Mediocre and Decelerating United States Economic Growth at around 1.7 Percent per Year, Contracting Private Domestic Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income per Capita, Unresolved US Balance of Payments and Fiscal Imbalance Threatening Risk Premium on Treasury Securities, World Financial Turbulence and Economic Slowdown with Global Recession Risk: Part II

 

Mediocre and Decelerating United States Economic Growth at around 1.7 Percent per Year, Contracting Private Domestic Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income per Capita, Unresolved US Balance of Payments and Fiscal Imbalance Threatening Risk Premium on Treasury Securities, World Financial Turbulence and Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Mediocre and Decelerating United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

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

IIA Stagnating Real Disposable Income and Consumption Expenditures

IIA1 Stagnating Real Disposable Income and Consumption Expenditures

IIA2 Financial Repression

IIB Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

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/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth and households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that threatens risk premium on Treasury debt with Himalayan interest rate hikes; 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 financial 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 Dec 14 and daily values throughout the week ending on Dec 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 Dec 14 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Dec 14, 2012”, first row “USD/EUR 1.3162 -1.8 %,” provides the information that the US dollar (USD) depreciated 1.8 percent to USD 1.3162/EUR in the week ending on Fri Dec 14 relative to the exchange rate on Fri Dec 7. 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 1.3162/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Dec 14, depreciating to USD 1.3229/EUR on Tue Dec 18, or by 0.5 percent. The dollar depreciated because more dollars, $1.3229, were required on Tue Dec 18 to buy one euro than $1.3162 on Dec 14. 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 1.3162/EUR on Dec 14; 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 Dec 14, to the last business day of the current week, in this case Fri Dec 21, such as depreciation by 0.2 percent to USD 1.3189/EUR by Dec 21; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 0.2 percent from the rate of USD 1.3162/EUR on Fri Dec 14 to the rate of USD 1.3189/EUR on Fri Dec 21 {[(1.3189/1.3162) – 1]100 = 0.2%} and appreciated (denoted by positive sign) by 0.4 percent from the rate of USD 1.3244 on Thu Dec 20 to USD 1.3189/EUR on Fri Dec 21 {[(1.3189/1.3244) -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 Dec 17 to Dec 21, 2012

Fri Dec 14, 2012	M 17	Tue 18	W 19	Thu 20	Fr 21
USD/EUR 1.3162 -1.8%	1.3163 0.0% 0.0%	1.3229 -0.5% -0.5%	1.3227 -0.5% 0.0%	1.3244 -0.6% -0.1%	1.3189 -0.2% 0.4%
JPY/  USD 83.51 -1.2%	83.89 -0.5% -0.5%	84.20 -0.8% -0.4%	84.40 -1.1% -0.2%	84.39 -1.1% 0.0%	84.24 -0.9% 0.2%
CHF/  USD 0.9179 1.8%	0.9176 0.0% 0.0%	0.9130 0.5% 0.5%	0.9134 0.5% 0.0%	0.9116 0.7% 0.2%	0.9156 0.3% -0.4%
CHF/ EUR 1.2081 0.0%	1.2079 0.0% 0.0%	1.2077 0.0% 0.0%	1.2080 0.0% 0.0%	1.2073 0.1% 0.1%	1.2076 0.0% 0.0%
USD/  AUD 1.0565 0.9465 0.7%	1.0553 0.9476 -0.1% -0.1%	1.0535 0.9492 -0.3% -0.2%	1.0481 0.9541 -0.8% -0.5%	1.0483 0.9539 -0.8% 0.0%	1.0402 0.9614 -1.6% -0.8%
10 Year  T Note 1.704	1.775	1.824	1.801	1.798	1.77
2 Year     T Note 0.232	0.256	0.28	0.28	0.27	0.272
German Bond 2Y -0.04 10Y 1.35	2Y -0.01 10Y 1.37	2Y 0.00 10Y 1.41	2Y -0.01 10Y 1.43	2Y 0.00 10Y 1.42	2Y -0.01 10Y 1.38
DJIA 13135.01 -0.2%	13235.39 0.8% 0.8%	13350.96 1.6% 0.9%	13251.97 0.9% -0.7%	13311.72 1.3% 0.5%	13190.84 0.4% -0.9%
DJ Global 1973.39 0.9%	1986.11 0.6% 0.6%	2006.89 1.7% 1.1%	2013.20 2.0% 0.3%	2016.97 2.2% 0.2%	1998.76 1.3% -0.9%
DJ Asia Pacific 1293.46 0.9%	1292.80 -0.1% -0.1%	1298.75 0.4% 0.5%	1313.20 1.5% 1.1%	1311.19 1.4% -0.2%	1302.85 0.7% -0.6%
Nikkei 9737.56 2.2%	9828.88 0.9% 0.9%	9923.01 1.9% 1.0%	10160.40 4.3% 2.4%	10039.33 3.1% -1.2%	9940.06 2.1% -1.0%
Shanghai 2150.63 4.3%	2160.34 0.5% 0.5%	2162.46 0.6% 0.1%	2162.24 0.5% 0.0%	2168.35 0.8% 0.3%	2153.31 0.1% -0.7%
DAX 7596.47 1.0%	7604.94 0.1% 0.1%	7653.58 0.8% 0.6%	7668.50 0.9% 0.2%	7670.71 1.0% 0.0%	7636.23 0.5% -0.5%
DJ UBS Comm. 140.54 -0.7%	140.46 -0.1% -0.1%	140.33 -0.1% -0.1%	139.55 -0.7% -0.6%	138.91 -1.2% -0.5%	139.26 -0.9% 0.3%
WTI $ B 86.73 0.9%	87.47 0.9% 0.9%	87.92 1.4% 0.5%	89.51 3.2% 1.8%	89.98 3.7% 0.5%	88.94 2.5% -1.2%
Brent    $/B 109.15 1.8%	107.97 -1.1% -1.1%	108.93 -0.2% 0.9%	110.12 0.9% 1.1%	110.22 1.0% 0.1%	109.16 0.0% -1.0%
Gold  $/OZ 1697.0 -0.5%	1699.20 0.1% 0.1%	1671.00 -1.5% -1.7%	1668.10 -1.7% -0.2%	1648.30 -2.9% -1.2%	1657.80 -2.3% 0.6%

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. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States. An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):

“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”

Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.

The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN

), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.

First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:

“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”

Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.

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. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. 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. Sovereign yields continued to decline by Oct 5 with the yield of the ten-year sovereign bond of Spain trading at 5.663 percent and that of Italy at 4.922 percent. On Oct 12, 2012, the yield of the ten-year sovereign bond of Spain traded at 5.612 percent and that of Italy at 4.856 percent. Sovereign bonds continued to decline in the week of Oct 19 with the ten-year government bond Spain trading at 5.289 percent and that of Italy at 4.655 percent. On Oct 26, the yield of the ten-year government bond of Spain traded at 5.574 percent and that of Italy at 4.838 percent. On Nov 2, the ten-year government bond of Spain traded at 5.649 percent, increasing to 5.820 percent on Nov 9 while the ten-year bond of Italy traded at 4.879 percent on Nov 2, increasing o 4.898 percent on Nov 9 under renewed concerns about Greece. The ten-year bond of Italy traded at 4.816 percent on Nov 16 while the yield of the ten-year bond of Spain traded at 5.864 percent. The ten-year yield of the government of Spain traded at 5.603 percent on Nov 23 while the ten-year yield of the government of Italy traded at 4.696 percent. 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. The major risk event during the week was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Doubts of repurchase of Greek sovereign bonds, turmoil in Italian politics and reduction of growth forecasts by the European Central Bank and the Deutsche Bundesbank contributed to increase of the yield of the ten-year sovereign bond of Spain to 5.454 percent on Dec 7, 2012 and of the ten-year sovereign bond of Italy to 4.471 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). On Fri Dec 14, the yield of the ten-year bond of Spain traded at 5.366 percent and that of Italy at 4.527 percent. The yield of the ten-year sovereign bond of Spain traded at 5.228 percent on Dec 21, 2012 and that of Italy at 4.424 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). 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. Increasing risk appetite drove the yield of the ten-year Treasury to 1.737 percent on Oct 5, 2012 and depreciated the dollar to USD 1.3036 with more muted response in the yield of the ten-year bond of Germany rising to 1.52 percent and the two-year yield to 0.06 percent. There is indication of some risk aversion in the week of Oct 12, 2012, with decline of the yield of the ten-year Treasury to 1.663 percent and that of Germany to 1.45 percent, stability of the two-year Treasury yield at 0.264 percent and marginal decline of the yield of the two-year German bond to 0.04 percent while the dollar appreciated to USD 1.2953/EUR. Risk aversion fluctuated in the week of Oct 19 but the week ended with the increase of the yield of the two-year note of the US to 0.296 percent and of the ten-year note to 1.766 percent; there was similar increase of the yield of the two-year government bond of Germany to 0.11 percent and of the ten-year yield to 1.59 percent; and the dollar depreciated 0.5 percent to USD 1.3023 percent. Mild risk aversion returned in the week of Oct 26, with the 10-year Treasury yield declining marginally to 1.748 percent and that of Germany to 1.54 percent while the dollar appreciated to USD 1.2942/EUR. Mild risk aversion continued in the week of Nov 2 with declines in the yield of the ten-year Treasury note to 1.715 percent and of the ten-year government bond of Germany to 1.45 percent while the dollar appreciated to USD 1.2838/EUR. Risk aversion deepened in the week of Nov 9 with the two-year Treasury trading at 0.256 percent and the ten-year at 1.614 percent while the two-year government bond of Germany traded at minus 0.03 percent and the ten-year at 1.35 percent while the dollar strengthened to USD 1.2711/EUR. There is continuing risk aversion in the week of Nov 16, with the yields of the two-year Treasury at 0.24 percent and of the ten-year Treasury at 1.584, the yield of the two-year government bond at minus 0.03 percent and of the ten-year German government bond at 1.33 percent and the rate of USD 1.2743/EUR. Expectations of an agreement on US fiscal affairs and Greece’s bailout improved risk appetite in the holiday week of Nov 23 with the US two-year yield rising to 0.273 percent and the ten-year yield to 1.691, less pronounced improvement with the two-year yield of Germany at 0.00 percent and ten-year yield at 1.44 percent but depreciation of the dollar to USD 1.2975/EUR while stock markets soared. While yields of sovereign bonds of Spain and Italy fell sharply in the week of Nov 30, yields of US and German bonds traded down to 0.248 for two years and 1.612 for ten years for the US and 0.01 percent for two years and 1.39 percent for ten years for Germany. The dollar remained almost unchanged at USD 1.2987/EUR. Reductions of growth forecasts by the European Central Bank and Deutsche Bundesbank together with doubts on sovereign bond repurchase by Greece and Italian political turmoil contributed to decrease of the yield of the two-year government bond of Germany to minus 0.008 on Dec 7, 2012, and of the ten-year yield to 1.39 while the dollar appreciated to USD 1.2026/EUR while risk aversion continued in the US with the two-year Treasury yield at 0.256 percent and the ten-year yield at 1.625 percent. Yields backed up to 1.704 for the ten-year US Treasury and 1.35 for the ten-year German bond in the week of Dec 14, 2012, while the dollar depreciated to USD 1.3162/EUR. Treasury yields continued to back up in the week of Dec 21, 2012, with the ten-year at 1.77 percent and the two-year at 0.272 with the two-year of Germany at minus 0.01 percent and the ten-year at 1.38 percent while the dollar depreciated to USD 1.3189/EUR. The 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 below consumer price inflation of 2.2 percent in the 12 months ending in Oct (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.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
12/21/12	0.272	1.77	-0.01	1.38	1.3189
12/14/12	0.232	1.704	-0.04	1.35	1.3162
12/7/12	0.256	1.625	-0.08	1.30	1.2926
11/30/12	0.248	1.612	0.01	1.39	1.2987
11/23/12	0.273	1.691	0.00	1.44	1.2975
11/16/12	0.24	1.584	-0.03	1.33	1.2743
11/9/12	0.256	1.614	-0.03	1.35	1.2711
11/2/12	0.274	1.715	0.01	1.45	1.2838
10/26/12	0.299	1.748	0.05	1.54	1.2942
10/19/12	0.296	1.766	0.11	1.59	1.3023
10/12/12	0.264	1.663	0.04	1.45	1.2953
10/5/12	0.26	1.737	0.06	1.52	1.3036
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-Dec 20, 2012

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

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

Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines.

Equity indexes in Table III-1 continued to trend upward in the week ending on Dec 21, 2012. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors are driving indexes higher. DJIA decreased 0.3 percent on Dec 14, decreasing 0.2 percent in the week. Germany’s Dax decreased 0.9 percent on Fri Dec 21 and increased 0.4 percent in the week. Dow Global decreased 0.9 percent on Dec 21 and increased 1.3 percent in the week. Japan’s Nikkei Average decreased 1.0 percent on Fri Dec 21 and increased 2.1 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a newly elected administration. Dow Asia Pacific TSM decreased 0.6 percent on Dec 21 and increased 0.7 percent in the week while Shanghai Composite decreased 0.7 percent on Dec 21 and increased 0.1 percent in the week supported by a fourteen-month high of the HSBC flash manufacturing index (available through Markit at http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10452), falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2153.31 on Fri Dec 21. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.

Commodities were mixed in the week of Dec 14, 2012. The DJ UBS Commodities Index increased 0.7 percent on Fri Dec 14 and decreased 0.7 percent in the week, as shown in Table III-1. WTI increased 2.5 percent in the week of Dec 21 while Brent increased 0.0 percent in the week even with conflicts in the Middle East. Gold increased 0.6 percent on Fri Dec 21 and decreased 2.3 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 €1,113,699 million on Dec 14, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,699,268 million in the statement of Dec 7. There is high credit risk in these transactions with capital of only €85,552 million as analyzed by Cochrane (2012Aug31).

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

	Dec 31, 2010	Dec 28, 2011	Dec 14, 2012
1 Gold and other Receivables	367,402	419,822	479,113
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	259,542
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	35,085
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	17,403
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,113,699
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	228,987
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	585,569
8 General Government Debt Denominated in Euro	34,954	33,928	30,008
9 Other Assets	278,719	336,574	275,405
TOTAL ASSETS	2,004, 432	2,733,235	3,024,812
Memo Items
Sum of 5 and  7	1,004,174	1,489,759	1,699,268
Capital and Reserves	78,143	85,748	85,552

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/fs121218.en.html

IIIE Appendix Euro Zone survival risk. 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), or euro area, are only 42.5 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.9 percent in Jan-Oct 2012 relative to Jan-Oct 2011 while those to EMU are falling at 0.9 percent.

