	12.1	-0.7
Nondefense Aircraft
S	-6.4	6.3	-4.9
NO	-101.8	51.1	32.5
Capital Goods
S	-1.7	-0.4	0.9
NO	-26.2	2.0	8.1
Nondefense Capital Goods
S	-1.7	0.1	0.8
NO	-24.3	4.8	2.4
Capital Goods ex Aircraft
S	-0.9	-1.1	1.4
NO	1.1	-5.2	-2.7

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

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr021.html

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Aug 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Aug 2012 total $1784.8 billion and new orders total $1733.6 billion, growing respectively by 8.2 percent and 5.5 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 7.0 percent and new orders increased 4.5 percent. Excluding defense, shipments grew 9.0 percent and new orders grew 6.7 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $617.7 billion for shipments, growing 6.5 percent, and new orders $627.9 billion, growing 1.0 percent. Excluding aircraft, capital goods shipments reached $505.6 billion, growing by 6.7 percent, and new orders $507.8 billion, growing 2.3 percent. There is no suggestion in these data that the US economy is close to recession but performance at the margin appears somewhat weaker without enough data to discern trends.

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Aug 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/  2011
Total	1,784,776	8.2	1,733,559	5.5
Excluding Transport	1,280,245	7.0	1,225,532	4.5
Excluding Defense	1,700,560	9.0	1,651,256	6.7
Machinery	257,969	10.5	252,487	-2.0
Computers & Electronic Products	221,583	-0.2	170,717	2.6
Computers & Related Products	21,369	-5.4	21,377	-4.9
Transport Equipment	504,531	11.5	508,027	8.2
Motor Vehicles	346,674	13.5	345,348	13.3
Nondefense Aircraft	72,216	22.6	82,919	11.9
Capital Goods	617,668	6.5	627,975	1.0
Nondefense Capital Goods	552,429	8.7	563,987	3.9
Capital Goods ex Aircraft	505,551	6.7	507,779	2.3

Note: Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Table VA-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.5 percent in US national income in IQ2012 and 86.3 percent in IIQ2012. Most of US national income is in the form of services. In Aug 2012, there were 133.092 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 112.349 million NSA in Aug 2012 accounted for 84.4 percent of total nonfarm jobs of 133.092 million, of which 12.074 million, or 10.8 percent of total private jobs and 9.1 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.605 million NSA in Aug 2012, or 70.3 percent of total nonfarm jobs and 83.3 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IIQ2011, as shown in Table VA-3. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IQ2012	% Total	SAAR IIQ2012	% Total
National Income WCCA	13,788.3	100.0	13,867.8	100.0
Domestic Industries	13,573.4	98.4	13,620.5	98.2
Private Industries	11,922.7	86.5	11,967.5	86.3
Agriculture	134.0	1.0	132.8	0.9
Mining	211.0	1.5	208.7	1.5
Utilities	211.9	1.5	214.7	1.6
Construction	585.6	4.3	585.8	4.2
Manufacturing	1521.9	11.0	1530.4	11.0
Durable Goods	865.2	6.3	877.3	6.3
Nondurable Goods	656.6	4.8	653.1	4.7
Wholesale Trade	831.6	6.0	852.8	6.2
Retail Trade	947.5	6.9	947.2	6.8
Transportation & WH	416.5	3.0	417.7	3.0
Information	486.7	3.5	497.0	3.6
Finance, insurance, RE	2301.3	16.7	2271.1	16.4
Professional, BS	1955.0	14.2	1983.5	14.3
Education, Health Care	1380.8	10.0	1832.7	13.2
Arts, Entertainment	541.1	3.9	542.7	3.9
Other Services	397.9	2.9	400.3	2.9
Government	1650.7	12.0	1653.0	11.9
Rest of the World	214.9	1.6	247.3	1.8

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

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. These forecasts are biannual in Apr and Oct.

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

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

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

Source: Policy Board, Bank of Japan

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

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

http://www.boj.or.jp/en/mopo/outlook/index.htm/

Private-sector activity in Japan contracted at a moderate rate with the Markit Composite Output PMI^™ Index increasing from 47.4 in Jul to 48.6 in Aug, which is still below 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9974). Alex Hamilton, economist at Markit and author of the report, finds that three consecutive monthly declines of both output of manufacturing and activity in services suggest disappearing growth of the economy of Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9974). The Markit Business Activity Index of Services increased from 47.5 in Jul to 49.3 in Aug, also showing contraction at slower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9974). The Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, fell from 47.9 in Jul to 47.7 in Aug, in the weakest private-sector manufacturing activity in 16 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9971). Alex Hamilton, economist at Markit and author of the report, finds deterioration in total new business of exports and domestic with orders with growth restrained in the midst of weakening international demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9971).Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 8/9/11 Table 26
Corporate Goods Prices	Aug ∆% +0.3 12 months ∆% minus 1.8 Blog 9/16/12
Consumer Price Index	Aug NSA ∆% 0.1; Aug 12 months NSA ∆% -0.4 Blog 9/30/12
Real GDP Growth	IIQ2012 ∆%: 0.3 on IQ2012;  IIQ2012 SAAR 0.7; ∆% from quarter a year earlier: 3.2 % Blog 9/16/12
Employment Report	Aug Unemployed 2.77 million Change in unemployed since last year: minus 180 thousand Unemployment rate: 4.2% Blog 9/30/12
All Industry Indices	Jul month SA ∆% -0.6 12-month NSA ∆% 0.5 Blog 9/23/12
Industrial Production	Aug SA month ∆%: -1.3 12-month NSA ∆% -4.3 Blog 9/30/12
Machine Orders	Total Jul ∆% -2.6 Private ∆%: 4.3 Jul ∆% Excluding Volatile Orders 4.6 Blog 9/16/12
Tertiary Index	Jul month SA ∆% -0.8 Jul 12 months NSA ∆% 0.8 Blog 9/16/12
Wholesale and Retail Sales	Aug 12 months: Total ∆%: -2.7 Wholesale ∆%: -4.3 Retail ∆%: 1.8 Blog 9/30/12
Family Income and Expenditure Survey	Aug 12-month ∆% total nominal consumption 1.4, real 1.8 Blog 9/30/12
Trade Balance	Exports Aug 12 months ∆%: -5.8 Imports Aug 12 months ∆% -5.4 Blog 9/23/12

Links to blog comments in Table JPY:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

In Aug 2012, industrial production in Japan decreased 1.3 percent and decreased 4.3 percent in the 12 months ending in Aug 2012, as shown in Table VB-1. In the five months Apr-Aug 2012, industrial production fell cumulative 5.4 or at the annual equivalent rate of 12.5 percent. As a result, growth of industrial production in 12 months fell from 14.2 percent in Mar 2012 to minus 4.3 percent in Aug 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 2011 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 by 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
Aug 2012	-1.3	-4.3
Jul	-1.0	-0.8
Jun	0.4	-1.5
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/index.html

The employment report for Japan in Aug 2012 is in Table VB-2. The rate of unemployment seasonally adjusted decreased to 4.2 percent in Aug 2012 from 4.3 percent in Jul 2012. The rate of unemployment not seasonally adjusted fell to 4.2 in Aug 2012 from 4.5 percent a year earlier. The employment rate at 56.6 percent in Aug 2012 was unchanged from a year earlier.

Table VB-2, Japan, Employment Report Aug 2012 

Unemployed	2.77 million
Change since last year	-180 thousand; ∆% –6.1
Unemployment rate	4.2% SA -0.1; NSA 4.2%, -0.3 from earlier year
Population ≥ 15 years	110.95 million
Change since last year	∆% 0.0
Labor Force	65.59 million
Change since last year	∆% –0.3
Employed	62.81 million
Change since last year	% 0.0
Labor force participation rate	59.1
Change since last year	-0.1
Employment rate	56.6%
Change since last year	0.0

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 2010 to 2012. The sharp decline in Sep 2011 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 both Jun and Jul 2012 with further decline to 4.2 percent in Aug 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 Rate	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 with recovery in Jul and Aug 2012 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 1.8 percent in real terms in Aug 2012 and increased 1.4 percent in nominal terms. There are several segments of decreasing real consumption: clothing and footwear declining 3.0 percent in real terms and 3.3 percent in nominal terms, fuel, light and water charges declining 1.4 percent in real terms but increasing 1.8 percent in nominal terms, food declining 0.3 percent in nominal terms and increasing 0.4 percent in nominal terms, culture and recreation declining 10.7 in real terms and 12.3 percent in nominal terms and other consumption expenditures declining 0.1 percent in real terms and 1.3 percent in nominal terms. Real household income increased 1.8 percent; real disposable income increased 2.6 percent; and real consumption expenditures increased 0.9 percent.

Table VB-4, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Aug 2012	Nominal	Real
Households of Two or More Persons
Total Consumption	1.4	1.8
Excluding Housing, Vehicles & Remittance		1.7
Food	-0.3	0.4
Housing	-8.7	-8.5
Fuel, Light & Water Charges	1.8	-1.4
Furniture & Household Utensils	3.7	6.9
Clothing & Footwear	-3.3	-3.0
Medical Care	8.2	8.9
Transport and Communications	7.3	8.5
Education	-5.0	-5.4
Culture & Recreation	-1.3	-0.1
Other Consumption Expenditures	4.1	-4.5*
Workers’ Households
Income	1.4	1.8
Disposable Income	2.2	2.6
Consumption Expenditures	0.5	0.9

*Real: nominal deflated by CPI excluding imputed rent

Source: http://www.stat.go.jp/english/data/kakei/156.htm

Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VB-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 Aug 2012. Consumption was an important driver of GDP growth in Japan in IQ2012. Real GDP grew at the seasonally adjusted annual rate (SAAR) of 5.3 percent in IQ2012 with private consumption contributing 3.0 percentage points for the highest contribution to growth (Table VB-2 at http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation_16.html). There was deceleration in IIQ2012 with growth of GDP at SAAR of 0.7 percent and contribution of 0.3 percentage points of personal consumption. Nominal consumption increased 4.3 percent in May 2012 but at a lower 1.5 percent in Jun 2012, 1.2 percent in Jul 2012 and 1.4 percent in Aug 2012. Real consumption expenditures increased 4.0 percent in May 2012 but at a lower 1.6 percent in Jun 2012, 1.7 percent in Jul 2012 and 1.8 percent in Aug 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 ∆% Relative to a Year Earlier	Real Consumption Expenditures ∆% Relative to a Year Earlier
Aug 2012	1.4	1.8
Jul	1.2	1.7
Jun	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

Japan is experiencing weak internal demand as in most advanced economies, interrupted by strong growth in IQ2012 but renewed weakening at the end of IIQ2012 and beginning of IIIQ2012. Table VB-6 provides Japan’s wholesale and retail sales. Retail sales increased 1.8 percent in the 12 months ending in Aug 2012. Total sales decreased 2.7 percent in the 12 months ending in Aug 2012. Retail sales are recovering from deep drops in Mar and Apr 2011 following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Retail sales have been increasing in 12-month percentage changes from Dec 2011 through Jun 2012 but fell again by 0.7 percent in Jul 2012, increasing 1.8 percent in Aug 2012.

Table VB-6, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Aug 2012	-2.7	-4.3	1.8
Jul	-3.1	-4.0	-0.7
Jun	-2.8	-3.8	0.2
May	2.5	2.1	3.6
Apr	1.7	0.3	5.7
Mar	2.9	0.5	10.3
Feb	-0.1	-1.3	3.4
Jan	-2.0	-3.5	1.8
Dec 2011	-0.8	-2.0	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2011	1.0	1.8	-1.2
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

Source: http://www.meti.go.jp/english/statistics/index.html

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120904_402833237.htm). Table CIPMNM provides this index and components from Jan to Aug 2012. The index fell from 58.0 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. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug.

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

2012	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Aug	56.3	52.7	57.6	51.2	63.2
Jul	55.6	53.2	49.7	48.7	63.9
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/t20120904_402833237.htm

Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Aug 2011 to Aug 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 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 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/t20120904_402833237.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 and to the contraction zone at 49.2 in Aug. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug. The index of employment also fell from 51.0 in Apr to 49.1 in Aug.

Table CIPMNMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted

2012	IPM	PI	NOI	INV	EMP	SDEL
Aug	49.2	50.9	48.7	45.1	49.1	50.0
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/t20120904_402833158.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/t20120904_402833158.htm). Chart CIPMM provides the index from Aug 2011 to Aug 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. The index then fell to contraction at 49.2 in Aug 2012.

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120904_402833158.htm

The HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10082 ) is mixed. The overall Flash China Manufacturing PMI^™ increased marginally from 47.6 in Aug to 47.8 in Sep for a two-month high while the Flash China Manufacturing Output Index decreased from 48.2 in Aug to 47.0 in Sep, at a ten-month low and in contraction territory below 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that new easing policies implemented in recent weeks should help in improving the economy beginning in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10082).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	Aug 12-month ∆%: minus 3.5 Aug month ∆%: minus 0.5 Blog 9/16/12
Consumer Price Index	Aug month ∆%: 0.6 Aug 12 months ∆%: 2.0 Blog 9/16/12
Value Added of Industry	Aug month ∆%: 0.69 Jan-Aug 2012/Jan-Aug 2011 ∆%: 10.1 Blog 9/16/12
GDP Growth Rate	Year IIQ2012 ∆%: 7.6 Quarter IIQ2012 ∆%: 1.8 Blog 7/15/12
Investment in Fixed Assets	Aug month ∆%: 1.33 Total Jan-Aug 2012 ∆%: 20.2 Real estate development: 15.6 Blog 9/16/12
Retail Sales	Aug month ∆%: 1.28 Aug 12 month ∆%: 13.2 Jan-Aug ∆%: 14.1 Blog 9/16/12
Trade Balance	Aug balance $26.66 billion Exports ∆% 2.7 Imports ∆% -2.6 Cumulative Aug: $120.76 billion Blog 9/16/12

Links to blog comments in Table CNY:

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.4 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.3 percent in 2012 but 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	1.4
2012*			-0.3
2013*			1.0