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

Oct 2012	Exports % Share	∆% Jan-Oct 2012/ Jan-Oct 2011	Imports % Share	Imports ∆% Jan-Oct 2012/ Jan-Oct 2011
EU	56.0	0.2	53.7	-7.3
EMU 17	42.5	-0.9	43.3	-7.3
France	11.6	0.0	8.4	-5.9
Germany	13.1	0.1	15.5	-10.9
Spain	5.3	-8.1	4.5	-8.1
UK	4.7	10.2	2.7	-13.6
Non EU	44.0	9.9	46.3	-3.1
Europe non EU	13.3	9.7	12.5	-1.4
USA	6.1	18.8	3.2	2.2
China	2.7	-12.0	7.4	-16.3
OPEC	4.7	24.9	8.5	22.4
Total	100.0	4.4	100.0	-5.4

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €330 million with the 17 countries of the euro zone (EMU 17) in Oct 2012 and deficit of €1601 million in Jan-Oct 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €9,267 million in Jan-Oct with Europe non European Union and of €11,391 million with the US and in reducing the deficit with non European Union of €3106 million in Jan-Oct 2012. There is significant rigidity in the trade deficits in Jan-Oct of €14,168 million with China and €16,853 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 Oct 2012 Millions of Euro	Trade Balance Cumulative Jan-Oct 2012 Millions of Euro
EU	981	9,634
EMU 17	-330	-1,601
France	1,048	10,183
Germany	-375	-4,837
Spain	143	1,359
UK	916	7,993
Non EU	1,471	-3,106
Europe non EU	1,051	9,267
USA	1,268	11,391
China	-1,245	-14,168
OPEC	-1,128	-16,853
Total	2,452	6,528

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Oct 2012 relative to Jan-Oct 2011. Growth rates in 12 months of imports are negative with the exception of 9.3 percent for energy. The higher rate of growth of exports of 5.3 percent in Jan-Oct 2012/Jan-Oct 2011 relative to imports of minus 2.6 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.

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

	Exports Share %	Exports ∆% Jan-Oct 2012/ Jan-Oct 2011	Imports Share %	Imports ∆% Jan-Oct 2012/ Jan-Oct 2011
Consumer Goods	28.9	5.3	25.0	-2.6
Durable	5.9	2.4	3.0	-5.9
Non Durable	23.0	6.0	22.0	-2.2
Capital Goods	32.3	2.5	21.1	-12.3
Inter- mediate Goods	34.2	3.3	34.3	-11.3
Energy	4.7	20.0	19.6	9.3
Total ex Energy	95.3	3.6	80.4	-8.9
Total	100.0	4.4	100.0	-5.4

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Table III-6 provides Italy’s trade balance by product categories in Oct 2012 and cumulative Jan-Oct 2012. Italy’s trade balance excluding energy generated surplus of €7613 million in Oct 2012 and €60,206 million in Jan-Oct 2012 but the energy trade balance created deficit of €5161 million in Oct 2012 and €53,677 million in Jan-Oct 2012. The overall surplus in Oct 2012 was €2452 million with surplus of €6528 million in Jan-Oct 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

	Oct 2012	Cumulative Jan-Oct 2012
Consumer Goods	1,834	13,406
Durable	1,089	9,371
Nondurable	745	4,035
Capital Goods	4,711	40,621
Intermediate Goods	1,067	6,179
Energy	-5,161	-53,677
Total ex Energy	7,613	60,206
Total	2,452	6,528

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, 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 Subsection IIIF 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/datamapper/index.php?db=WEO) 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	71,277
Euro Zone	12,065	-0.5	73.4
Portugal	211	-0.7	110.9
Ireland	205	-4.4	103.0
Greece	255	-1.7	170.7
Spain	1,340	-4.5	78.6
Major Advanced Economies G7	33,769	-5.1	89.0
United States	15,653	-6.5	83.8
UK	2,434	-5.6	83.7
Germany	3,367	1.4	58.4
France	2,580	-2.2	83.7
Japan	5,984	-9.1	135.4
Canada	1,770	-3.2	35.8
Italy	1,980	2.6	103.1
China	8,250	-1.3*	22.2**

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

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 $4155.8 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 $3975.1 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 $8130.8 billion, which would be equivalent to 136.7 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 241.5 percent if including debt of France and 177.4 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	8,855.7
B Germany	1,996.3		$8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4%
C France	2,159.5
B+C	4,155.8	GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7%
D Italy	2,041.4
E Spain	1,053.2
F Portugal	234.0
G Greece	435.3
H Ireland	211.2
Subtotal D+E+F+G+H	3,975.1

Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO

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 Oct 2012. German exports to other European Union (EU) members are 57.3 percent of total exports in Oct 2012 and 57.2 percent in Jan-Oct 2012. Exports to the euro area are 37.6 percent in Oct and 37.6 percent in Jan-Oct. Exports to third countries are 42.7 percent of the total in Oct and 42.8 percent in Jan-Oct. There is similar distribution for imports. Exports to non-euro countries are decreasing 2.7 percent in Oct 2012 and increasing 4.4 percent in Jan-Oct 2012 while exports to the euro area are increasing 7.0 percent in Oct and decreasing 1.2 percent in Jan-Oct 2012. Exports to third countries, accounting for 42.7 percent of the total in Oct 2012, are increasing 1.8 percent, and 10.9 percent in Jan-Oct, accounting for 42.8 percent of the cumulative total in Jan-Oct 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 high share in its 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 ∆%

	Oct 2012  € Billions	Oct 12-Month ∆%	Jan–Oct 2012 € Billions	Jan-Oct 2012/ Jan-Oct 2011 ∆%
Total Exports	98.5	10.6	924.4	4.8
A. EU Members	56.4 % 57.3	7.8	528.6 % 57.2	0.6
Euro Area	37.0 % 37.6	7.0	347.8 % 37.6	-1.2
Non-euro Area	19.3 % 19.7	-2.7	180.7 % 19.6	4.4
B. Third Countries	42.1 % 42.7	1.8	395.8 % 42.8	10.9
Total Imports	82.7	6.0	765.1	1.7
C. EU Members	51.9 % 62.8	5.4	484.4 % 63.3	1.7
Euro Area	35.5 % 42.9	-5.7	339.4 % 44.4	1.4
Non-euro Area	16.4 % 19.8	-2.8	145.0 % 18.9	2.5
D. Third Countries	30.8 % 37.2	6.9	280.7 % 36.7	1.7

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

Source:

Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/12/PE12_432_51.html;jsessionid=5B7D9B7A67D38989763779A0A5711A66.cae4

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	2.6	1.8	1.5	7.7
Japan	0.5	-0.4	-0.9	4.2
China	7.4	2.0	-2.2
UK	0.0	2.7* RPI 3.0	2.2* output 1.4** input -0.3*	7.8
Euro Zone	-0.6	2.2	2.6	11.7
Germany	0.9	1.9	1.5	5.4
France	0.1	1.6	2.9	10.7
Nether-lands	-1.4	3.2	4.5	5.5
Finland	-1.1	3.2	2.8	7.7
Belgium	-0.3	2.2	4.5	7.5
Portugal	-3.4	1.9	4.6	16.3
Ireland	-0.5	1.6	3.0	14.7
Italy	-2.4	2.6	2.6	11.1
Greece	-7.2	0.4	4.1	NA
Spain	-1.6	3.0	3.5	26.2

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/november-2012/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-prices-indices/november-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 2.6 percent in IIIQ2012 relative to IIIQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_3rd.pdf See I Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). Japan’s GDP fell 0.2 percent in IVQ2011 relative to IVQ2010 and contracted 1.6 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 10.4 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, increasing at the SAAR of 5.7 percent in IQ2012 and decreasing at 0.1 percent in IIQ2012 but contracting at the SAAR of 3.5 percent in IIIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ); the UK grew at 1.0 percent in IIIQ2012 relative to IIQ2012 and GDP fell 0.1 percent in IIIQ2012 relative to IIIQ2011 (see Section VH at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html); and the Euro Zone grew at minus 0.1 percent in IIIQ2012, minus 0.2 percent in IIQ2012, 0.0 percent in IQ2012 relative to IVQ2011 and fell 0.6 percent in IIIQ2012 relative to IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.7 percent in the US but 17.7 percent for unemployment/underemployment or job stress of 28.6 million (see Table I-4 at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ), 4.2 percent for Japan (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH and earlier at http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2012/index.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.8 percent in the US, -0.4 percent for Japan, 2.0 percent for China, 2.2 percent for the Euro Zone and 2.7 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/2012/12/recovery-without-hiring-forecast-growth.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 IIA2 and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html), weak hiring with the loss of 10 million full-time jobs (see Section I at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html 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.

Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):

“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.

Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.

The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”

Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:

“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”

The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Unconventional monetary policy will remain in perpetuity, or QE∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.2 percent on average in the cyclical expansion in the 13 quarters from IIIQ2009 to IIIQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.

First, reduction of the unemployment rate to normal would take between 15 and 43.3 years depending on the definition (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). The US labor force stood at 154.088 million in Oct 2011 and at 155.779 million in Oct 2012, not seasonally adjusted, for increase of 1.691 million, or 140,917 per month. The US labor force stood at 153.683 million in Nov 2011 and 154.953 million in Nov 2012, not seasonally adjusted, for increase of 1.270 million or 105,833 per month. The average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 is insufficient even to absorb 140,917 new entrants per month into the labor force. The difference between the average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 and the 105,833 average monthly increase in the labor force from Nov 2011 to Nov 2012 is 19,945 monthly new jobs net of absorption of new entrants in the labor force. There are 28.6 million in job stress in the US currently. The provision of 19,945 new jobs per month net of absorption of new entrants in the labor force would require 1434 months to provide jobs for the unemployed and underemployed (28.6 million divided by 19,945) or 119 years (1434 divided by 12). Net job creation of 19,945 jobs per month only adds 239,340 jobs in a year. The civilian labor force of the US in Nov 2012 not seasonally adjusted stood at 154.953 million with 11.404 million unemployed or effectively 18.094 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 4.2 years. Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.748 million for new net job creation of 3.656 million that at the current rate would take 15 years. Under the calculation in this blog there are 18.094 million unemployed by including those who ceased searching because they believe there is no job for them. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.346 million jobs net of labor force growth that at the current rate would take 43.2 years. These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply.

Second, calculations show that actual US GDP growth is around 1.7 percent per year that will perpetuate unemployment/underemployment (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.7 percent is well below trend growth of 3 percent per year from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.73 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.73 percent in IIIQ2012 annualizes to 1.5 percent in the first three quarters of 2012 {([(1.02)^1/4(1.013)^1/4(1.0173^1/4]^4/3 -1)100 = 1.7%}. The actual rate required to reduce unemployment/underemployment to normal is even higher than 3 percent in historical trend.

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation QE∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“Release Date: December 12, 2012

For immediate release

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient 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 will 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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee 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 and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain 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 Treasury and agency mortgage-backed securities, 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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.””

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 or QE_∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.”

3. Advance Guidance on “6 ¼ 2 ½ “ Rule. Policy will be accommodative even after the economy recovers satisfactorily: “o 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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

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 that is actually a target of growth forecast. 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; see Shultz et al 2012), 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 Dec 12, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.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 IIIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html) and the PCE inflation data from the report on personal income and outlays (Section IV and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The Bureau of Economic Analysis (BEA) provides the third estimate of IIIQ2012 GDP with the advance estimate of IVQ2012 and annual for 2012 to be released on Jan 30 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I). 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 IIA and IV in this blog for Nov 2012 and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for Dec will be released at 8:30 AM on Jan 31, 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 Nov report at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html; the Oct report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html; the Sep report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html; 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 Nov was released on Fri Dec 7, 2012 (http://www.bls.gov/ces/) and analyzed in this blog in Section I (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). “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/fomcprojtabl20121212.pdf).

It is instructive to focus on 2012 and 2013 as 2014, 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 Dec 12, 2012 and the second row “PR” the projection of the Sep 13, 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 and 1.7 to 1.8 percent at the Dec 12, 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 but reduced to 2.3 to 3.0 percent at the Dec 12, 2012 meeting.

2. 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, lowering the projection to 7.8 to 7.9 percent at the Dec 12, 2012 meeting. 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 and reduced to 7.4 to 7.7 percent at the Dec 12 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 and 1.6 to 1.7 percent at the Dec 12, 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 and lowered to 1.7 to 1.9 percent at the Dec 12, 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  Sep PR	1.7 to 1.8 1.7 to 2.0	7.8 to 7.9 8.0 to 8.2	1.6 to 1.7 1.7. to 1.8	1.6 to 1.7 1.7 to 1.9
2013  Sep PR	2.3 to 3.0 2.5 to 3.0	7.4 to 7.7 7.6 to 7.9	1.3 to 2.0 1.6 to 2.0	1.6 to 1.9 1.7 to 2.0
2014  Sep PR	3.0 to 3.5 3.0 to 3.8	6.8 to 7.3 6.7 to 7.3	1.5 to 2.0 1.6 to 2.0	1.6 to 2.0 1.8 to 2.0
2015 Sep	3.0 to 3.7 3.0 to 3.8	6.0 to 6.6 6.0 to 6.8	1.7 to 2.0 1.8 to 2.0	1.8 to 2.0 1.9 to 2.0
Longer Run Sep 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 Sep PR	1.6 to 2.0 1.6 to 2.0	7.7 to 8.0 8.0 to 8.3	1.6 to 1.8 1.5 to 1.9	1.6 to 1.8 1.6 to 2.0
2013 Sep PR	2.0 to 3.2 2.3 to 3.5	6.9 to 7.8 7.0 to 8.0	1.3 to 2.0 1.5 to 2.1	1.5 to 2.0 1.6 to 2.0
2014 Sep PR	2.8 to 4.0 2.7 to 4.1	6.1 to 7.4 6.3 to 7.5	1.4 to 2.2 1.6 to 2.2	1.5 to 2.0 1.6 to 2.2
2015 Sep PR	2.5 to 4.2 2.5 to 4.2	5.7 to 6.8 5.7 to 6.9	1.5 to 2.2 1.8 to 2.3	1.7 to 2.2 1.8 to 2.3
Longer Run Sep PR	2.2 to 3.0 2.2 to 3.0	5.0 to 6.0 5.0 to 6.3	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.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/fomcprojtabl20121212.pdf). There are 19 participants expecting the rate to remain at 0 to ¼ percent in 2012 and none to be higher. Not much change is expected in 2013 either with 17 participants anticipating the rate at the current target of 0 to ¼ percent and only two expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 14 participants with three expecting the rate to be in the range of 1.0 to 2.0 percent, one participant expecting rates at 0.5 to 1.0 percent and one participant 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, nine participants expect rates to be below 1.0 percent while nine expect rates from 1.0 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	19
2013	17	1		1
2014	14	1		3	1
2015	1	8		6	1	3
Longer Run						19

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.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	2
2014	3
2015	13
2016	1

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.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) and the release for Nov 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1112.pdf). There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.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 3.3 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 aversion 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 1.2 percent in Jun-Jul 2012 with core PCE excluding food and energy at 1.8 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 4.3 percent annual equivalent in Aug-Sep 2012 with PCEX excluding food and energy at 0.6 percent while PCEE energy jumped at 85.8 percent annual equivalent. In the ninth wave, prices collapsed with reversal of carry trade positions in a new episode of risk aversion with central PCE at annual equivalent minus 0.6 percent in Oct-Nov and PCEX at 0.6 percent while energy prices fell at minus 24.6 percent.