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

The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, fell from 46.3 in Aug to 45.9 in Sep, for eight consecutive declines and twelve drops in thirteen months, registering the lowest reading in 39 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9951). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI suggests technical recession (defined as two or more consecutive declines in GDP) in the economy of the euro zone in IIIQ2012; the index is consistent with decline of GDP of 0.6 percent in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10072). 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	IIQ2012 ∆% -0.2; IIQ2012/IIQ2011 ∆% -0.5 Blog 9/9/12
Unemployment	Jul 2012: 11.3% unemployment rate Jul 2012: 18.002 million unemployed Blog 9/2/12
HICP	Aug month ∆%: 0.4 12 months Jul ∆%: 2.6 Blog 9/16/12
Producer Prices	Euro Zone industrial producer prices Jul ∆%: 0.4 Jun 12-month ∆%: 1.8 Blog 9/9/12
Industrial Production	Jul month ∆%: 0.6; Jul 12 months ∆%: -2.3 Blog 9/16/12
Retail Sales	Jul month ∆%: -0.2 Jul 12 months ∆%: -1.7 Blog 9/9/12
Confidence and Economic Sentiment Indicator	Sentiment 85.0 Sep 2012 Confidence minus 25.9 Sep 2012 Blog 9/30/12
Trade	Jan-Jul 2012/Jan-Jul 2011 Exports ∆%: 8.8 Imports ∆%: 2.5 Jul 2012 12-month Exports ∆% 11.2 Imports ∆% 2.1 Blog 9/23/12

Links to blog comments in Table EUR:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

9/2/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html

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-1 with the index falling from 102.5 in Jul 2011 to 85.0 in Sep 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-1, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Historical Average	100.0	-6.7	10.4	-12.9	-9.1	-17.7
Maximum	117.9 05-00	7.8 04-07	35.3     08-98	2.5 05-00	5.3 06-90	6.1 02-90
Minimum	69.1 03-09	-38.2 03-09	-27.3 03-09	-34.3 03-09	-24.9 01-93	-46.3 09-93
Sep 2012	85.0	-16.1	-12.0	-25.9	-18.6	-31.9
Aug	86.1	-15.4	-10.8	-24.6	-17.2	-33.1
Jul	87.9	-15.1	-8.5	-21.5	-15.0	-28.5
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	92.8	-9.0	-2.4	-19.9	-11.1	-27.5
Mar	94.4	-7.1	-0.3	-19.1	-12.0	-26.7
Feb	94.5	-5.7	-0.9	-20.3	-14.0	-24.6
Jan	93.5	-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 Annual ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	4.2	4.0
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: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1

The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, increased from 47.0 in Aug to 49.7 in Sep, which is the highest reading in five months resulting from slower rate of decline of manufacturing and improvement in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10075). The pace of decline of new export orders for manufacturing was more moderate than the 40-month record of decline in Aug. Tim Moore, Senior Economist at Markit, finds that output stabilization was attained by executing existing orders because of the lack of new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10075).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	IIQ2012 0.3 ∆%; II/Q2012/IIQ2011 ∆% 0.5 1.0 CA 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12
Consumer Price Index	Aug month NSA ∆%: 0.4 Aug 12-month NSA ∆%: 2.1 Blog 9/16/12
Producer Price Index	Aug month ∆%: 0.5 CSA, 0.6 NSA 12-month NSA ∆%: 1.6 Blog 9/23/12
Industrial Production	Mfg Jul month CSA ∆%: 1.8 12-month NSA: 1.8 Blog 9/9/12
Machine Orders	MFG Jul month ∆%: 0.5 Jul 12-month ∆%: -1.7 Blog 9/9/12
Retail Sales	Aug Month ∆% -0.8 12-Month ∆% 0.3 Blog 9/30/12
Employment Report	Unemployment Rate Jul 5.4% Blog 9/30/12
Trade Balance	Exports Jul 12-month NSA ∆%: 9.2 Imports Jul 12 months NSA ∆%: 1.9 Exports Jul month SA ∆%: 0.5; Imports Jul month SA 0.9 Blog 9/9/12

Links to blog comments in Table DE:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

Germany’s labor market continues to show strength not found in most of the advanced economies, as shown in Table VE-1. The number unemployed, not seasonally adjusted, fell from 2.52 million in Aug 2011 to 2.31 million in Aug 2012, or 8.3 percent, while the unemployment rate fell from 6.0 percent in Aug 2011 to 5.4 percent in Aug 2012. The number of persons in employment, not seasonally adjusted, increased from 39.79 million in Aug 2011 to 40.38 million in Aug 2012, or 1.5 percent, while the employment rate increased from 63.2 percent in Aug 2011 to 64.2 percent in Aug 2012. The number unemployed, seasonally adjusted, fell from 2.32 million in Jul 2012 to 2.31 million in Aug 2012, while the unemployment rate fell from 5.8 percent in Jul 2012 to 5.4 percent in Aug 2012. The number of persons in employment, seasonally adjusted, increased from 40.03 million in Jul 2012 to 40.09 million in Aug 2012, or 0.1 percent.

Table VE-1, Germany, Unemployment Labor Force Survey

	Aug 2012	Jul 2012	Aug 2011
NSA
Number Unemployed Millions	2.31 ∆% Aug 2012/Jul 2012: -5.7 ∆% Aug 2012/Aug 2011: -8.3	2.45	2.52
% Rate Unemployed	5.4	5.8	6.0
Persons in Employment Millions	40.38 ∆% Aug 2012/Jul 2012: 1.5 ∆% Aug 2012/Aug 2011: 1.5	39.77	39.79
Employment Rate	64.2	63.1	63.2
SA
Number Unemployed Millions	2.31 ∆% Aug 2012/Jul  2012: -0.4 ∆% Aug 2012/Aug 2011: –6.1	2.32	2.46
% Rate Unemployed	5.4	5.8	6.0
Persons in Employment Millions	40.09 ∆% Aug 2012/Jul 2012: 0.1 ∆% Aug  2012/Aug 2011: 1.0	40.03	39.71

NSA: not seasonally adjusted; SA: seasonally adjusted

Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/09/PE12_336_132.html;jsessionid=4BCD05CB74C82E0AE31C6FDA269AD89B.cae2

The unemployment rate in Germany as percent of the labor force in Table VE-2 stood at 6.5 percent in Sep 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
Sep 2012	6.5
Aug	6.8
Jul	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 Jun 2012 and 6.8 percent in Jul and Aug 2012.

Chart VE-1, Germany, Unemployment Rate, Unadjusted, Percent

Source: Statistisches Bundesamt Deutschland (Destatis)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 0.8 percent in Aug 2012 after decreases of 1.0 percent in May and 0.4 percent in Apr with increases of 0.3 percent in Jun and 1.0 percent in Mar. The 12-month percentage change is minus 0.8 percent in Aug 2012.

Table VE-3, Retail Sales in Germany Adjusted for Inflation

	12-Month ∆% NSA	Month ∆% SA and Calendar Adjusted
Aug 2012	-0.8	0.3
Jul	-1.6	-1.0
Jun	3.6	0.3
May	-1.3	-0.1
Apr	-5.0	-0.4
Mar	3.6	1.0
Feb	1.8	-0.1
Jan	1.5	-1.1
Dec 2011	0.5	0.5
Nov	0.9	-0.6
Oct	-0.1	0.0
Sep	1.5	0.3
Aug	3.6	-0.4
Jul	-2.1	0.3
Jun	-2.0	2.9
May	4.7	-2.1
Apr	4.8	0.7
Mar	-2.7	-2.7
Feb	3.0	1.0
Jan	3.0	0.9
Dec 2010	0.6	0.7
Dec 2009	-2.2
Dec 2008	3.3
Dec 2007	-6.2
Dec 2006	1.3

Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart VE-2 of the Statistisches 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: Statistisches Bundesamt Deutschland (Destatis), Federal Statistical Office of Germany https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart VE-3 of the Statistisches 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: Statistisches Bundesamt Deutschland (Destatis), Federal Statistical Office of Germany

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIQ1949 to IIQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.8 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using second quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.

Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012

Period	Average ∆%
1949-2012*	3.3
2000-2012*	1.1
2000-2011	1.1
2000-2007	1.7
1990-1999	1.9
1980-1989	2.6
1970-1979	3.8
1960-1969	5.7
1950-1959	4.2

*Second Quarter on Second Quarter

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

The Markit Flash France Composite Output Index fell sharply from 48.0 in Aug to 44.1 in Sep, which is the lowest reading in 41 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10071). Jack Kennedy, Senior Economist at Markit and author of the report, finds weakness in IIIQ2012 GDP with possible contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10071).

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	Aug month ∆% 0.7 12 months ∆%: 2.1 9/16/12
PPI	Aug month ∆%: 1.2 Jun 12 months ∆%: 2.5 Blog 9/30/12
GDP Growth	IIQ2012/IQ2012 ∆%: 0.0 IIQ2012/IIQ2011 ∆%: 0.3 Blog 9/30/12
Industrial Production	Jul SA ∆%: Manufacturing 0.9 YOY NSA ∆%: Manufacturing -2.8 Blog 9/16/12
Consumer Spending	Aug Manufactured Goods ∆%: -1.0 Aug 12-Month Manufactured Goods ∆%: -0.9 Blog 9/30/12
Employment	IIQ2012 Unemployed 2.785 million Unemployment Rate: 9.7% Employment Rate: 63.9% Blog 9/9/12
Trade Balance	Jul Exports ∆%: month 0.8, 12 months 3.6 Jul Imports ∆%: month -3.5, 12 months -1.9 Blog 9/9/12
Confidence Indicators	Historical averages 100 Sep Mfg Business Climate 90 Blog 9/30/12

Links to blog comments in Table FR:

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

Table VF-1 provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIQ1949 to IIQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.8 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using second quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.

Table VF-1, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012

Period	Average ∆%
1949-2012*	3.3
2000-2012*	1.1
2000-2011	1.1
2000-2007	1.7
1990-1999	1.9
1980-1989	2.6
1970-1979	3.8
1960-1969	5.7
1950-1959	4.2

*Second Quarter on Second Quarter

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

Growth of GDP in a quarter relative to the prior quarter is provided for France in Table VF-2. GDP growth in IIQ2012 was flat for a third consecutive quarter since IVQ2011. The French economy grew 0.1 in IIQ2011 and 0.2 percent in IIIQ2011. Growth in the twelve quarters of expansion from IIIQ2009 to IIQ2011 accumulated 3.7 percent at the annual equivalent rate of 1.2 percent while accumulated growth of 0.3 percent from the second quarter of 2011 to the second quarter of 2012 has been at the annual equivalent rate of 0.2 percent. Recovery has been much weaker than the cumulative 2.7 percent in the four quarters of 2006. Weak recoveries in advanced economies have prevented full utilization of labor, capital and productive resources.

Table VF-2, France, Quarterly Real GDP Growth, Quarter on Prior Quarter ∆%

	IQ	IIQ	IIIQ	IVQ
2012	0.0	0.0
2011	0.9	0.1	0.2	0.0
2010	0.3	0.7	0.4	0.4
2009	-1.7	0.0	0.1	0.5
2008	0.3	-0.6	-0.5	-1.6
2007	0.6	0.5	0.4	0.3
2006	0.7	1.0	0.1	0.9
2005	0.1	0.3	0.5	0.7
2004	0.5	0.8	0.4	0.8
2003	0.2	0.0	0.7	0.6
2002	0.7	0.5	0.3	-0.1
2001	0.5	0.3	0.2	-0.5
2000	1.1	0.7	0.5	0.9
1999	0.6	0.9	1.0	1.2

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

Growth rates of France’s real GDP in a quarter relative to the same quarter a year earlier are shown in Table VF-3. France has not recovered the rates of growth in excess of 2 percent prior to the global recession. GDP fell 4.3 percent in IQ2009, 3.7 percent in IIQ2009, 3.1 percent in IIIQ2009 and 1.0 percent in IVQ2009. Growth in IVQ2011 relative to IVQ2010 was 1.2 percent and GDP growth declined to 0.4 percent in IQ2012 and 0.3 IIQ2012 relative to the same quarter a year earlier.

Table VF-3, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2012	0.4	0.3
2011	2.3	1.7	1.5	1.2
2010	1.0	1.6	1.9	1.8
2009	-4.3	-3.7	-3.1	-1.0
2008	1.6	0.5	-0.5	-2.3
2007	2.6	2.1	2.5	1.9
2006	2.3	3.0	2.5	2.7
2005	2.1	1.7	1.9	1.7
2004	1.8	2.6	2.3	2.5
2003	0.9	0.4	0.8	1.6
2002	0.6	0.9	0.9	1.3
2001	2.6	2.2	1.9	0.5
2000	4.3	4.1	3.6	3.3
1999	2.9	2.8	3.2	3.7

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

Percentage changes and contributions of segments of GDP in France are provided in Table VF-4. Internal demand contributed 0.1 percentage points to GDP growth in IIQ2012, 0.0 percentage points to GDP growth in IQ2012, 0.3 percentage points in IVQ2011 and 0.2 percentage points in IIIQ2011. Net foreign trade subtracted 0.4 percentage points of GDP growth in IIQ2012 and 0.1 percentage points in IQ2012 but contributed 0.7 percentage points in IVQ201 after contributing 0.4 percentage points in IIIQ2011.

Table VF-4, France, Contributions to GDP Growth, Calendar and Seasonally Adjusted, %

∆% from Prior Period	IIIQ 2011	IVQ 2011	IQ 2012	IIQ 2012	2011	2012
GDP	0.2	0.0	0.0	0.0	1.7	0.2
Imports	0.0	-1.1	0.7	1.7	5.2	0.9
Household Consump.	0.3	-0.1	0.1	-0.1	0.2	-0.1
Govt. Consump.	0.2	0.2	0.5	0.4	0.2	1.1
GFCF	0.2	1.3	-0.8	0.5	3.5	0.7
Exports	1.6	1.4	0.1	0.2	5.5	2.2
% Point Contribs.
Internal Demand ex Inventory Changes	0.2	0.3	0.0	0.1	0.9	0.4
Inventory Changes	-0.4	-0.9	0.1	0.3	0.8	-0.6
Net Foreign Trade	0.4	0.7	-0.1	-0.4	0.0	0.4

Notes: Consump.: Consumption; Gvt.: Government; GFCF: Gross Fixed Capital Formation; Contribus.: Contributions

Source:  Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques provides percentage point contributions to GDP growth. GDP grew sharply into IQ2011 and then stalled in IIQ2011. Final consumption was the key negative contributor to GDP growth in IIQ2011. GDP growth strengthened in IIIQ2011 with the impulse originating in final consumption. Net trade, gross fixed capital formation (GFCF) and final consumption drove GDP growth in IVQ2011. Final consumption and inventory change were positive contributors to GDP growth in IQ2012 with subtractions by GFCF (Gross Fixed Capital Formation) and net trade. Net trade subtracted from growth in IIQ2012.