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
Nov	-0.2	-0.9	-0.2	0.1	0.0	0.2	-4.4
Oct	0.1	0.0	-0.2	0.2	0.1	0.3	-0.2
∆% AE Oct-Nov	-0.6	5.3	-2.4	1.8	0.6	3.0	-24.6
Sep	0.3	0.7	-0.2	0.1	0.0	-0.1	4.8
Aug	0.4	0.8	-0.2	0.1	0.0	0.1	5.8
∆% AE Aug-Sep	4.3	9.4	-2.4	1.2	0.6	0.0	85.8
Jul	0.1	0.0	-0.3	0.1	0.1	0.0	-0.2
Jun	0.1	-0.1	-0.1	0.2	0.2	0.2	-1.5
∆% AE Jun-Jul	1.2	-0.6	-2.4	1.8	1.8	1.2	-9.8
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	3.3	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 much less volatility in the PCE index excluding food and energy shown in Chart IV-2 with monthly percentage changes from 1999 to 2012. With the exception of 2001 there are no negative changes and again changes around 0.2 percent when excluding 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

Fluctuations in the PCE index of food are much wider as shown in Chart IV-3 by monthly percentage changes from 1999 to 2012. There are also multiple negative changes and positive changes even exceeding 1.0 percent in three months.

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 and large percentages.

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 since 2000. 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 2011, declining to 1.4 percent in Nov 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 1.5 percent in Nov 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. The final row of Table IV-6 provides average rates of 12-month change of PCE prices in Dec. The average for central PCE prices is 2.2 per cent per year from 2000 to 2011 and 1.9 percent for core PCE. PCE food grew at the average rate of 2.6 percent from 2000 to 2011 and energy PCE at 6.1 percent with significant oscillations.

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

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2012
Nov	1.4	0.5	-1.7	1.9	1.5	1.3	0.8
Oct	1.7	1.3	-1.8	1.9	1.6	1.0	4.8
Sep	1.6	1.1	-1.6	1.9	1.5	0.9	3.2
Aug	1.4	0.6	-1.8	1.9	1.5	1.5	0.0
Jul	1.3	0.1	-1.8	2.0	1.7	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
Dec 2009	2.3	4.1	-0.7	1.4	1.6	-1.6	20.5
Dec 2008	0.6	-3.8	-2.4	2.8	1.8	6.8	-23.7
Dec 2007	3.5	3.6	-1.9	3.5	2.5	5.0	18.6
Dec 2006	2,3	0.5	-2.0	3.2	2.7	1.3	3.7
Dec 2005	3.0	1.7	-1.4	3.7	2.3	1.7	16.3
Dec 2004	3.0	2.6	-0.7	3.2	2.2	2.3	18.0
Dec 2003	2.0	-0.1	-3.9	3.2	1.5	3.6	9.4
Dec 2002	2.2	0.6	-2.8	3.0	1.8	1.0	12.7
Dec 2001	1.0	-2.0	-2.4	2.8	1.7	2.4	-13.8
Dec 2000	2.4	1.5	-1.3	2.9	1.8	2.8	14.1
Average ∆%2000-2011	2.2	1.0	-20.0*	2.8	1.9	2.6	6.1

*Percentage change from 2000 to 2011.

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 carry-trade 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 carry-trade 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

There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-7 provides indexes for the two categories and within them for the two types of prices from Jan 2011 to Nov 2012. Current prices paid were rising at an accelerating rate from 35.79 in Jan 2011 to 69.89 in May 2011 but the rate of increase dropped significantly to 25.88 in Feb 2012, increasing sharply to 50.62 in Mar in the commodity price shock but falling to 45.78 in Apr, 37.35 in May, 19.59 in Jun and 7.41 in Jul as risk aversion caused decline of commodity prices. At the margin, the index of prices paid rose to 16.47 in Aug and 19.15 in Sep in yet net another bout of carry trade but eased to 17.20 in Oct, 14.61 in Nov and 16.12 in Dec 2012 with renewed risk aversion. The index of current prices received also fell sharply from 27.96 in May 2011 to 4.49 in Oct 2011, meaning that prices were increasing at a very low rate and then rose to 13.58 in Mar 2012, increasing to 19.28 in Apr but declining to 12.05 in May, 1.03 in Jun, 3.70 in Jul, 2.35 in Aug, which is also relatively low, near the border of contraction at 0.0, and 5.32 in Sep 2012, easing to 4.30 in Oct 2012 and increasing to 5.62 in Nov 2012, falling to 1.08 in Dec 2012. In the expectations for the next six months, the index of prices paid also declined from 68.82 in May 2011 to 56.98 in Dec 2011, rising to 66.67 in Mar 2012 but declining to 50.60 in Apr 2012, increasing to 57.83 in May and falling to 34.02 in Jun 2012, 35.80 in Jul and 31.76 in Aug but increasing to 40.43 in Sep 2012 and 44.09 in Oct 2012, declining to 39.33 in Nov 2012 and rising to 51.61 in Dec 2012. Expected prices received also rose in the first five months of 2011, declining from 35.48 in May 2011 to 15.22 in Aug 2011 but then rising to 32.10 in Mar 2012 and declining to 22.89 in Apr and May 2012, 17.53 in Jun, 16.05 in Jul and 14.12 in Aug but increasing to 23.40 in Sep 2012 and 24.73 in Oct 2012, declining to 15.73 in Nov 2012 and rising to 25.81 in Dec 2012. Unconventional monetary policy of zero interest rates and quantitative easing has increased the volatility of inflation via carry trades, creating uncertainty in financial and economic decisions.

Table IV-7, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Six Months Prices Paid	Six Months Prices Received
Dec 2012	16.13	1.08	51.61	25.81
Nov	14.61	5.62	39.33	15.73
Oct	17.20	4.30	44.09	24.73
Sep	19.15	5.32	40.43	23.40
Aug	16.47	2.35	31.76	14.12
Jul	7.41	3.70	35.80	16.05
Jun	19.59	1.03	34.02	17.53
May	37.35	12.05	57.83	22.89
Apr	45.78	19.28	50.60	22.89
Mar	50.62	13.58	66.67	32.10
Feb	25.88	15.29	62.35	34.12
Jan	26.37	23.08	53.85	30.77
Dec 2011	24.42	3.49	56.98	36.05
Nov	18.29	6.10	36.59	25.61
Oct	24.47	4.49	40.45	17.98
Sep	32.61	8.70	53.26	22.83
Aug	28.26	2.17	42.39	15.22
Jul	43.33	5.56	51.11	30.00
Jun	56.12	11.22	55.10	19.39
May	69.89	27.96	68.82	35.48
Apr	57.69	26.92	56.41	38.46
Mar	53.25	20.78	71.43	36.36
Feb	45.78	16.87	55.42	27.71
Jan	35.79	15.79	60.00	42.11

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are provided in Table IV-6. As inflation waves throughout the world (analyzed in http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html), indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the levels in the beginning of 2011 because of risk aversion frustrating carry trades even under zero interest rates. In Dec 2012, the index of current prices received was 15.4, indicating moderate increase of prices received but higher than in Nov 2012, while the index of current prices paid fell from 22.5 in Apr 2012 to minus 2.8 in Jun 2012, indicating moderate contraction, increasing to 27.8 in Dec 2012 in a new round of marginal pressure of input inflation. The index of future prices paid increased from 35.2 in Apr 2012 to 37.8 in May and rebounded to 49.1 in Oct 2012, 51.7 in Nov 2012 and 48.7 in Dec 2012, indicating higher expectation of increases in prices paid or prices of inputs while the index of future prices received fell from 20.4 in Apr 2012 to 7.7 in May, 13.5 in Jun and 14.6 in Jul, indicating softness in expected future prices received or sales prices, but rebounded to 20.3 in Aug and 27.2 in Sep 2012 in yet another round of influence of carry trades, declining to 14.9 in Oct 2012 and 13.7 in Nov 2012, rising again to 29.0 in Dec 2012.

Table IV-8, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Future Prices Paid	Future Prices Received
Dec 2012	27.8	15.4	48.7	29.0
Nov	27.9	6.3	51.7	13.7
Oct	19.0	5.4	49.1	14.9
Sep	8.0	-0.2	38.0	27.2
Aug	11.2	2.8	33.1	20.3
Jul	3.7	1.6	22.8	14.6
Jun	-2.8	-6.9	20.1	13.5
May	5.0	-4.5	37.8	7.7
Apr	22.5	9.4	35.2	20.4
Mar	18.7	8.4	39.4	25.6
Feb	38.7	15.0	50.4	32.0
Jan	31.8	11.2	52.7	23.8
Dec 2011	30.4	10.3	49.4	26.4
Nov	25.9	6.2	41.0	28.1
Oct	23.5	1.6	44.8	27.2
Sep	25.0	3.9	37.8	22.0
Aug	20.1	-6.0	40.2	20.1
Jul	30.2	3.9	44.2	12.7
Jun	32.8	5.2	30.5	4.1
May	46.4	16.3	53.4	27.0
Apr	54.4	23.0	55.4	33.5
Mar	59.8	19.3	63.6	34.8
Feb	63.2	17.5	67.8	35.9
Jan	51.9	14.5	62.8	36.0

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VI-14 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia provides the diffusion index of current prices paid or prices of inputs from Nov 2011 to Nov 2012. Inflation of inputs moderated significantly during the shock of risk aversion in 2012, even falling briefly into contraction territory below zero and expanding now at marginally increasing pace.

Chart IV-14, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

Chart IV-15 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia provides the current diffusion index of prices received, which are prices of sales of products by companies. There is much less dynamism than in prices paid because commodity-rich inputs are only part of total costs. The high levels early in 2011 have not been realized again under the pressure on carry trades of risk financial assets from the European debt crisis and the index crossed again downward into the contraction zone below 0, moving back into moderate expansion. Carry trades from zero interest rates cause instability in net margins of business because of more dynamic effects on input prices than in prices of product sales.

Chart IV-15, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

The producer price index of Germany increased 0.1 percent in Nov 2012, calendar and seasonally adjusted (CSA), decreased 0.1 not seasonally adjusted (NS) in Nov 2012 and increased 1.4 percent in the 12 months ending in Nov 2012, as shown in Table IV-9. The producer price index of Germany has similar waves of inflation as in many other countries (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave from Jan to Apr 2011, the annual equivalent rate of producer price inflation was 10.4 percent NSA and 6.5 percent CSA, propelled by carry trades from zero interest rates to exposures in commodity futures in a mood of risk appetite. In the second wave in May and Jun 2011, the annual equivalent rate of producer price inflation was only 0.6 percent NSA because of the collapse of the carry trade in fear of risks of European sovereign debt but 3.7 percent CSA. In the third wave from Jul to Sep 2011, annual-equivalent producer price inflation in Germany was 2.8 percent NSA and 4.1 percent CSA with fluctuations in commodity prices resulting from perceptions of the sovereign risk crisis in Europe. In the fourth wave from Oct to Nov 2011, annual equivalent inflation was 1.8 percent NSA and 3.7 percent CSA as financial markets were shocked with strong risk aversion. In the fifth wave from Dec 2011 to Jan 2012, annual equivalent inflation was at 1.2 percent NSA and minus 0.6 percent CSA. In the sixth wave, annual equivalent inflation increased to 6.2 percent in Feb-Mar 2012 NSA and 4.9 percent in Feb-Apr and 1.2 percent CSA. In the seventh wave, annual equivalent inflation was minus 2.8 percent in May-Jul 2012 NSA and minus 0.8 percent SA. In the eighth wave, annual equivalent inflation was 4.9 percent in Aug-Sep 2012 NSA and 6.2 percent SA. In the ninth wave, renewed risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Oct-Nov 2012 and 1.2 percent CSA. Annual data in the bottom of Table IV-7 show that the producer price index fell 5.2 percent in the 12 months ending in Dec 2009 as a result of the fall of commodity prices originating in risk aversion after the panic of 2008.

Table IV-9, Germany, Index of Producer Prices for Industrial Products ∆%

	12 Months ∆% NSA	Month ∆% Calendar and SA	Month ∆%  NSA
Nov 2012	1.4	0.1	-0.1
Oct	1.5	0.1	0.0
AE ∆% Oct-Nov		1.2	-0.6
Sep	1.7	0.3	0.3
Aug	1.6	0.7	0.5
AE ∆% Aug-Sep		6.2	4.9
Jul	0.9	-0.1	0.0
Jun	1.6	-0.1	-0.4
May	2.1	0.0	-0.3
AE ∆% May-Jul		-0.8	-2.8
Apr	2.4	-0.2	0.2
Mar	3.3	0.4	0.6
Feb	3.2	0.1	0.4
AE ∆% Feb-Apr		1.2	4.9
Jan	3.4	0.1	0.6
Dec 2011	4.0	-0.2	-0.4
AE ∆% Dec-Jan		-0.6	1.2
Nov	5.2	0.3	0.1
Oct	5.3	0.3	0.2
AE ∆% Oct-Nov		3.7	1.8
Sep	5.5	0.3	0.3
Aug	5.5	0.1	-0.3
Jul	5.8	0.6	0.7
AE ∆% Jul-Sep		4.1	2.8
Jun	5.6	0.3	0.1
May	6.1	0.3	0.0
AE ∆% May-Jun		3.7	0.6
Apr	6.4	0.6	1.0
Mar	6.2	0.3	0.4
Feb	6.4	0.5	0.7
Jan	5.7	0.7	1.2
AE ∆% Jan-Apr		6.5	10.4
Dec 2010	5.3	0.8	0.7
Nov	4.4	0.4	0.2
Oct	4.3	0.4	0.4
Sep	3.9	0.5	0.3
Aug	3.2	0.2	0.0
Jul	3.7	0.6	0.5
Jun	1.7	0.5	0.6
May	0.9	0.3	0.3
Apr	0.6	0.5	0.8
Mar	-1.5	0.6	0.7
Feb	-2.9	0.0	0.0
Jan	-3.4	0.4	0.8
Dec 2009	-5.2	0.2	-0.1
Dec 2008	4.0	-0.2	-0.8
Dec 2007	1.9	0.4	-0.1
Dec 2006	4.2	0.3	0.1
Dec 2005	4.8	0.5	0.3
Dec 2004	2.9	0.3	0.1
Dec 2003	1.8		0.0
Dec 2002	0.5		0.1
Dec 2001	0.1		-0.2

Source: Statistisches Bundesamt Deutschland

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

Chart IV-16 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the producer price index of Germany from 2004 to 2012. Producer price inflation peaked in 2008 with the rise of commodity prices induced by the carry trade from zero interest rates to commodity futures. Prices then declined with the flight away from risk financial assets to government obligations after the financial panic in Sep 2008. With zero interest rates and no risk aversion, the carry trade pushed commodity future prices upwardly resulting in new rising trend of the producer price index. The right-hand side of the chart shows moderation and even decline in prices because of severe risk aversion frustrating carry trades from zero interest rates to commodity futures but then return of risk appetite with another surge of the index in annual equivalent rate at 6.2 percent in Feb-Mar 2012 and 4.9 percent annual equivalent in Feb-Apr 2012 but decline of 0.3 percent in May 2012 and 0.4 percent in Jun 2012 with flat prices in Jul 2012 with the pace at annual equivalent rate of minus 4.1 percent in May-Jun 2012 and flat prices in Jul 2012. Inflation returned in Aug and Sep 2012 with carry trades into commodity futures with 4.9 percent annual equivalent. Inflation then collapsed to zero in Oct 2012 NSA and minus 0.1 percent in Nov 2012.