Chart VF-1, France, Percentage Point Contributions to GDP Growth

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28

The Aug monthly report of household expenditures in consumption goods for France is in Table VF-5. Total consumption decreased 0.8 percent in Jun 2012. Consumption of manufactured products decreased 1.0 percent in Aug after increasing 0.4 percent in Jul. Total consumption decreased 0.5 percent in Aug 2012 relative to Aug 2011 and consumption of manufactured goods decreased 0.9 percent in Aug 2012 relative to Aug 2011. Internal demand is weak throughout most advanced economies.

Table VF-5, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading-Days SA

	Total	Food	Eng. Goods	Energy	Mfg Goods
Aug 2012	-0.8	-0.4	-0.8	-1.8	-1.0
Aug 2012/Aug 2011	-0.5	-0.4	-0.4	-1.6	-0.9
Jul	0.4	0.1	0.6	0.5	0.4
Jun	0.4	1.1	-0.1	-0.2	0.5
May	0.2	0.1	1.9	-3.2	1.3
Apr	0.6	-0.6	-2.2	10.2	-1.3
Mar	-2.6	-2.1	0.8	-11.4	-0.6
Feb	2.2	1.2	-0.8	11.7	0.5
Jan	-0.3	1.3	-2.5	2.3	-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	-0.8	0.1
Sep	-0.1	0.5	0.5	-2.9	0.0
Aug	0.7	0.2	0.3	2.9	0.8
Jul	-0.3	0.3	-0.8	-0.1	-0.3
Jun	0.6	-0.9	0.6	3.0	0.5
May	0.1	-0.5	-0.5	3.3	-0.7
Apr	-1.5	1.0	-1.9	-6.2	-0.9
Mar	-0.7	-0.3	-1.1	-0.3	-0.8
Feb	0.3	0.5	1.2	-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=20120928

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 downward trend of monthly consumption with fluctuations.

Chart VF-2, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120928

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds consecutive worsening conditions in Jun-Jul with marginal improvement in Aug-Sep. Table VF-6 shows the INSEE business climate manufacturing indicator. The headline synthetic index decreased from 91 in Jun to 89 in Jul but increased to 90 in both Aug and Sep. The final row shows general production expectations deteriorating from minus 32 in Jun to minus 44 in Jul and Aug and minus 52 in Sep, well below the average since 1976 of minus 8. The indicator of demand and export order levels fell from minus 30 in Jun to minus 36 in Jul but then improved to minus 28 in both Aug and Sep, which is still well below the average since 1976 of minus 12.

Table VF-6, France, Business Climate Indicators of INSEE

Mfg 2012	Average since 1976	Jun	Jul	Aug	Sep
Synthetic Index	100	91	89	90	90
Recent Changes in Output	5	-7	-10	-9	-18
Finished- Goods Inventory Level	13	11	12	13	8
Demand and Total Order Levels	-17	-33	-30	-33	-28
Demand and Export Order Levels	-12	-30	-36	-28	-28
Personal Production Expectations	5	-5	-9	-7	-6
General Production Expectations	-9	-32	-44	-44	-52

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120925

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jul 2012 and a marginal upward move in Aug-Sep 2012.

Chart VF-3, France, INSEE Industrial Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120925

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jul 2012 with new improvement in Aug 2012.

Chart VF-4, INSEE Business Climate Manufacturing Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120925

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar followed by weakens in Apr through Jul 2012 and stability in Aug-Sep 2012.

Chart VF-5, Climate Manufacturing General Production, Personal Production and Recent Changes in Output of INSEE, SA %

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120925

VG Italy. The Markit/ADACI Business Activity Index increased from 43.0 in Jul to 44.0 in Aug, indicating sharp contraction of output of Italy’s services sector in 15 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10045). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the rate of contraction in services moderated in Aug but continues at very weak relative levels in the history of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10045). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), fell from 44.3 in Jul to 43.6 in Aug for 11 consecutive months of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10011). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds deeper fall in Italy’s manufacturing with the second worst reading in more than three years, affecting GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10011). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Sep month ∆%: 0.0 Sep 12-month ∆%: 3.2 Blog 9/30/12
Producer Price Index	Aug month ∆%: 0.8 Aug 12-month ∆%: 3.0 Blog 9/30/12
GDP Growth	IIQ2012/IQ2012 SA ∆%: minus 0.8 IIQ2012/IIQ2011 NSA ∆%: minus 2.6 Blog 9/16/12
Labor Report	Jul 2012 Participation rate 64.0% Employment ratio 57.1% Unemployment rate 10.7% Blog 9/2/12
Industrial Production	Jul month ∆%: -0.2 12 months ∆%: minus 7.3 Blog 9/16/12
Retail Sales	Jul month ∆%: -0.2 Jul 12-month ∆%: -3.2 Blog 9/30/12
Business Confidence	Mfg Sep 88.3, May 86.5 Construction Sep 86.5, May 82.2 Blog 9/30/12
Trade Balance	Balance Jul SA €1607 million versus Jun €801 Exports Jul month SA ∆%: 0.3; Imports Jul month ∆%: 2.9 Exports 12 months Jul NSA ∆%: +4.3 Imports 12 months NSA ∆%: minus 4.3 Blog 9/23/12

Links to blog comments in Table IT:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/2/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of_2.html

An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales decreased 0.2 percent in Jul 2012 relative to Jul 2012, decreased 1.0 percent in May-Jul 2012 relative to Feb-Apr 2012, decreased 3.2 percent in Jul 2012 relative to Jul 2011 and decreased 1.7 percent in Jan-Jul 2012 relative to Jan-Jul 2011.

Table VG-1, Italy, Retail Sales ∆%

	Jul 2012/ Jun 2012 SA	May-Jul 12/    Feb-Apr 12 SA	Jul 2012/ Jul 2011 NSA	Jan-Jul 2012/ Jan-Jul 2011
Total	-0.2	-1.0	-3.2	-1.7
Food	-0.1	-0.6	-2.0	-0.1
Non-food	-0.3	-1.2	-3.8	-2.4

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71250

Chart VG-1 provides 12-month percentage changes of retail sales in Italy. There are only positive changes in Dec 2010 and Apr 2011. Retail sales fell relative to a year earlier in most months of 2011 with improvement in Feb and Mar 2012 but sharp decline in Apr 2012 followed by improvements in May and Jun 2012 and another sharp drop in Jul 2012.

Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

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

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage changes in 2011 and Jan-Jul 2012 and annual rates from 2008 to 2011 in Table VG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but few monthly increases of 0.5 percent in Oct, 1.3 percent in Apr and 0.1 percent in Mar. There are negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr 2011 and 0.0 percent in Feb. There is only one month with positive 12-month percentage change in 2012, 1.5 percent in Mar 2012. Retail sales grew 1.2 percent in Jan 2012 and 0.8 percent in Feb 2012, reducing sharply the 12-month percentage change from minus 3.7 percent in Dec 2011 to only minus 1.1 percent in Jan 2012 and positive 0.5 percent in the 12 months ending in Feb 2012 and 1.5 percent in the 12 months ending in Mar 2012. Decline of the monthly rates in Mar 2012 of 0.8 percent and 1.6 percent in Apr 2012 pulled down the 12-month percentage change in Apr to minus 6.8 percent. Increase of 0.1 percent in May 2012 resulted in decrease of 1.7 percent in 12 months and growth of 0.4 percent in Jun 2012 further reduced the 12-month percentage change to minus 0.5 percent. Further decline of 0.2 percent in Jul 2012 resulted in decline of 3.2 percent in 12 months.