Chart IV-16, Germany, Index of Producer Prices for Industrial Products, 2005=100

Source: Statistisches Bundesamt Deutschland

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

Chart IV-17 of the US Bureau of Labor Statistics provides the US producer price index of finished goods from 2004 to 2012. Chart IV-7 of the US mirrors behavior in Chart IV-1 of Germany. Carry trades from zero interest rates to exposures in commodity futures and risk financial assets have synchronized worldwide inflation during periods of risk appetite and disinflation during periods of risk aversion.

Chart IV-17, US, Producer Price Index, Finished Goods, NSA, 2004-2012

Source: US Bureau of Labor Statstics

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

Chart IV-18 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the unadjusted producer price index, trend and trend ends. There is a clear upward trend of prices after the end of risk aversion with zero interest rates in 2009. The actual curve fell below trend in the current episode of severe risk aversion but rose again in Feb-Apr 2012, falling in May-Jun 2012 with flat prices in Jul 2012, another increase in Aug-Sep 2012 and flat prices in Oct 2012 with decline of 0.1 percent in Nov 2012.

Chart IV-18, Germany, Producer Price Index, Non-adjusted Value and Trend, 2005=100

Source: Statistiche Bundesamt Deutschland https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-10 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12-month rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct, 5.4 in Nov and down to 1.8 percent in Jul 2012, increasing marginally to 2.3 percent in Aug 2012, 2.5 percent in Sep, 2.6 in Oct and 2.2 percent in Nov 2012. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by output prices for the UK, which was originated in decline of commodity prices but was used as an argument for unconventional monetary policy of zero interest rates and quantitative easing during the past decade.

Table IV-10, UK Output Prices 12 Months ∆% NSA

	All Manufactured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Nov 2012	2.2	1.4	1.9
Oct	2.6	1.4	2.3
Sep	2.5	1.2	2.2
Aug	2.3	1.2	1.9
Jul	1.8	1.2	1.5
Jun	2.0	1.7	1.7
May	2.8	2.1	2.5
Apr	3.3	2.3	3.1
Mar	3.7	2.5	3.5
Feb	4.1	3.0	4.1
Jan	4.0	2.4	4.0
Dec 2011	4.8	3.0	4.8
Nov	5.4	3.1	5.6
Oct	5.7	3.3	5.9
Sep	6.3	3.7	6.4
Aug	6.0	3.5	6.2
Jul	6.1	3.4	6.2
Jun	5.8	3.2	5.9
May	5.4	3.4	5.5
Apr	5.6	3.6	5.8
Mar	5.6	3.1	5.5
Feb	5.3	3.1	5.2
Jan	5.0	3.3	5.0
Dec 2010	4.2	2.7	4.0
Year ∆%
2011	5.6	3.4	5.7
2010	4.2	3.0	3.9
2009	1.6	2.5	1.0
2008	6.7	3.7	6.7
2007	2.3	1.4	2.1
2006	2.0	1.5	2.0
2005	1.9	1.0	1.9
2004	1.0	-0.3	0.6
2003	0.6	0.1	0.5
2002	-0.1	-0.4	-0.1
2001	-0.3	-0.6	-0.3
2000	1.4	-0.5	0.8
1999	0.6	-1.0	-0.3
1998	0.0	-0.9	-0.9
1997	0.9	0.3	0.1

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

Monthly and annual equivalent rates of change of output prices are shown in Table IV-11. There are waves of inflation similar to those in other countries (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, annual equivalent inflation was 12.0 percent in Jan-Apr 2011 with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 2.0 percent in May-Oct 2011. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.6 percent in Nov 2011 to Jan 2012. In the fourth wave, the energy commodity shock processed through carry trades caused the jump of annual equivalent inflation to 7.9 percent in Feb-Apr 2012. A fifth wave occurred in May-Jun 2012 with decline of output inflation by 5.3 percent annual equivalent in an environment of risk aversion that caused decline of commodity prices. A sixth wave under commodity shocks induced by carry trades from zero interest rates resulted in annual equivalent inflation of 4.5 percent in Jul-Sep 2012 and 4.0 percent in Jul-Oct 2012. In the seventh wave, annual equivalent inflation in Nov 2012 fell to minus 2.4 percent.

Table IV-11, UK Output Prices Month ∆% NSA

	All Manufactured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Nov 2012	-0.2	0.0	-0.2
∆% AE Nov	-2.4	0.0	-2.4
Oct	0.2	0.1	0.2
Sep	0.5	0.3	0.5
Aug	0.5	0.1	0.6
Jul	0.1	-0.1	0.1
∆% AE Jul-Oct	4.0	1.2	4.3
Jun	-0.6	-0.2	-0.6
May	-0.3	-0.1	-0.4
∆% AE May-Jun	-5.3	-1.8	-5.8
Apr	0.7	0.6	0.5
Mar	0.6	0.1	0.5
Feb	0.6	0.5	0.6
∆% AE Feb-Apr	7.9	4.9	6.6
Jan	0.4	0.3	0.3
Dec 2011	-0.2	-0.1	-0.2
Nov	0.2	-0.1	0.2
∆% AE Nov-Jan	1.6	0.4	1.2
Oct	0.0	-0.1	0.1
Sep	0.3	0.3	0.2
Aug	0.0	0.1	0.1
Jul	0.3	0.4	0.3
Jun	0.2	0.2	0.2
May	0.2	0.2	0.2
∆% AE May-Oct	2.0	2.2	2.2
Apr	1.1	0.8	0.9
Mar	1.1	0.5	1.1
Feb	0.5	0.0	0.5
Jan	1.1	0.8	1.1
Jan-Apr ∆% AE	12.0	6.5	11.4
Dec 2010	0.5	0.0	0.6

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

Input prices in the UK have been more dynamic than output prices until the current event of risk aversion, as shown by Table IV-12, but with sharp oscillations because of the commodity and raw material content. The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 18.1 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.4 percent in Mar 2012 and 4.1 percent excluding food, tobacco, beverages and petroleum with the rates falling further in Apr to 1.1 percent for materials and fuels purchased and 2.2 percent excluding food, tobacco, beverages and petroleum. Input-price inflation collapsed in the 12 months ending in Jul 2012 to minus 2.6 percent for materials and fuels purchased and minus 1.5 percent excluding food, beverages and tobacco. Inflation returned at 1.2 percent in the 12 months ending in Aug 2012 but minus 0.5 percent excluding food, tobacco, beverages and petroleum. Inflation of input prices in Sep 2012 was minus 0.8 percent and minus 0.8 percent excluding food, beverages and petroleum. In Nov 2012, inflation of input prices of all manufacturing and materials purchased was minus 0.3 percent in 12 months and minus 0.1 percent in 12 months excluding food, tobacco, beverages and petroleum. There is only comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum followed in 2009 by decline of 3.8 percent by materials and fuels purchased and increase of 1.6 percent for the index excluding items. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.

Table IV-12, UK, Input Prices 12-Month ∆% NSA

	All Manufacturing Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum
Nov 2012	-0.3	-0.1
Oct	0.0	-0.4
Sep	-0.8	-0.8
Aug	1.2	-0.5
Jul	-2.6	-1.5
Jun	-2.2	-0.3
May	0.1	1.1
Apr	1.1	2.2
Mar	5.4	4.1
Feb	7.7	5.7
Jan	6.5	5.6
Dec 2011	8.9	7.2
Nov	13.8	10.2
Oct	14.5	11.0
Sep	18.1	13.3
Aug	16.3	13.0
Jul	18.5	13.3
Jun	16.8	12.6
May	16.3	11.4
Apr	17.9	12.2
Mar	14.8	10.3
Feb	14.9	10.7
Jan	14.2	10.5
Dec 2010	13.1	9.0
Year ∆%
2011	15.4	11.5
2010	9.9	5.7
2009	-3.8	1.6
2008	22.2	16.9
2007	2.9	2.3
2006	9.8	7.3
2005	10.9	6.9
2004	3.3	1.6
2003	1.2	-0.6
2002	-4.4	-4.8
2001	-1.2	-1.2
2000	7.4	3.7
1999	-1.3	-3.6
1998	-9.1	-4.6
1997	-8.2	-6.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

Table IV-13 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are strong waves of inflation of input prices in the UK similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, input prices rose at the high annual equivalent rate of 35.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 3.1 percent in May-Oct 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 1.2 percent in Nov-Dec 2011. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 18.1 percent in Jan-Mar 2012 under relaxed risk aversion. In the fifth wave, annual equivalent inflation was minus 21.9 percent in Apr-Jun 2012 because of collapse of commodity prices during increasing risk aversion. In the sixth wave, annual equivalent inflation of materials and fuels purchased jumped to 4.0 percent in Jul-Aug 2012. In the seventh wave, annual equivalent inflation moderated to 1.2 percent in Sep-Nov 2012.

Table IV-13, UK Input Prices Month ∆% 

	All Manufacturing Materials and Fuels Purchased NSA	Excluding Food, Tobacco, Beverages and Petroleum SA
Nov 2012	0.1	0.3
Oct	0.1	0.1
Sep	0.1	0.3
∆% Sep-Nov	1.2	2.8
Aug	2.0	1.0
Jul	0.2	-0.3
∆% Jul-Aug	14.0	4.3
Jun	-2.1	-0.2
May	-2.6	-0.8
Apr	-1.4	0.1
∆% Apr-Jun	-21.9	-3.6
Mar	1.6	-0.7
Feb	2.5	1.0
Jan	0.1	-0.1
∆% AE Jan-Mar	18.1	0.8
Dec 2011	-0.6	-0.8
Nov	0.4	0.1
∆% AE Nov-Dec	-1.2	-4.1
Oct	-0.8	-0.5
Sep	2.1	0.6
Aug	-1.9	0.1
Jul	0.6	0.9
Jun	0.1	1.0
May	-1.6	-0.1
∆% AE May-Oct	-3.1	4.1
Apr	2.8	2.0
Mar	3.8	1.0
Feb	1.4	1.0
Jan	2.3	1.5
∆% AE Jan-Apr	35.6	17.8
Dec 2010	3.9	1.9

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-14. There are high contributions of 0.44 percentage points by food products, 0.83 percentage points by tobacco and alcohol, 0.27 percentage points by computer, electrical and optical and 0.42 percentage points by other manufactured products. There are diversified sources of contributions to 12 months output price inflation such as 0.22 percentage points by clothing, textile and leather and 0.08 percentage points by transport equipment. In general, contributions by products rich in commodities are the drivers of inflation. There were diversified contributions in percentage points to monthly inflation: 0.09 percentage points by food products, 0.01 percentage points by clothing and 0.03 percentage points by chemical and pharmaceutical. The decrease of petroleum prices by 2.1 percent deducted 0.28 percentage points from monthly inflation of manufactured products and increase of 0.3 percent by chemical and pharmaceutical added 0.03 percentage points.

Table IV-14, UK, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points

Nov 2012	12 Months % Points	12 Months ∆%	Month  % Points	Month ∆%
Total %		2.2		-0.2
Food Products	0.44	2.8	0.09	0.5
Tobacco & Alcohol	0.83	8.2	-0.01	-0.1
Clothing, Textile & Leather	0.22	2.1	0.00	0.0
Paper and Printing	-0.02	-0.6	0.00	0.1
Petroleum	-0.01	-0.1	-0.28	-2.1
Chemical & Pharmaceutical	0.00	0.0	0.03	0.3
Metal, Machinery & Equipment	-0.01	-0.4	-0.01	-0.2
Computer, Electrical & Optical	0.27	3.4	0.00	0.1
Transport Equipment	0.08	0.8	-0.01	-0.1
Other Manufactured Products	0.42	2.5	-0.03	-0.2

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices, shown in Table IV-15. Crude oil is a large factor with deduction of 1.03 percentage points from the 12-month rate and deduction of 0.73 percentage points from the monthly rate in Nov. Inflation also transfers to the domestic economy through the prices of imported inputs: imported metals deducted 0.57 percentage points from the 12-month rate and deducted 0.14 percentage points from the Nov rate. Domestic food added 0.98 percentage points to the 12-month rate and added 0.12 percentage points to the Nov rate. Reversals of commodity exposures in carry trades during risk aversion are a major source of financial instability.

Table IV-15, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points

Nov 2012	12 Months % Points	12 Months ∆%	Month % Points	Month ∆%
Total		-0.3		0.1
Fuel	0.41	4.5	0.44	2.6
Crude Oil	-1.03	-4.0	-0.73	-1.6
Domestic Food Materials	0.98	10.6	0.12	0.6
Imported Food Materials	0.29	5.8	0.11	1.1
Other Domestic Produced Materials	-0.01	-0.2	0.02	0.3
Imported Metals	-0.57	-7.8	-0.14	-1.2
Imported Chemicals	-0.07	-0.7	0.18	1.0
Imported Parts and Equipment	-0.18	-1.3	0.03	0.1
Other Imported Materials	-0.13	-1.3	0.09	0.6

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/november-2012/index.html

Consumer price inflation in the UK is shown in Table IV-16. The CPI index increased 0.2 percent in Nov and 2.7 percent in 12 months. The same inflation waves (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html) are present in UK CPI inflation. In the first wave in Jan-Apr 2011, annual equivalent inflation was at a high 6.5 percent. In the second wave in May-Jul 2011, annual equivalent inflation fell to only 0.4 percent. In the third wave in Aug-Nov 2011, annual equivalent inflation returned at 4.6 percent. In the fourth wave in Dec 2011 to Jan 2012, annual equivalent inflation was minus 0.6 percent because of decline of 0.5 percent in Jan 2012. In the fifth wave, annual equivalent inflation increased to 6.2 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was minus 3.0 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation in Jul-Nov 2012 was 4.2 percent and 6.2 percent in Oct 2012 with the rate in Oct caused mostly by increases in university tuition payments.

Table IV-16, UK, Consumer Price Index All Items, Month and 12-Month ∆%

	Month ∆%	12 Months ∆%
Nov 2012	0.2	2.7
Oct	0.5	2.7
Sep	0.4	2.2
Aug	0.5	2.5
Jul	0.1	2.6
AE ∆% Jul-Nov	4.2
Jun	-0.4	2.4
May	-0.1	2.8
AE ∆% May-Jun	-3.0
Apr	0.6	3.0
Mar	0.3	3.5
Feb	0.6	3.4
AE ∆% Feb-Apr	6.2
Jan	-0.5	3.6
Dec 2011	0.4	4.2
AE ∆% Dec-Jan	-0.6
Nov	0.2	4.8
Oct	0.1	5.0
Sep	0.6	5.2
Aug	0.6	4.5
AE ∆% Aug-Nov	4.6
Jul	0.0	4.4
Jun	-0.1	4.2
May	0.2	4.5
May-Jul	0.4
Apr	1.0	4.5
Mar	0.3	4.0
Feb	0.7	4.4
Jan	0.1	4.0
AE ∆% Jan-Apr	6.5
Dec 2010	1.0	3.7
Nov	0.4	3.3
Oct	0.3	3.2
Sep	0.0	3.1
Aug	0.5	3.1
Jul	-0.2	3.1
Jun	0.1	3.2
May	0.2	3.4
Apr	0.6	3.7
Mar	0.6	3.4
Feb	0.4	3.0
Jan	-0.2	3.5

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/november-2012/index.html

Inflation has been unusually high in the UK since 2006, as shown in Table IV-17. There were no rates of inflation close to 2.0 percent in the period from 1997 to 2004. Inflation has exceeded 2 percent since 2005, reaching 3.6 percent in 2008, 3.3 percent in 2010 and 4.5 percent in 2011.

Table IV-17, UK, Consumer Price Index, Annual ∆%

1997	1.8
1998	1.6
1999	1.3
2000	0.8
2001	1.2
2002	1.3
2003	1.4
2004	1.3
2005	2.1
2006	2.3
2007	2.3
2008	3.6
2009	2.2
2010	3.3
2011	4.5

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/november-2012/index.html

Table IV-18 provides the analysis of inflation in Nov 2012 by the UK Office for National Statistics. The driver of monthly inflation of 0.2 percent is increase of 1.1 percent in food and nonalcoholic beverage, adding 0.12 percentage points. Clothing and footwear increased 0.6 percent, contributing 0.04 percentage points and housing and household services increased 0.6 percent, adding 0.09 percentage points. Contributions of percentage points to the 12-month rate of consumer price inflation of 2.7 percent are provided by the final two columns in Table IV-18. Food and nonalcoholic beverages increased 3.9 percent in 12 months, adding 0.44 percentage points. Education increased 19.7 percent in the prior month of Oct, adding 0.38 percentage points to the 12-month inflation of consumer prices. The UK Office for National Statistics explains as follows (http://www.ons.gov.uk/ons/dcp171778_286398.pdf pages 3-4):

“The CPI rose by 0.5 per cent between September and October this year. By far the largest upward contribution to the 1-month change came from: education: prices, overall, rose by 19.1 per cent between September and October. This is more than twice the size of the next biggest monthly increase for education prices since CPI records began in 1996. The increase was due predominantly to a significant rise in undergraduate tuition fees, where the maximum annual tuition fees for new UK and EU students in England rose to £9,000.”

Table IV-18, UK, Consumer Price Index Month and Twelve-month ∆% and Percentage Point Contributions to Change by Components

Nov 2012	Month ∆%	Percentage Point Contribution	12 Months ∆%	Percentage Point Contribution
CPI All Items	0.2		2.7
Food & Non-Alcoholic Beverages	1.1	0.12	3.9	0.44
Alcohol & Tobacco	-0.5	-0.02	5.7	0.24
Clothing & Footwear	0.6	0.04	-0.6	-0.02
Housing & Household Services	0.6	0.09	2.0	0.29
Furniture & Household Goods	-0.1	-0.01	0.6	0.04
Health	0.0	0.00	2.5	0.06
Transport	-1.0	-0.16	2.6	0.41
Communication	-0.2	-0.01	3.7	0.10
Recreation & Culture	0.0	0.00	1.0	0.14
Education	0.0	0.00	19.7	0.38
Restaurants & Hotels	0.5	0.06	3.3	0.38
Miscellaneous Goods & Services	0.4	0.04	2.3	0.22

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/november-2012/index.html

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/datamapper/index.php?db=WEO) to show GDP in dollars in 2011 and the growth rate of real GDP of the world and selected regional countries from 2012 to 2015. 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 3.3 percent in 2012 but accelerating to 3.6 percent in 2013, 4.2 percent in 2014 and 4.4 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,697 billion of world output of $69,899 billion, or 48.2 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2012 to 2015 in contrast with 3.9 percent for the world as a whole. While the world would grow 16.4 percent in the four years from 2012 to 2015, the G7 as a whole would grow 7.8 percent. The difference in dollars of 2011 is rather high: growing by 16.4 percent would add $11.5 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,867 but growing by 7.8 percent would add $5.2 trillion of output to the world, or somewhat below 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 $25,438 billion, or 36.4 percent of world output. The EMDEs would grow cumulatively 24.9 percent or at the average yearly rate of 5.7 percent, contributing $6.3 trillion from 2012 to 2015 or the equivalent of 86.8 percent of $7,298 billion of China in 2011. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,468 billion, or 19.3 percent of world output, which is equivalent to 39.9 percent of the combined output of the major advanced economies of the G7.

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

	GDP USD 2011	Real GDP ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World	69,899	3.3	3.6	4.2	4.4
G7	33,697	1.4	1.5	2.2	2.5
Canada	1,739	1.9	2.0	2.4	2.4
France	2,778	0.1	0.4	1.1	1.5
DE	3,607	0.9	0.9	1.4	1.4
Italy	2,199	-2.3	-0.7	0.5	1.2
Japan	5,867	2.2	1.2	1.1	1.2
UK	2,431	-0.4	1.1	2.2	2.6
US	15,076	2.2	2.1	2.9	3.4
Euro Area	13,114	-0.4	0.2	1.2	1.5
DE	3,607	0.9	0.9	1.4	1.4
France	2,778	0.1	0.4	1.1	1.5
Italy	2,199	-2.3	-0.7	0.5	1.2
POT	238	-3.0	-1.0	1.2	1.9
Ireland	221	0.4	1.4	2.5	2.9
Greece	299	-6.0	-4.0	0.0	2.8
Spain	1,480	-1.5	-1.3	1.0	1.6
EMDE	25,438	5.3	5.6	5.9	6.1
Brazil	2,493	1.5	3.9	4.2	4.2
Russia	1,850	3.7	3.8	3.9	3.9
India	1,827	4.9	6.0	6.4	6.7
China	7,298	7.8	8.2	8.5	8.5

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/datamapper/index.php?db=WEO). 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 V-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. Estimated rates of unemployment for 2012 are particularly high for the countries with sovereign debt difficulties in Europe: 15.5 percent for Portugal (POT), 14.8 percent for Ireland, 23.8 percent for Greece, 24.9 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is estimated at 7.5 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	7.5	7.5	7.3	6.9
Canada	7.5	7.3	7.3	7.1	6.9
France	9.6	10.1	10.5	10.3	9.8
DE	6.0	5.2	5.3	5.2	5.2
Italy	8.4	10.6	11.1	11.3	11.0
Japan	4.6	4.5	4.4	4.5	4.4
UK	8.0	8.1	8.1	7.9	7.6
US	8.9	8.2	8.1	7.7	7.1
Euro Area	10.2	11.2	11.5	11.2	10.8
DE	6.0	5.2	5.3	5.2	5.2
France	9.6	10.1	10.5	10.3	9.8
Italy	8.4	10.6	11.1	11.3	11.0
POT	12.7	15.5	16.0	15.3	14.7
Ireland	14.4	14.8	14.4	13.7	13.1
Greece	17.3	23.8	25.4	24.5	22.4
Spain	21.7	24.9	25.1	24.1	23.2
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	6.5	6.0	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.1	4.1	4.1	4.1

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IIIQ2012 available now for all countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.4 percent in IQ2012 and 3.4 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 0.0 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 0.1 percent, which is much lower than 5.7 percent in IQ2012. Growth of 3.9 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. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.5 percent and increased 0.5 percent relative to a year earlier. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. China grew at 2.2 percent in IIIQ2012, which annualizes at 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). There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.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 and 7.4 percent in IIIQ2012 relative to IIIQ2011. GDP was flat in the euro area in IQ2012 and fell 0.1 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. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.6 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. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. 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. In IIIQ2012, GDP grew 0.8 percent, 3.1 percent at SAAR and 2.6 percent relative to IIIQ2011 (Section I) but with substantial unemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In IQ2012, UK GDP fell 0.3 percent, declining 0.1 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and 0.5 percent relative to a year earlier. UK GDP increased 1.0 percent in IIIQ2012 and fell 0.1 percent relative to a year earlier. Italy has experienced decline of GDP in five consecutive quarters from IIIQ2011 to IIIQ2012. Italy’s GDP fell 0.8 percent in IQ2012 and declined 1.4 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.4 percent relative to a year earlier. France’s GDP stagnated in IQ2012 and increased 0.4 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.2 percent and increased 0.2 percent relative to a year earlier.

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: 1.4 SAAR: 5.7	3.4
China	1.8	8.1
Euro Area	0.0	-0.1
Germany	0.5	1.7
France	0.0	0.4
Italy	-0.8	-1.4
United Kingdom	-0.3	-0.1
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3         SAAR: 1.3	2.1
Japan	QOQ: 0.0 SAAR: -0.1	3.9
China	1.8	7.6
Euro Area	-0.2	-0.5
Germany	0.3	0.5 1.0 CA
France	-0.1	0.1
Italy	-0.7	-2.4
United Kingdom	-0.4	-0.5
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.8  SAAR: 3.1	2.6
Japan	QOQ: –0.9 SAAR: –3.5	0.5
China	2.2	7.4
Euro Area	-0.1	-0.6
Germany	0.2	0.4
France	0.2	0.2
Italy	-0.2	-2.4
United Kingdom	1.0	-0.1

QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate

Source: Country Statistical Agencies

http://www.bea.gov/national/index.htm#gdp

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 and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). Japan’s exports decreased 4.1 percent in the 12 months ending in Nov, 6.5 percent in the 12 months ending in Oct, 10.3 percent in the 12 months ending in Sep, 5.8 percent in the 12 months ending in Aug and 8.1 percent in 12 months ending in Jul while imports increased 0.8 percent in the 12 months ending in Nov, decreased 1.6 percent in the 12 months ending in Oct, increased 4.1 in the 12 months ending in Sep, 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 and deducted 2.9 percentage points from GDP growth in IIIQ2012. 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. Trade rebounded in China in Sep with growth of exports of 9.9 percent in the 12 months ending in Sep and 2.4 percent for imports. There was further growth in China’s exports of 11.6 percent in the 12 months ending in Oct while imports increased 2.4 percent. In Nov 2012, China’s exports increased 2.9 percent in 12 months and 7.3 percent in Jan-Nov 2012 while imports were unchanged in Nov 2012 and increased 4.1 percent in Jan-Nov 2012. Germany’s exports increased 0.3 percent in the month of Oct and increased 10.6 percent in the 12 months ending in Oct while imports increased 2.5 percent in the month of Oct and increased 6.0 percent in the 12 months ending in Oct. Net trade contributed 1.4 percentage points to growth of Germany’s GDP in IIQ2012 and contributed 1.4 percentage points in IIIQ2012. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, fell from 47.4 in Sep to 46.0 in Oct for the eighth consecutive month in contraction territory below 50.0 and much lower than the long-term average of the index of 52.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278). New export orders fell for sixteen consecutive months at the fastest rate of decline since Apr 2009. UK’s exports decreased 0.8 percent in Oct and decreased 2.7 percent in Aug-Oct 2012 relative to a year earlier while imports increased 1.9 percent in Oct and decreased 0.1 percent in Aug-Oct 2012 relative to a year earlier. Net trade deducted 0.8 percentage points from UK GDP growth in IIQ2012 and added 0.7 percentage points in IIIQ2012. France’s exports increased 0.7 percent in Oct while imports decreased 0.2 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012. US exports decreased 3.6 percent in Oct 2012 and goods exports increased 4.7 percent in Jan-Oct relative to a year earlier but net trade added 0.38 percentage points to GDP growth in IIIQ2012. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

In the six months ending in Nov 2012, United States national industrial production accumulated increase of 0.3 percent at the annual equivalent rate of 0.6 percent, which is much lower than 2.5 percent growth in 12 months. Capacity utilization for total industry in the United States fell increased 0.7 percentage points in Nov to 78.4 percent from 77.7 percent in Oct, which is 1.9 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 1.1 percent in Nov seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent (Section VA and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.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	-3.6 Oct	4.7 Jan-Oct	-2.1 Oct	3.8 Jan-Oct
Japan		Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1		Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1
China	-1.8 Jul 0.6 Aug 4.7 Sep -5.7 Oct	1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4 11.6 Oct 7.8 Jan-Oct 2.9 Nov 7.3 Jan-Nov	2.2 Jul -0.3 Aug 4.9 Sep -9.4 Oct	4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep 2.4 Oct 4.6 Jan-Oct 0.0 Nov 4.1 Jan-Nov
Euro Area	8.6 12-M Oct	8.6 Jan-Oct	7.0 12-M Oct	2.1 Jan-Oct
Germany	0.3 Oct CSA	10.6 Oct	2.5 Oct CSA	6.0 Oct
France Oct	0.7	4.9	-0.2	0.6
Italy Oct	0.0	12.0	0.8	0.9
UK	-0.8 Oct	-2.7 Aug-Oct 12/Aug-Oct 11	1.9 Oct	-0.1 Aug-Oct 12/Aug-Oct 11
Net Trade % Points GDP Growth	% Points
USA IIIQ2012	0.38
Japan	-0.3 IIQ2012 -2.9 IIIQ2012
Germany	1.4 IIQ2012 1.4 IIIQ2012
France	-0.4 IIQ2012   0.3 IIIQ2012
UK	-0.8 IIQ2012 0.7 IIIQ2012

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 and imports of Japan with selected regions and countries is provided in Table V-5 for Nov 2012. The share of Asia in Japan’s trade is more than one half, 54.8 percent of exports and 45.9 percent of imports. Within Asia, exports to China are 17.2 percent of total exports and imports from China 23.7 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 18.7 percent of total exports and share of imports from the US of 8.1 percent in total imports. Western Europe has share of 10.3 percent in Japan’s exports and of 11.4 percent in imports. Rates of growth of exports of Japan in Nov are sharply negative for all countries and regions with the exception of 5.3 percent for exports to the US, 11.0 percent for Mexico and 19.2 percent for the Middle East. 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 4.1 percent in Nov 2012 while imports increased 0.8 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Nov are negative for some trading partners: minus 5.5 percent for the US, minus 4.5 percent for the Middle East and minus 14.2 percent for Australia. Imports from Asia increased 3.6 percent in the 12 months ending in Nov while imports from China increased 5.8 percent.

Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Nov 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	4,983,900	-4.1	5,937,332	0.8
Asia	2,729,189	-2.5	2,726,959	3.6
China	858,693	-14.5	1,406,156	5.8
USA	933,760	5.3	479,933	-5.5
Canada	59,616	-11.6	90,043	10.8
Brazil	33,595	-10.4	91,728	0.6
Mexico	74,434	11.0	31,446	20.9
Western Europe	513,037	-21.2	676,894	3.6
Germany	131,431	-14.1	190,133	7.7
France	37,419	-25.5	107,427	24.5
UK	89,427	-34.4	56,689	16.2
Middle East	183,230	19.2	1,034,102	-4.5
Australia	120,513	-1.5	338,643	-14.2

Source: Japan, Ministry of Finance 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

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, increased to 53.7 in Nov from 51.0 in Oct, indicating expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10439). This index has remained above the contraction territory of 50.0 during 40 consecutive months. Both global manufacturing and services have slowed down considerably with services accelerating while manufacturing stabilized (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10439). The employment index fell from 50.8 in Oct to 50.0 in Nov with continuing increases in input prices but at slower pace. David Hensley, Director of Global Economic Coordination at JP Morgan, finds encouraging signs in services while manufacturing could grow again toward the end of 2012 but employment may be restrained by cost restraint (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10439). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased to 49.7 in Nov from 48.8 in Oct, for the highest reading in five month and just below the neutral 50.0 level (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10408). New export business declined for the eighth consecutive month in Nov, mixing growth in China and stability in the US with decreases in Europe and Japan. David Hensley, Director of Global Economics Coordination at JP Morgan, finds improving global manufacturing at the end of the year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10408). The HSBC Brazil Composite Output Index, compiled by Markit, increased to 53.0 in Nov from 50.7 in Oct, indicating solid expansion at the fastest rate in eight months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10409). The HSBC Brazil Services Business Activity index, compiled by Markit, increased from 50.4 in Oct to 52.5 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10409). Andre Loes, Chief Economist, Brazil, at HSBC, finds consolidation of the recovery of economic activity in Brazil (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10409). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) increased from 50.2 in Oct to 52.2 in Nov, indicating improvement of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10395). Andre Loes, Chief Economist, Brazil at HSBC, finds recovery improving with gains in both output and new orders at the fastest pace since IQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10395).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465). The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) increased to 52.8 in Nov from 51.0 in Oct, indicating marginal improvement in manufacturing sector conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10399). The index of new exports orders increased from 47.2 in Oct to 50.3 in Nov while total new orders increased from 51.1 in Oct to 53.6 in Nov. The increase in new export orders was the first in six months. Chris Williamson, Chief Economist at Markit, finds that manufacturing continue to be weak in output and creation of jobs; the increase of the index is partly due to new work resulting from Hurricane Sandy; and manufacturing is likely to make only marginal contribution to growth that is weakening when considering consumer spending (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10399). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® decreased 2.2 percentage points from 51.7 in Oct to 49.5 in Nov, which is the lowest level since 49.2 in Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders decreased 3.9 percentage points from 54.2 in Oct to 50.3 in Nov. The index of exports decreased 1.0 percentage points from 48.0 in Oct to 47.0 in Nov, remaining in mild contraction territory. The Non-Manufacturing ISM Report on Business^® PMI increased 0.5 percentage points from 54.2 in Oct to 54.7 in Nov, indicating growth during 40 consecutive months, while the index of new orders increased 3.3 percentage points from 54.8 in Oct to 58.1 in Nov (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	Nov 12 months NSA ∆%: 1.8; ex food and energy ∆%: 1.9 Nov month ∆%: -0.3; ex food and energy ∆%: 0.1 Blog12/16/12
Producer Price Index	Nov 12-month NSA ∆%: 1.5; ex food and energy ∆% 2.2 Nov month SA ∆% = -0.8; ex food and energy ∆%: 0.1 Blog 12/16/12
PCE Inflation	Nov 12-month NSA ∆%: headline 1.4; ex food and energy ∆% 1.5 Blog 12/23-24/12
Employment Situation	Household Survey: Nov Unemployment Rate SA 7.7% Blog calculation People in Job Stress Nov: 28.4 million NSA, 18.2% of Labor Force Establishment Survey: Nov Nonfarm Jobs +146,000; Private +147,000 jobs created  Oct 12-month Average Hourly Earnings Inflation Adjusted ∆%: -1.3 Blog 12/9/12
Nonfarm Hiring	Nonfarm Hiring fell from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million Private-Sector Hiring Oct 2012 4.352 million lower by 0.912 million than 5.264 million in Oct 2005 Blog 12/16/12
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2012 2.6 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 Blog 12/23-24/12
Real Private Fixed Investment	SAAR IIIQ2012 0.9 ∆% IVQ2007 to IIIQ2012: minus 12.6% Blog 12/23-24/12
Personal Income and Consumption	Nov month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.8 Real Personal Consumption Expenditures (RPCE): 0.6 12-month Nov NSA ∆%: RDPI: 2.5; RPCE ∆%: 2.1 Blog 12/23-24/2012
Quarterly Services Report	IIIQ12/IIIQ11 SA ∆%: Information 2.1 Professional 6.0 Administrative 3.9 Hospitals 7.4 Financial & Insurance 6.5 Blog 12/9/12
Employment Cost Index	Compensation Private IIIQ2012 SA ∆%: 0.5 Sep 12 months ∆%: 2.0 Blog 11/4/12
Industrial Production	Nov month SA ∆%: minus 1.1 Nov 12 months SA ∆%: 2.5 Manufacturing Nov SA ∆% 1.1 Nov 12 months SA ∆% 2.7, NSA 2.5 Capacity Utilization: 78.4 Blog 12/23-24/12
Productivity and Costs	Nonfarm Business Productivity IIIQ2012∆% SAAE 2.9; IIIQ2012/IIIQ2011 ∆% 1.7; Unit Labor Costs SAAE IIIQ2012 ∆% -1.9; IIIQ2012/IIIQ2011 ∆%: 0.1 Blog 12/9/2012
New York Fed Manufacturing Index	General Business Conditions From Nov -5.22 to Dec -8.10 New Orders: From Nov 3.08 to Dec -3.70 Blog 12/23-24/12
Philadelphia Fed Business Outlook Index	General Index from Nov -10.7 to Dec 8.1 New Orders from Nov minus 4.6 to Dec 10.7 Blog 12/23-24/12
Manufacturing Shipments and Orders	New Orders SA Oct ∆% 0.8 Ex Transport 1.3 Jan-Oct NSA New Orders 3.5 Ex transport 2.6 Blog 12/9/12
Durable Goods	Nov New Orders SA ∆%: 0.7; ex transport ∆%: 1.6 Jan-Nov New Orders NSA ∆%: 4.5; ex transport ∆% 2.8 Blog 12/23-24/12
Sales of New Motor Vehicles	Jan-Nov 2012 13,135,576; Jan-Nov 2011 11,534,206. Nov SAAR 15.54 million, Oct SAAR 14.29 million, Nov 2011 SAAR 13.55 million Blog 12/9/12
Sales of Merchant Wholesalers	Jan-Oct 2012/Jan-Oct 2011 NSA ∆%: Total 5.5; Durable Goods: 6.4; Nondurable Goods: 4.8 Blog 12/16/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Oct 12/Oct 11 NSA ∆%: Sales Total Business 6.3; Manufacturers 5.4 Retailers 5.4; Merchant Wholesalers 8.2 Blog 12/16/12
Sales for Retail and Food Services	Jan-Nov 2012/Jan-Nov 2011 ∆%: Retail and Food Services 5.5; Retail ∆% 5.2 Blog 12/16/12
Value of Construction Put in Place	Oct SAAR month SA ∆%: 1.4 Oct 12-month NSA: 10.8 Jan-Oct 2012 ∆% 9.3 Blog 12/9/12
Case-Shiller Home Prices	Sep 2012/Sep 2011 ∆% NSA: 10 Cities 2.1; 20 Cities: 3.0 ∆% Sep SA: 0.3 Cities 0.4 ; 20 Cities: 0.4 Blog 12/2/12
FHFA House Price Index Purchases Only	Sep SA ∆% 0.2; 12 month NSA ∆%: 4.5 Blog 12/2/12
New House Sales	Oct 2012 month SAAR ∆%: minus 0.3 Jan-Oct 2012/Jan-Oct 2011 NSA ∆%: 20.5 Blog 12/2/12
Housing Starts and Permits	Nov Starts month SA ∆%: -3.0 ; Permits ∆%: 3.6 Jan-Nov 2012/Jan-Nov 2011 NSA ∆% Starts 27.1; Permits  ∆% 32.8 Blog 12/23-24/12
Trade Balance	Balance Oct SA -$44240 million versus Sep -$40277 million Exports Oct SA ∆%: -3.6 Imports Oct SA ∆%: -2.1 Goods Exports Jan-Oct 2012/2011 NSA ∆%: 4.7 Goods Imports Jan-Oct 2012/2011 NSA ∆%: 3.8 Blog 12/16/12
Export and Import Prices	Nov 12-month NSA ∆%: Imports -1.6; Exports 0.7 Blog 12/16/12
Consumer Credit	Oct ∆% annual rate: 6.2 Blog 12/9/12
Net Foreign Purchases of Long-term Treasury Securities	Oct Net Foreign Purchases of Long-term Treasury Securities: $1.3 billion Major Holders of Treasury Securities: China $1161 billion; Japan $1135 billion; Total Foreign US Treasury Holdings Oct $5482 billion Blog 12/23-24/12
Treasury Budget	Fiscal Year 2013/2012 ∆% Nov: Receipts 9.7; Outlays 15.8; Individual Income Taxes 12.5 Deficit Fiscal Year 2011 $1,297 billion Deficit Fiscal Year 2012 $1,089,353 million Blog 12/16/2012
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 11/18/12
Commercial Banks Assets and Liabilities	Oct 2012 SAAR ∆%: Securities 8.3 Loans 4.4 Cash Assets -66.6 Deposits 7.3 Blog 11/25/12
Flow of Funds	IIIQ2012 ∆ since 2007 Assets -$2059B Real estate -$4035B Financial +$1529 MM Net Worth -$1232B Blog 12/9/12
Current Account Balance of Payments	IIIQ2012 -$128 B %GDP 3.3 Blog 12/23-24/12

Links to blog comments in Table USA:

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

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

12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html

11/25/12 http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real.html

11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html

11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html

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

Industrial production decreased 1.0 percent in Aug 2012, increased 0.2 percent in Sep, fell 0.7 percent in Oct and rebounded 1.1 percent in Nov, as shown in Table VA-1, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/current/):

“Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October. In November, manufacturing output increased 1.1 percent after having decreased 1.0 percent in October; in addition to the storm-related rebound, a sizable rise in the production of motor vehicles and parts boosted factory output in November. The output of utilities advanced 1.0 percent, and production at mines rose 0.8 percent. At 97.5 percent of its 2007 average, total industrial production in November was 2.5 percent above its year-earlier level. Capacity utilization for total industry increased 0.7 percentage point to 78.4 percent, a rate 1.9 percentage points below its long-run (1972--2011) average.”

In the six months ending in Nov 2012, industrial production accumulated increase of 0.3 percent at the annual equivalent rate of 0.6 percent, which is substantially lower than 2.5 percent growth in 12 months. Business equipment fell 0.9 percent in Aug 2012, decreased 0.3 percent in Sep, decreased 1.3 percent in Oct and increased 1.2 percent in Nov, growing 7.4 percent in the 12 months ending in Nov and at the annual equivalent rate of 1.3 percent in the six months ending in Nov 2012. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/current/): “Capacity utilization for total industry increased 0.7 percentage point to 78.4 percent, a rate 1.9 percentage points below its long-run (1972-2011) average.” United States industry is decelerating but the effects of hurricane Sandy prevent accurate evaluation

Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, % 

2012	Nov	Oct	Sep	Aug	Jul	Jun	Sep  12/ Sep  11
Total	1.1	-0.7	0.2	-1.0	0.7	0.0	2.5
Market Groups
Final Products	1.1	-1.3	0.2	-0.9	0.4	0.4	2.5
Consumer Goods	1.2	-1.2	0.4	-1.0	0.4	-0.2	1.2
Business Equipment	1.2	-1.3	-0.3	-0.9	0.1	1.9	7.4
Non Industrial Supplies	0.9	-0.7	0.0	-0.6	0.0	-0.3	2.1
Construction	1.4	-0.3	0.5	-0.2	-0.8	-0.9	2.9
Materials	1.0	-0.1	0.2	-1.2	1.1	-0.2	2.7
Industry Groups
Manufacturing	1.1	-1.0	0.1	-0.8	0.3	0.4	2.7
Mining	0.8	0.3	1.6	-0.9	1.3	0.1	3.0
Utilities	1.0	0.0	-0.8	-2.2	3.0	-2.7	0.7
Capacity	78.4	77.7	78.3	78.3	79.2	78.8	1.5

Sources: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/g17/current/

Manufacturing increased 1.1 percent in Nov 2012 seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent. More data are required to evaluate output-reducing effects of hurricane Sandy. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.4 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steady in the past six months.