Table VG-2, Italy, Retail Sales Month and 12-Month ∆%

	12-Month ∆% NSA	Month ∆% SA
Jul 2012	-3.2	-0.2
Jun	-0.5	0.4
May	-1.7	0.1
Apr	-6.8	-1.6
Mar	1.5	-0.8
Feb	0.5	0.8
Jan	-1.1	1.2
Dec 2011	-3.7	-1.0
Nov	-1.8	-0.7
Oct	-1.4	0.5
Sep	-1.6	-0.4
Aug	-0.3	-0.3
July	-2.3	-0.1
Jun	-1.1	-0.6
May	-0.4	-0.5
Apr	2.2	1.3
Mar	-2.1	0.1
Feb	0.0	-0.7
Jan	-1.1	-1.0
Dec 2010	0.6	0.6
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71250

Italy’s index of business confidence in manufacturing and construction is provided in Table VG-3. There has been improvement of manufacturing confidence below the historical average of 100 from 86.5 in May with reading of 88.3 in Sep. Order books have improved from minus 42 in May to minus 40 in Sep. There is mild improvement in construction with an increase of the index from 82.2 in May to 86.5 in Sep.

Table VG-3, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Sep	Aug	Jul	Jun	May
Mfg Confidence	88.3	87.3	87.3	88.8	86.5
Order Books	-40.0	-40	-41	-40	-42
Stocks Finished Products	1	2	2	1	2
Production Expectation	-7	-8	-7	-5	-8
Construction Confidence	86.5	82.4	84.1	85.7	82.2
Order Books	-46	-44	-44	-44	-44
Employment	-5	-17	-15	-12	-19

Mfg: manufacturing

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/71280

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

VH United Kingdom. Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 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 0.9 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	0.9
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/naa2/quarterly-national-accounts/q2-2012/index.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® increased from 51.0 in Jul to 53.7 in Aug with growth during 20 consecutive months, increasing at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10047). Chris Williamson, Chief Economist at Markit, finds rising activity in services increases hopes for positive reading of GDP in IIIQ2012 after decline of 0.5 percent in IIQ2012 but with remaining uncertainty on construction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10047). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased from 45.2 in Jul to 49.5 in Aug, for the highest reading in four months and approaching the expansion barrier at 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10013). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that weakness in Europe and lower world economic growth could affect manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10013).

Table UK, UK Economic Indicators

CPI	Aug month ∆%: 0.5 Aug 12-month ∆%: 2.5 Blog 9/23/12
Output/Input Prices	Output Prices: Jul 12-month NSA ∆%: 1.7; excluding food, petroleum ∆%: 1.3 Input Prices: Jul 12-month NSA ∆%: -2.4 Excluding ∆%: -1.5 Blog 9/9/12
GDP Growth	IIQ2012 prior quarter ∆% minus 0.4; year earlier same quarter ∆%: minus 0.5 Blog 9/30/12
Industrial Production	Jul 2012/Jul 2011 NSA ∆%: Production Industries minus 0.8; Manufacturing minus 0.5 Blog 9/9/12
Retail Sales	Aug month ∆%: -0.2 Aug 12-month ∆%: +2.7 Blog 9/23/12
Labor Market	May-Jul Unemployment Rate: 8.1%; Claimant Count 4.8%; Earnings Growth 1.5% Blog 9/16/12
Trade Balance	Balance Jul minus ₤1517 million Exports Jul ∆%: 5.2; May-Jul ∆%: -0.7 Imports Jul ∆%: -1.7 May-Jul ∆%: -0.4 Blog 9/16/12

Links to blog comments in Table UK:

9/23/12 http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html

9/16/12 http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html

9/9/12 http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or_10.html

Annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 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 0.9 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-1, 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	0.9
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/naa2/quarterly-national-accounts/q2-2012/index.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 1998. Growth in IIQ2011 was reduced to minus 0.1 percent. The estimate for IIIQ2011 is at 0.5 percent. The estimate for IVQ2011 is contraction of 0.4 percent. The GDP of the UK contracted in a second consecutive quarter by 0.3 percent in the latest estimate for IQ2012. The third estimate for IIQ2012 is contraction of 0.4 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table VH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2012	-0.3	-0.4
2011	0.5	0.1	0.5	-0.4
2010	0.6	0.7	0.6	-0.4
2009	-1.5	-0.2	0.4	0.4
2008	0.1	-0.9	-1.8	-2.1
2007	1.1	1.2	1.2	0.2
2006	0.5	0.3	0.2	0.9
2005	0.6	1.2	0.8	1.1
2004	0.7	0.2	0.0	0.6
2003	0.6	1.2	1.2	1.2
2002	0.4	0.8	0.8	0.9
2001	1.3	0.7	0.5	0.4
2000	1.0	1.4	0.3	0.2
1999	0.5	0.3	1.7	1.3
1998	0.8	0.7	0.6	0.9

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six consecutive quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 4.6 percent in IVQ2008, 6.1 percent in IQ2009, 5.4 percent in IIQ2009 and 3.3 percent in IIIQ2009. (3) The economy bounced strongly with 2.1 percent in IIQ2010, 2.4 percent in IIIQ2010 and 1.5 percent in IVQ2010. (4) Recovery in 2011 did not continue at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.5 percent in IVQ2010 to 1.4 percent in IQ2011, 0.7 percent in IIQ2011, 0.6 percent in IIIQ2011 and 0.7 percent in IVQ2011 but contraction of 0.1 percent in IQ2012 relative to IQ2011 and contraction of 0.5 percent in IIQ2012 relative to IIQ2011. In IQ2012, GDP fell 0.3 percent for a second consecutive quarter and fell 0.1 percent relative to a year earlier. In IIQ2012, GDP fell 0.4 percent relative to IQ2012 and fell 0.5 percent relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

Table VH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2012	-0.1	-0.5
2011	1.4	0.7	0.6	0.7
2010	1.2	2.1	2.4	1.5
2009	-6.1	-5.4	-3.3	-0.9
2008	2.7	0.5	-2.4	-4.6
2007	2.6	3.6	4.6	3.8
2006	3.7	2.7	2.1	2.0
2005	1.5	2.5	3.3	3.8
2004	4.4	3.4	2.2	1.6
2003	3.3	3.6	4.0	4.3
2002	2.0	2.2	2.5	3.1
2001	3.3	2.5	2.8	2.9
2000	4.4	5.6	4.1	2.9
1999	2.8	2.4	3.5	4.0
1998	4.0	3.7	3.3	3.1

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Growth rates of GDP and components of gross value added in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Contraction of GDP in IIQ2012 resulted from sharp contraction of construction by 3.0 percent with total production declining 0.7 percent and manufacturing 0.8 percent while services fell 0.1 percent. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 5.9 percent and contraction of total production by 0.2 percent with manufacturing unchanged while services crawled 0.2 percent. Contraction of GDP of 0.4 percent in IVQ2011 resulted from sharp contraction of 1.4 percent in total production, with manufacturing declining 1.0 percent. Even services fell by 0.1 percent in IVQ2011. Growth of 0.5 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components. Growth in 2011 originated mostly in services. GDP contracted 0.4 percent in IVQ2010, 0.4 percent in IVQ2010, 0.3 percent in IQ2012 and 0.4 percent in IIQ2012. All components are negative in IVQ2011 with exception of 0.2 percent for construction and services fell 0.1 percent while all components are negative in IQ2012 with meager growth of services of 0.2 percent and unchanged manufacturing. All components are negative in IIQ2012 with output falling 0.7 percent, construction 3.0 percent and services 0.1 percent.

Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter 

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	156	105	68	770
IIQ12	-0.4	-0.7	-0.8	-3.0	-0.1
IQ12	-0.3	-0.2	0.0	-5.9	0.2
IVQ11	-0.4	-1.4	-1.0	0.2	-0.1
IIIQ11	0.5	-0.2	-0.4	-0.5	0.8
IIQ11	0.1	-1.1	0.2	1.6	0.3
IQ11	0.5	-0.1	0.7	0.0	0.7
IVQ10	-0.4	0.1	0.5	-1.8	-0.4
IIIQ10	0.6	0.4	1.6	2.9	0.5
IIQ10	0.7	1.4	1.9	6.3	0.1
IQ10	0.6	1.1	0.8	2.3	0.2
IV09	0.4	0.3	1.1	0.5	0.6
III09	0.4	-1.1	-0.4	-0.1	0.5
II09	-0.2	0.0	0.2	-2.6	0.0
I09	-1.5	-4.3	-5.2	-5.8	-0.5
IV08	-2.1	-4.9	-5.2	-5.8	-1.4
III08	-1.8	-1.1	-1.3	-3.0	-1.6
II08	-0.9	-1.1	-1.6	-2.0	-0.6
I08	0.1	-0.3	0.4	1.6	0.0

Note: CONS: construction’ MFG: manufacturing

*Weights (2009) may not add because of rounding and exclusion of Agriculture, Forestry and Fishing with weight of 6. Output components are valued at basic prices while GDP is valued at market prices. The preliminary estimate places GDP next to gross value added by components because it is the only contribution to change in GDP.

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 0.7 percent in IIQ2012 with manufacturing falling 0.8 percent and construction dropping 3.0 percent. Total production fell 0.2 percent in IQ2012 with manufacturing unchanged while construction fell 5.9 percent and services increased 0.2 percent. Total production fell 1.4 percent in IVQ2011 with manufacturing declining 1.0 percent. Services fell 0.1 percent in IVQ2011 and grew 0.2 percent in IQ2012, reducing the support of economic activity in prior quarters.

VH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Agriculture	8.2	-1.0	-0.7	-2.4	-2.3	-2.6
Total Production	-0.1	-1.1	-0.2	-1.4	-0.2	-0.7
Manufacturing	0.7	0.2	-0.4	-1.0	0.0	-0.8
Extraction	-3.9	-7.0	-1.0	-2.7	-3.0	-3.3
Electricity, gas and air	-4.7	-3.1	1.9	-3.9	1.2	5.1
Water & sewerage	5.5	-0.9	0.2	0.4	1.1	-3.2
Construction	0.0	1.6	-0.5	0.2	-5.9	-3.0
Total Services	0.6	0.3	0.8	-0.1	0.2	-0.1
Distn, hotels & catering	0.7	0.4	0.2	-0.7	0.1	0.0
Transport, storage & comms	-0.6	0.4	0.9	-0.7	0.9	-1.3
Business services & finance	0.6	0.3	1.3	0.0	0.0	0.0
Government & other	1.3	0.2	0.4	0.3	0.3	0.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IIQ2012, total production deducted 0.1 percentage points with manufacturing deducting 0.1 percentage points, construction deducting 0.2 percentage points and total services deducted 0.1 percentage points. In IQ2012, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.4 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government.

Table VH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Agriculture	0.0	0.0	0.0	0.0	0.0	0.0
Total Production	0.0	-0.2	0.0	-0.2	0.0	-0.1
Manufacturing	0.1	0.0	0.0	-0.1	0.0	-0.1
Extraction	-0.1	-0.1	0.0	0.0	-0.1	-0.1
Electricity, gas and air	-0.1	0.0	0.0	-0.1	0.0	0.1
Water & sewerage	0.1	0.0	0.0	0.0	0.0	0.0
Construction	0.0	0.1	0.0	0.0	-0.4	-0.2
Total Services	0.5	0.2	0.6	-0.1	0.1	-0.1
Distn, hotels & catering	0.1	0.1	0.0	-0.1	0.0	0.0
Transport, storage & comms	-0.1	0.0	0.1	-0.1	0.1	-0.1
Business services & finance	0.2	0.1	0.4	0.0	0.0	0.0
Government & other	0.3	0.0	0.1	0.1	0.1	0.1

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Table VH-7 provides UK growth of value added by components on a quarter relative to the same quarter a year earlier. There was significant deceleration in growth of total production from 1.9 percent in IQ2011 to minus 2.5 percent in IIQ2012 with negative growth in all quarters from IIQ2011 to IIQ2012. Manufacturing growth fell from 4.7 percent in IQ2011 to minus 2.2 percent in IIQ2012. Construction growth fell from 7.9 percent in IQ2011 to minus 9.0 percent in IIQ2012. Growth of services has been more moderate with 1.2 percent in IQ2012 and 0.8 percent in IIQ2012.

Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Same Quarter Prior Year

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Agriculture	-5.1	-4.2	-2.9	3.7	-6.3	-7.8
Total Production	1.9	-0.7	-1.3	-2.8	-2.9	-2.5
Manufacturing	4.7	3.0	1.0	-0.5	-1.2	-2.2
Extraction	-10.4	-16.9	-15.8	-13.9	-13.1	-9.7
Electricity, gas and air	-3.0	-5.6	-0.1	-9.5	-4.0	4.2
Water & sewerage	7.1	3.9	3.4	5.2	0.8	-1.7
Construction	7.4	2.6	-0.7	1.4	-4.6	-9.0
Total Services	0.9	1.0	1.4	1.6	1.2	0.8
Distn, hotels & catering	0.5	0.7	0.5	0.6	0.0	-0.3
Transport, storage & comms	0.9	0.9	0.9	0.1	1.5	-0.3
Business services & finance	1.3	1.2	2.0	2.2	1.6	1.3
Government & other	0.6	1.1	1.3	2.2	1.2	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Table VH-8 provides contribution to growth on same quarter a year earlier. Contributions by total production have been negative in all quarter from IIQ2011 to IIQ2012. Manufacturing contributed minus 0.1 percentage points in IQ2012 and minus 0.2 percentage points in IIQ2012 compared with contribution of 0.5 percentage points in IQ2011 and 0.3 percentage points in IIQ2011. Total services contributed 0.9 percentage points in IQ2012 and 0.6 percentage points in IIQ2012.