Table VA-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12-Month NSA ∆%
Nov 2012	1.1	2.5
Oct	-1.0	1.7
Sep	0.1	3.0
Aug	-0.8	3.7
Jul	0.3	4.3
Jun	0.4	5.1
May	-0.7	5.1
Apr	0.7	5.7
Mar	-0.7	4.3
Feb	0.9	5.9
Jan	1.0	4.9
Dec 2011	1.5	4.4
Nov	0.0	4.0
Oct	0.5	4.3
Sep	0.4	4.0
Aug	0.3	3.4
Jul	0.8	3.2
Jun	0.0	3.1
May	0.2	2.9
Apr	-0.6	4.1
Mar	0.6	6.0
Feb	0.2	6.3
Jan	0.4	6.3
Dec 2010	1.0	6.6
Nov	0.2	5.5
Oct	0.1	6.6
Sep	0.2	6.7
Aug	0.0	7.1
Jul	0.8	7.3
Jun	0.0	9.0
May	1.4	8.3
Apr	1.0	6.5
Mar	1.1	4.2
Feb	0.1	0.6
Jan	0.9	0.5
Dec 2009	0.1	-3.7
Nov	0.9	-6.6
Oct	-0.1	-9.4
Sep	0.7	-10.7
Aug	1.0	-13.7
Jul	1.2	-15.3
Jun	-0.3	-17.8
May	-1.2	-17.8
Apr	-0.8	-18.4
Mar	-2.1	-17.5
Feb	0.0	-16.3
Jan	-2.9	-16.6
Dec 2008	-3.3	-14.1
Nov	-2.3	-11.4
Oct	-0.7	-9.1
Sep	-3.4	-8.8
Aug	-1.4	-5.3
Jul	-1.1	-3.8
Jun	-0.6	-3.2
May	-0.6	-2.5
Apr	-1.1	-1.3
Mar	-0.4	-0.7
Feb	-0.4	0.8
Jan	-0.4	2.1
Dec 2007	0.3	1.9
Nov	0.4	3.2
Oct	-0.5	2.7
Sep	0.5	2.9
Aug	-0.5	2.6
Jul	0.2	3.4
Jun	0.3	2.9
May	-0.2	3.1
Apr	0.8	3.6
Mar	0.6	2.5
Feb	0.6	1.7
Jan	-0.5	1.4
Dec 2006		2.8
Dec 2005		3.4
Dec 2004		4.0
Dec 2003		1.8
Dec 2002		2.3
Dec 2001		-5.5
Dec 2000		0.4
Dec 1999		5.4
Average ∆% Dec 1986-Dec 2011		2.3
Average ∆% Dec 1986-Dec 1999		4.3
Average ∆% Dec 1999-Dec 2006		1.3
Average ∆% Dec 1999-Dec 2011		0.2

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/g17/current/

Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart VA-1, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.

Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 5 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart VA-3, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

United States manufacturing output from 1919 to 2012 on a monthly basis is provided by Chart VA-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is stagnating at the margin.

Chart VA-4, US, Manufacturing Output, 1919-2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/

Manufacturing jobs decreased 7,000 in Nov 2012 relative to Oct 2012, seasonally adjusted but fell 40,000 in Nov 2012 relative to Oct 2012, not seasonally adjusted, as shown in Table VA-3, because of the weaker economy and international trade. In the six months ending in Nov, United States national industrial production accumulated increase of 0.28 percent at the annual equivalent rate of increase of 0.6 percent, which is substantially lower than 2.5 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.7 percentage point in Nov to 78.4 percent, which is 1.9 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 1.1 percent in Nov seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent. Table VA-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Nov 2012, there were 135.069 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 112.631 million NSA in Nov 2012 accounted for 83.4 percent of total nonfarm jobs of 135.069 million, of which 11.967 million, or 10.6 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 94.188 million NSA in Oct 2012, or 69.7 percent of total nonfarm jobs and 83.6 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, 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 IIQ2012	% Total	SAAR IIIQ2012	% Total
National Income WCCA	13,833.6	100.0	13,969.4	100.0
Domestic Industries	13,586.3	98.2	13,726.2	98.3
Private Industries	11,933.2	86.3	12,067.6	86.4
Agriculture	131.7	0.9	138.7	1.0
Mining	208.3	1.5	203.2	1.5%
Utilities	214.6	1.6	216.8	1.6
Construction	583.7	4.2	592.7	4.2
Manufacturing	1548.1	11.2	1552.5	11.1
Durable Goods	894.3	6.5	895.6	6.4
Nondurable Goods	653.8	4.7	656.9	4.7
Wholesale Trade	853.5	6.2	837.9	6.0
Retail Trade	951.9	6.9	959.8	6.9
Transportation & WH	414.5	3.0	414.9	3.0
Information	499.1	3.6	499.6	3.6
Finance, Insurance, RE	2237.5	16.2	2324.6	16.6
Professional, BS	1971.7	14.3	1997.2	14.3
Education, Health Care	1378.1	10.0	1385.7	9.9
Arts, Entertainment	540.4	3.9	540.5	3.9
Other Services	400.0	2.9	403.6	2.9
Government	1653.0	11.9	1658.6	11.9
Rest of the World	247.3	1.8	243.1	1.7

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

Chart VA-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2012. Output has stagnated since the late 1990s.

Chart VA-5, US, Motor Vehicles and Parts Output, 1972-2012

http://www.federalreserve.gov/releases/g17/current/

Motor vehicle sales and production in the US have been in long-term structural change. Table VA-4 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan-Sep 2012, light vehicle sales accumulated to 10,899,949, which is higher by 14.5 percent relative to 9,518,172 a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 14.94 million in Sep 2012, higher than 14.52 million in Aug 2012 and higher than 13.14 million in Sep 2011 (http://motorintelligence.com/m_frameset.html).

Table VA-4, US, New Motor Vehicle Sales and Car Production, Thousand Units

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

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

Chart VA-6 of the Board of Governors of the Federal Reserve System provides output of computers and electronic products in the United States from 1972 to 2012. Output accelerated sharply in the 1990s and 2000s and has surpassed the level before the global recession beginning in IVQ2007.

Chart VA-6, US, Output of Computers and Electronic Products, 1972-2012

http://www.federalreserve.gov/releases/g17/current/

Chart VA-7 of the Board of Governors of the Federal Reserve System shows that output accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.

Chart VA-7, US, Output of Durable Manufacturing, 1972-2012

http://www.federalreserve.gov/releases/g17/current/

Chart VA-8 of the Board of Governors of the Federal Reserve System provides output of aerospace and miscellaneous transportation equipment from 1972 to 2012. There is long-term upward trend with oscillations around the trend and cycles of large amplitude.

Chart VA-8, US, Output of Aerospace and Miscellaneous Transportation Equipment, 1972-2012

http://www.federalreserve.gov/releases/g17/current/

In the six months ending in Nov 2012, industrial production accumulated increase of 0.3 percent at the annual equivalent rate of 0.6 percent, which is substantially lower than 2.5 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.7 percentage point in Nov to 78.4 percent, which is 1.9 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 1.1 percent in Nov 2012 seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent. The index of general business conditions of the Federal Reserve Bank of New York Empire State Manufacturing Survey has fluctuated with further decline to contraction territory at minus 10.41 in Sep 2012 but improvement to minus 6.16 in Oct 2012 and minus 5.22 in Nov followed by deterioration to minus 8.10 in Dec 2012, which is still in contraction territory, as shown in Table VA-5. The index had been registering negative changes in the five months from Jun to Oct 2011. The new orders segment fell to minus 5.50 in Aug 2012, indicating mild contraction, and to minus 14.03 in Sep 2012, indicating faster contraction, improving to minus 8.97 in Oct 2012, which is still in contraction territory, and 3.08 in Nov that is above contraction, falling back to contraction at minus 3.70 in Dec 2012. There is declining reading in shipments decreasing to 4.09 in Aug 2012 with decline at minus 6.4 in Oct 2012 but moving into 14.59 in Nov 2012 and 8.83 in Dec 2012. The segment of number of employees eased to 16.47 in Aug 2012 and dropped to 4.26 in Sep 2012, falling in contraction territory at minus 1.08 in Oct 2012 and deeper to minus 14.61 in Nov 2012 and minus 9.68 in Dec 2012. Number of weekly hours worked fell to neutral at zero in Jul 2012 and increased marginally to 3.53 in Aug but fell to minus 1.06 in Sep, minus 4.30 in Oct 2012, minus 7.87 in Nov 2012 and minus 10.75 in Dec 2012, indicating contraction. Expectations for the next six months of the general business conditions index peaked at 54.87 in Jan 2012, declining to 18.66 in Dec 2012. Expectations of new orders also peaked at 53.85 in Jan 2012, declining to 2.35 in Aug 2012 but rebounding to 22.26 in Nov 2012. There is a similar pattern of strong recovery in shipments with decline to 8.24 in Aug 2012 and rebound to 34.41 in Nov 2012. Number of employees fell sharply to 3.53 in Aug 2012 and rebounded to 8.51 in Sep 2012 but was neutral at 0.00 in Oct 2012 and fell to contraction at 1.12 in Nov 2012, rebounding to 10.75 in Dec 2012. Hours worked collapsed to minus 8.24 in Aug, indicating expected contraction, rebounded to 2.13 in Sep 2012, indicating moderate expansion, and fell to minus 11.83 in Oct 2012, indicating sharper contraction, neutral at 0.00 in Nov 2012 and 5.38 in Dec 2012.

Table VA-5, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA

	General Index	New Orders	Shipments	# Workers	Average Work-week
Current
Dec 2012	-8.10	-3.70	8.83	-9.68	-10.75
Nov	-5.22	3.08	14.59	-14.61	-7.87
Oct	-6.16	-8.97	-6.4	-1.08	-4.30
Sep	-10.41	-14.03	2.75	4.26	-1.06
Aug	-5.85	-5.50	4.09	16.47	3.53
Jul	7.39	-2.69	10.28	18.52	0.00
Jun	2.29	2.18	4.81	12.37	3.09
May	17.09	8.32	24.14	20.48	12.05
Apr	6.56	6.48	6.41	19.28	6.02
Mar	20.21	6.84	18.21	13.58	18.52
Feb	19.53	9.73	22.79	11.76	7.06
Jan	13.48	13.70	21.69	12.09	6.59
Dec 2011	8.19	5.99	20.06	2.33	-2.33
Nov	0.80	-0.82	11.70	-3.66	2.44
Oct	-7.22	-0.26	2.89	3.37	-4.49
Sep	-7.43	-7.52	-8.28	-5.43	-2.17
Six Months
Dec 2012	18.66	22.26	34.41	10.75	5.38
Nov	12.88	21.35	30.34	-1.12	0.00
Oct	19.42	15.05	11.83	0.00	-11.83
Sep	27.22	17.02	12.77	8.51	2.13
Aug	15.20	2.35	8.24	3.53	-8.24
Jul	20.20	13.58	14.81	6.17	-4.94
Jun	23.13	15.46	12.37	16.49	2.06
May	29.26	30.12	25.30	12.05	8.43
Apr	43.12	45.78	44.58	27.71	10.84
Mar	47.50	41.98	43.21	32.10	20.99
Feb	50.38	44.71	49.41	29.41	18.82
Jan	54.87	53.85	52.75	28.57	17.58
Dec 2011	45.61	54.65	51.16	24.42	22.09
Nov	32.06	35.37	36.59	14.63	8.54
Oct	13.99	12.36	17.98	6.74	-2.25
Sep	22.93	13.04	13.04	0.00	-6.52

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

The Philadelphia Business Outlook Survey in Table VA-6 provides an optimistic reading in Oct 2011 with the movement to 10.8 away from the contraction zone of minus 12.7 in Sep and recovered to 12.5 in Mar 2012 from the decline to 3.1 in Nov but then fell to 8.5 in Apr 2012 and back to contraction territory at minus 5.8 in May and even sharper contraction at minus 16.6 in Jun, easing to minus 12.9 in Jul 2012 with contraction at minus 7.1 in Aug and milder contraction of 1.9 in Sep 2012. The index returned to growth territory at 5.7 in Oct 2012 but fell to contraction at 10.7 in Nov 2012, rebounding to expansion at 8.1 in Dec 2012. New orders were signaling increasing future activity, rising from contraction at minus 5.5 in Sep 2011 to positive reading but registered only 3.3 in Mar 2012 and fell further to 2.7 in Apr and into contraction reading at minus 1.2 in May and sharp contraction at 18.8 in Jun, with milder contraction at minus 5.5 in Aug 2012 and moderate expansion at 1.0 in Sep 2012 but then fell to minus 0.6 in Oct 2012 and minus 4.6 in Nov 2012, rebounding at 10.7 in Dec 2012. There is similar behavior in shipments as in new orders but with sharp contraction in Sep 2012 and mild contraction of minus 0.2 in Oct 2012 and minus 6.7 in Nov 2012, rebounding to 18.3 in Dec 2012. Employment or number of employees fell to contraction at minus 8.6 in Aug 2012, minus 7.3 in Sep 2012, minus 10.7 in Oct 2012 and minus 6.8 in Nov 2012 with movement to 3.6 in Dec 2012. The average work week also fell to sharp contraction at minus 19.1 in Jun 2012 and minus 14.6 in Aug 2012, remaining in contraction territory at minus 7.3 in Sep 2012, minus 7.6 in Oct 2012 and minus 6.2 in Nov 2012, moving to 4.2 in Dec 2012. Most indexes of expectations for the next six months are showing sharp increases but interruptions from May to Aug 2012 for the general index that rebounded to 41.2 in Sep 2012 but fell to 21.6 in Oct 2012 and 20.0 in Nov 2012, increasing to 30.9 in Dec 2012. Employment increased from Jan to Apr 2012, deteriorating in May and further deterioration in Aug but improvement in Sep with decline in Oct and Nov followed by improvement in Dec 2012 while the average work week weakened in Apr 2012 and contracted at minus 1.1 in May and minus 0.8 in Jun but recovery at 14.5 in Jul, declining to 4.8 in Aug and improving to 14.6 in Sep and 11.1 in Oct with decline to 7.9 in Nov 2012 followed by improvement to 17.7 in Dec 2012. With most US workers on hourly remuneration, contraction of the workweek means reduction of labor income, which can affect consumption. Personal consumption expenditures have share of 70.5 percent of GDP in IIIQ2012 (see Table I-10 and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).

Table VA-6, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Dec 12	8.1	10.7	18.3	3.6	4.2
Nov	-10.7	-4.6	-6.7	-6.8	-6.2
Oct	5.7	-0.6	-0.2	-10.7	-7.6
Sep	-1.9	1.0	-21.2	-7.3	-7.3
Aug	-7.1	-5.5	-11.3	-8.6	-14.6
Jul	-12.9	-6.9	-8.6	-8.4	-17.3
Jun	-16.6	-18.8	-16.6	1.8	-19.1
May	-5.8	-1.2	3.5	-1.3	-5.4
Apr	8.5	2.7	2.8	17.9	-2.3
Mar	12.5	3.3	3.5	6.8	2.7
Feb	10.2	11.7	15.0	1.1	10.1
Jan	7.3	6.9	5.7	11.6	5.0
Dec 11	6.8	10.7	9.1	11.5	2.8
Nov	3.1	3.5	6.0	10.6	7.1
Oct	10.8	8.5	13.6	5.0	4.2
Sep	-12.7	-5.5	-16.6	7.3	-6.2
Aug	-22.7	-22.2	-8.9	-0.9	-11.2
Jul	6.2	0.5	8.2	9.5	-3.9
Future
Dec 12	30.9	36.2	33.7	14.8	17.7
Nov	20.0	24.5	27.2	4.2	7.9
Oct	21.6	21.2	20.6	8.0	11.1
Sep	41.2	49.4	42.9	21.4	14.6
Aug	12.5	18.5	11.7	10.8	4.8
Jul	19.3	26.1	19.0	11.3	14.5
Jun	19.5	38.2	38.0	18.7	-0.8
May	15.0	26.3	20.8	10.6	-1.1
Apr	33.8	35.4	31.0	27.8	7.5
Mar	32.9	36.4	31.3	21.8	11.2
Feb	33.3	32.5	29.0	22.5	10.8
Jan	49.0	49.7	48.2	19.1	9.2
Dec 11	40.0	44.1	36.4	10.8	4.5
Nov	37.7	36.9	35.5	25.2	4.0
Oct	28.8	28.1	29.0	15.5	8.4
Sep	25.2	24.6	27.1	14.0	6.8
Aug	6.3	20.6	18.4	11.2	-0.7
Jul	25.8	31.2	26.1	12.9	6.6

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VA-9 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jun 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully appeared as renewed strength from late 2011 into Jan 2012 with decline to negative territory of the current activity index in Nov 2012 and return to positive territory in Dec 2012.