VH-8, UK, Contribution to Growth on Same Quarter Prior Year of Value Added by Components, %

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Agriculture	0.0	0.0	0.0	0.0	0.0	0.0
Total Production	0.3	-0.1	-0.2	-0.4	-0.4	-0.4
Manufacturing	0.5	0.3	0.1	-0.1	-0.1	-0.2
Extraction	-0.2	-0.4	-0.4	-0.3	-0.3	-0.2
Electricity, gas and air	0.0	-0.1	0.0	-0.1	-0.1	0.1
Water & sewerage	0.1	0.0	0.0	0.1	0.0	0.0
Construction	0.5	0.2	-0.1	0.1	-0.3	-0.7
Total Services	0.7	0.8	1.1	1.3	0.9	0.6
Distn, hotels & catering	0.1	0.1	0.1	0.1	0.0	0.0
Transport, storage & comms	0.1	0.1	0.1	0.0	0.2	0.0
Business services & finance	0.4	0.3	0.6	0.6	0.5	0.4
Government & other	0.2	0.3	0.3	0.5	0.3	0.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Table VH-9 provides UK growth of value added by components relative to a year earlier for 2011. There was significant deceleration in growth of total production from 2.1 percent in 2010 to minus 0.7 percent in 2011. Manufacturing growth fell from 3.8 percent in 2010 to 2.0 percent in 2011. Construction growth fell from 7.9 percent in 2010 to 2.6 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.7 percent in 2007 to decline 0.2 percent in 2008 and 2.1 percent in 2009. Growth of services in 2010 and 2011 has been more moderate at 1.1 percent and 1.2 percent, respectively.

Table VH-9, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2011
Agriculture	-2.3
Total Production	-0.7
Manufacturing	2.0
Extraction	-14.2
Electricity, gas and air	-4.6
Water & sewerage	4.9
Construction	2.6
Total Services	1.2
Distn, hotels & catering	0.6
Transport, storage & comms	0.7
Business services & finance	1.7
Government & other	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Total production subtracted 0.1 percentage points from value added in the UK in 2011, as shown in Table VH-10, compared with addition of 0.3 percentage points in 2010. Total services added 0.9 percentage points in 2010 and 1.0 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.4 percent in the final quarter of 2011, 0.3 percent in the first quarter of 2012 and 0.4 percent in the second quarter of 2012.

VH-10, UK, Contribution to Growth on Prior Year of Value Added by Components, %

Component	2011
Agriculture	0.0
Total Production	-0.1
Manufacturing	0.2
Extraction	-0.3
Electricity, gas and air	-0.1
Water & sewerage	0.1
Construction	0.2
Total Services	1.0
Distn, hotels & catering	0.1
Transport, storage & comms	0.1
Business services & finance	0.5
Government & other	0.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Table VH-11 provides growth on prior quarter of expenditure components of GDP. Household final consumption increased 0.3 percent in IQ2012 and fell 0.2 percent in IIQ2012. Gross fixed capital formation fell 2.7 percent in IIQ2011 after being more dynamic in earlier quarters. Exports fell 1.6 percent in IQ2012 and 1.1 percent in IIQ2012 while imports increased 1.4 percent in IIQ2012.

Table VH-11, UK, Growth Quarter on Prior Quarter, Expenditure Components of GDP

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Household final consumption expenditure	-1.2	-0.3	0.0	0.2	0.3	-0.2
NPISH final consumption expenditure	-0.4	2.1	-0.6	0.3	0.1	1.9
General government final consumption expenditure	0.2	0.3	0.1	0.3	3.1	-1.6
Gross capital formation	-1.3	4.3	3.9	-6.0	-5.1	6.0
- of which GFCF	-1.9	0.0	0.5	-0.7	3.2	-2.7
- of which Bus. Investment	-2.2	4.6	2.3	2.6	-2.6	0.9
Exports	1.6	-2.3	0.0	3.0	-1.6	-1.1
less Imports	-2.5	-0.5	0.3	1.6	-0.1	1.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Contributions to growth quarter on prior quarter of expenditure components of GDP are provided in Table VH-12. Household final consumption added 0.2 percentage points in IQ2012 and deducted 0.1 percentage points in IIQ2012. Gross fixed capital formation (GFCF) deducted 0.4 percentage points in IIQ2012 after adding 0.5 percentage points in IQ2012. Net trade deducted 0.8 percentage points in IIQ2012.

Table VH-12, UK, Contribution to Growth Quarter on Prior Quarter, Expenditure Components of GDP

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Household final consumption expenditure	-0.7	-0.2	0.0	0.1	0.2	-0.1
NPISH final consumption expenditure	0.0	0.1	0.0	0.0	0.0	0.1
General government final consumption expenditure	0.1	0.1	0.0	0.1	0.7	-0.4
Gross capital formation	-0.2	0.6	0.6	-0.9	-0.8	0.9
- of which GFCF	-0.3	0.0	0.1	-0.1	0.5	-0.4
- of which Bus. Investment	-0.2	0.4	0.2	0.2	-0.2	0.1
Exports	0.5	-0.7	0.0	0.9	-0.5	-0.3
less Imports	-0.8	-0.2	0.1	0.5	0.0	0.4
Net trade	1.3	-0.5	-0.1	0.4	-0.5	-0.8

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Growth of expenditure components of GDP on a quarter relative to the same quarter a year earlier are provided in Table VH-13. Household financial consumption expenditure was negative in all quarters from IQ2011 to IVQ2012 and grew 0.2 percent in both IQ2012 and IIQ2012. Gross fixed capital formation (GFCF) fell 1.6 percent in IIQ2012 relative to a year earlier after declining 3.2 percent in IQ2012 relative to a year earlier. Exports grew 0.3 percent in IIQ2012 relative to a year earlier.

Table VH-13, UK, Growth Quarter on Same Quarter Prior Year, Expenditure Components of GDP

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Household final consumption expenditure	-0.2	-1.4	-1.2	-1.4	0.2	0.2
NPISH final consumption expenditure	5.4	4.3	1.9	1.3	1.8	1.7
General government final consumption expenditure	-0.4	-0.2	0.6	0.9	3.8	1.9
Gross capital formation	-1.6	3.8	-0.5	0.6	-3.2	-1.6
- of which GFCF	-3.6	-0.9	-3.1	-2.0	3.1	0.3
- of which Bus. Investment	-5.1	5.4	4.2	7.4	6.9	3.1
Exports	10.0	3.5	2.6	2.3	-0.9	0.3
less Imports	4.0	0.5	-1.3	-1.1	1.3	3.2

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

Table VH-14 provides contributions to growth on a quarter relative to the same quarter a year earlier by expenditure components of GDP. Household final consumption deducted from IQ2011 to IVQ2011 and added 0.1 percentage points in both IQ2012 and IIQ2012. Gross fixed capital formation deducted 0.2 percentage points in IIQ2012. Net trade deducted 0.7 percentage points in IQ2012 and deducted 0.9 percentage points in IIQ2012.

Table VH-14, UK, Contribution to Growth Quarter on Same Quarter Prior Year, Expenditure Components of GDP

Component	2011 Q1	2011 Q2	2011 Q3	2011 Q4	2012 Q1	2012 Q2
Household final consumption expenditure	-0.2	-0.9	-0.8	-0.8	0.1	0.1
NPISH final consumption expenditure	0.1	0.1	0.0	0.0	0.0	0.0
General government final consumption expenditure	-0.1	-0.1	0.1	0.2	0.9	0.4
Gross capital formation	-0.2	0.6	-0.1	0.1	-0.5	-0.2
- of which GFCF	-0.5	-0.1	-0.5	-0.3	0.5	0.0
- of which Bus. Investment	-0.4	0.4	0.3	0.6	0.5	0.3
Exports	2.9	1.0	0.8	0.7	-0.3	0.1
less Imports	1.2	0.2	-0.4	-0.4	0.4	1.0
Net trade	1.7	0.9	1.2	1.1	-0.7	-0.9

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2012/index.html

© Carlos M. Pelaez, 2010, 2011, 2012