Chart VA-9, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VA-10 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct 2011. The strength of the first quarter of 2011 has not been recovered with weakness in Apr-Aug 2012 moving into contraction territory with new drop to contraction territory in Nov 2012 followed by expansion in Dec 2012.

Chart VA-10, Federal Reserve Bank of Philadelphia Current New Orders Diffusion Index

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Manufacturers’ shipments of durable goods increased 1.5 percent in Nov 2012 after increasing 0.1 percent in Oct and 0.5 percent in Sep. New orders increased 0.7 percent in Nov after increasing 1.1 percent in Oct after 9.1 percent in Sep, as shown in Table VA-7. These data are very volatile. Volatility is illustrated by decrease of 13.9 percent in Nov after increase of orders for nondefense aircraft of 2642.2 percent in Sep after decrease of 97.2 percent in Aug and increases of 51.1 percent in Jul and 32.5 percent in Jun. New orders excluding transportation equipment increased 1.6 percent in Nov, 1.9 percent in Oct and 1.7 percent in Sep. Capital goods new orders, indicating investment, decreased 2.6 percent in Nov after increase of 1.5 percent in Oct and 24.2 percent in Sep. New orders of nondefense capital goods decreased 2.8 percent in Nov after increasing 2.8 percent in Oct and 22.8 percent in Sep. Excluding more volatile aircraft, capital goods orders increased 2.7 percent in Nov and 3.2 percent in Oct with decrease of 0.5 percent in Sep.

Table VA-7, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Nov 2012  ∆%	Oct 2012  ∆%	Sep 2012 ∆%
Total
S	1.5	0.1	0.5
NO	0.7	1.1	9.1
Excluding Transport
S	1.3	0.2	0.4
NO	1.6	1.9	1.7
Excluding Defense
S	1.5	0.1	0.5
NO	0.8	1.3	8.5
Machinery
S	3.2	1.3	-0.8
NO	3.3	3.4	7.8
Computers & Electronic Products
S	-1.6	-0.1	2.3
NO	0.1	2.2	-0.5
Computers
S	0.9	-9.3	0.9
NO	3.1	-9.5	-0.2
Transport Equipment
S	2.2	-0.3	0.8
NO	-1.1	-0.6	29.7
Motor Vehicles
S	3.1	-0.6	-1.1
NO	3.5	-0.1	-1.7
Nondefense Aircraft
S	0.3	0.5	13.6
NO	-13.9	0.2	2,642.2
Capital Goods
S	1.4	0.0	1.8
NO	-2.6	1.5	24.2
Nondefense Capital Goods
S	1.3	0.4	1.4
NO	-2.8	2.8	22.8
Capital Goods ex Aircraft
S	1.8	0.6	-0.3
NO	2.7	3.2	-0.5

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

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

Chart VA-11 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. Twelve-month percentage rates have fallen from the highs in 2010.

Chart VA-11, US, Manufacturers’ Durable Goods New Orders 2010-2011

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

Additional perspective on manufacturers’ shipments and new orders of durable goods is provided by Table VA-8. Values are cumulative millions of dollars in Jan-Nov 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Nov 2012 total $2468.4 billion and new orders total $2389.4 billion, growing respectively by 7.3 percent and 4.4 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 5.8 percent and new orders increased 2.8 percent. Excluding defense, shipments grew 7.9 percent and new orders grew 5.3 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 $856.3 billion for shipments, growing 5.9 percent, and new orders $861.9 billion, growing 0.0 percent. Excluding aircraft, capital goods shipments reached $696.6 billion, growing by 5.3 percent, and new orders $692.6 billion, growing 0.1 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-8, US, Value of Manufacturers’ Shipments and New Orders of Durable Goods, NSA, Millions of Dollars 

Jan-Nov 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/  2011
Total	2,468,395	7.3	2,389,415	4.5
Excluding Transport	1,763,228	5.8	1,674,541	2.8
Excluding Defense	2,350,483	7.9	2,276,535	5.3
Machinery	355,301	9.6	342,954	-3.1
Computers & Electronic Products	308,374	-0.7	233,455	-0.3
Computers & Related Products	29,408	-11.2	29,532	-10.6
Transport Equipment	705,167	11.2	714,874	8.8
Motor Vehicles	481,946	12.4	480,618	12.1
Nondefense Aircraft	103,630	21.9	122,718	13.7
Capital Goods	856,324	5.9	861,989	0.0
Nondefense Capital Goods	764,913	7.4	776,535	1.9
Capital Goods ex Aircraft	696,641	5.3	692,563	0.1

Note: Transport: transportation

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

Chart VA-12 of the Board of Governors of the Federal Reserve System shows that output accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.

Chart VA-12, US, Output of Durable Manufacturing, 1972-2012

http://www.federalreserve.gov/releases/g17/current/

Manufacturing jobs decreased 7,000 in Nov 2012 relative to Oct 2012, seasonally adjusted but fell 40,000 in Nov 2012 relative to Oct 2012, not seasonally adjusted, as shown in Table VA-9, because of the weaker economy and international trade. In the six months ending in Nov, United States national industrial production accumulated increase of 0.28 percent at the annual equivalent rate of increase of 0.6 percent, which is substantially lower than 2.5 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.7 percentage point in Nov to 78.4 percent, which is 1.9 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 1.1 percent in Nov seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent. Table VA-9 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Nov 2012, there were 135.069 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 112.631 million NSA in Nov 2012 accounted for 83.4 percent of total nonfarm jobs of 135.069 million, of which 11.967 million, or 10.6 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 94.188 million NSA in Oct 2012, or 69.7 percent of total nonfarm jobs and 83.6 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, as shown in Table VA-9. 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-9, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IIQ2012	% Total	SAAR IIIQ2012	% Total
National Income WCCA	13,833.6	100.0	13,969.4	100.0
Domestic Industries	13,586.3	98.2	13,726.2	98.3
Private Industries	11,933.2	86.3	12,067.6	86.4
Agriculture	131.7	0.9	138.7	1.0
Mining	208.3	1.5	203.2	1.5%
Utilities	214.6	1.6	216.8	1.6
Construction	583.7	4.2	592.7	4.2
Manufacturing	1548.1	11.2	1552.5	11.1
Durable Goods	894.3	6.5	895.6	6.4
Nondurable Goods	653.8	4.7	656.9	4.7
Wholesale Trade	853.5	6.2	837.9	6.0
Retail Trade	951.9	6.9	959.8	6.9
Transportation & WH	414.5	3.0	414.9	3.0
Information	499.1	3.6	499.6	3.6
Finance, Insurance, RE	2237.5	16.2	2324.6	16.6
Professional, BS	1971.7	14.3	1997.2	14.3
Education, Health Care	1378.1	10.0	1385.7	9.9
Arts, Entertainment	540.4	3.9	540.5	3.9
Other Services	400.0	2.9	403.6	2.9
Government	1653.0	11.9	1658.6	11.9
Rest of the World	247.3	1.8	243.1	1.7

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

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-10. Housing starts decreased 3.0 percent in Nov 2012 after increasing 5.3 percent in Oct 2012 and 12.4 percent in Sep 2012. Housing permits, indicating future activity, increased 3.6 percent in Nov 2012 but decreased 2.5 percent in Oct 2012 and increased 11.1 percent in Sep 2012. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-10.

Table VA-10, US, Housing Starts and Permits SSAR Month ∆%

	Housing  Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Nov 2012	861	-3.0	899	3.6
Oct	888	5.3	868	-2.5
Sep	843	12.4	890	11.1
Aug	750	3.0	801	-1.2
Jul	728	-3.4	811	6.7
Jun	754	6.8	760	-3.1
May	706	-5.5	784	8.4
Apr	747	5.8	723	-6.0
Mar	706	-1.7	769	8.8
Feb	718	-0.3	707	3.4
Jan	720	3.3	684	-2.4
Dec 2011	697	-1.6	701	-1.1
Nov	708	12.4	709	6.3
Oct	630	-2.6	667	8.3
Sep	647	11.4	616	-4.5
Aug	581	-5.4	645	2.9
Jul	614	-0.2	627	-0.9
Jun	615	11.6	633	1.4
May	551	-0.2	624	7.9
Apr	552	-8.0	578	-2.0
Mar	600	15.8	590	10.1
Feb	518	-18.0	536	-5.3
Jan	632	17.3	566	-10.4
Dec 2010	539	-1.1	632	12.9
Nov	545	0.4	560	0.4
Oct	543	-8.6	558	-0.9
Sep	594	-0.8	563	-2.9

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

http://www.census.gov/construction/nrc/

Housing starts and permits in Jan-Nov not-seasonally adjusted are provided in Table VA-11. Housing starts increased 27.1 percent in Jan-Nov 2012 relative to Jan-Nov 2011 and in the same period new permits increased 32.8 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 57.4 percent in Jan-Nov 2012 relative to Jan-Nov 2006 and fell 62.7 percent relative to Jan-Nov 2005. Housing permits fell 56.8 percent in Jan-Nov 2012 relative to Jan-Nov 2006 and fell 62.8 percent in Jan-Nov 2012 from Jan-Nov 2005.

Table VA-11, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan-Nov 2012	719.9	746.4
Jan-Nov 2011	566.2	562.0
∆% Jan-Nov 2012/Jan-Nov 2011	27.1	32.8
Jan-Nov 2006	1688.5	1727.4
∆% Jan-Nov 2012/	-57.4	-56.8
Jan-Nov 2005	1932.2	2004.0
∆%/ Jan-Nov 2012	-62.7	-62.8

Source: US Census Bureau http://www.census.gov/construction/nrc/

Chart VA-13 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-13 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in recent months.

Chart VA-13, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

http://www.census.gov/briefrm/esbr/www/esbr020.html

Table VA-12 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) from May to Nov of the year from 2000 to 2012. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 728,000 to 888,000 in May-Nov 2012, which is an improvement over the range of 581,000 to 708,000 in May-Nov 2011.

Table VA-12, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units

	May	Jun	Jul	Aug	Sep	Oct	Nov
2000	1,575	1,559	1,463	1,541	1,507	1,549	1,551
2001	1,605	1,636	1,670	1,567	1,562	1,540	1,602
2002	1,764	1,717	1,655	1,633	1,804	1,648	1,753
2003	1,751	1,867	1,897	1,833	1,939	1,967	2,083
2004	1,981	1,828	2,002	2,024	1,905	2,072	1,782
2005	2,025	2,068	2,054	2,095	2,151	2,065	2,147
2006	1,942	1,802	1,737	1,650	1,720	1,491	1,570
2007	1,415	1,448	1,354	1,330	1,183	1,264	1,197
2008	973	1,046	923	844	820	777	652
2009	540	585	594	586	585	534	588
2010	583	536	546	599	594	543	545
2011	551	615	614	581	647	630	708
2012	706	754	728	750	843	888	861

Source: US Census Bureau

http://www.census.gov/construction/nrc/

Chart VA-13 of the US Census Bureau provides construction of new housing units started in the US at seasonally adjusted annual rate (SAAR) from Jan 1959 to Nov 2012 that help to analyze in historical perspective the debacle of US new house construction. There are three periods in the series. (1) There is stationary behavior with wide fluctuations from 1959 to the beginning of the decade of the 1970s. (2) There is sharp upward trend from the 1990s to 2006 propelled by the US housing subsidy, politics of Fannie Mae and Freddie Mac and unconventional monetary policy of near zero interest rates from Jun 2003 to Jun 2004 and suspension of the auction of 30-year Treasury bonds. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html  . (3) Housing construction dropped vertically during the global recession. There was initial stability followed by some recovery in recent months.

Chart VA-14, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate), Thousands of Units, Jan 1959-Nov 2012

Source: US Census Bureau

http://www.census.gov/construction/nrc/

Table VA-13 provides actual new housing units started in the US, or not seasonally adjusted, in Apr-Nov from 2000 to 2012. The number of housing units started fell from the peak of 197.9 thousand in May 2005 to 67.8 thousand in May 2012 or 65.7 percent. The number of housing units started fell from 160.7 thousand in Nov 2005 to 64.6 thousand in Nov 2012 or by 59.8 percent. The number of housing units started jumped from 53.0 thousand in Nov 2011 to 64.6 thousand in Nov 2012 or by 21.9 percent.

Table VA-13, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units

	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov
2000	149.5	152.9	146.3	135.0	141.4	128.9	139.7	117.1
2001	151.3	154.0	155.2	154.6	141.5	133.1	139.8	121.0
2002	148.8	165.5	160.3	155.9	147.0	155.6	146.8	133.0
2003	151.2	165.0	174.5	175.8	163.8	171.3	173.5	153.7
2004	179.5	187.6	172.3	182.0	185.9	164.0	181.3	138.1
2005	184.6	197.9	192.8	187.6	192.0	187.9	180.4	160.7
2006	160.5	190.2	170.2	160.9	146.8	150.1	130.6	115.2
2007	135.6	136.5	137.8	127.9	121.2	101.5	115.0	88.8
2008	89.5	91.7	102.5	86.7	76.4	73.9	68.2	47.5
2009	42.5	52.2	59.1	56.8	52.9	52.6	44.5	42.3
2010	62.0	56.2	53.8	51.5	56.3	53.0	45.4	40.6
2011	49.0	54.0	60.5	57.6	54.5	58.8	53.2	53.0
2012	66.8	67.8	74.7	69.2	69.0	75.8	77.2	64.6

Source: US Census Bureau

http://www.census.gov/construction/nrc/

Chart VA-15 of the US Census Bureau provides new housing units started in the US not seasonally adjusted (NSA) from Jan 1959 to Nov 2012. There is the same behavior as in Chart VA-14 SA but with sharper fluctuations in the original series without seasonal adjustment. There are the same three periods. (1) The series is virtually stationary with wide fluctuations from 1959 to the late 1980s. (2) There is downward trend during the savings and loans crisis of the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. (3) There is vertical drop of new housing construction in the US during the global recession from (Dec) IVQ2007 to (Jun) IIQ2009 (http://www.nber.org/cycles/cyclesmain.html). The final segment shows upward trend but it could be simply part of yet another fluctuation. Marginal improvement in housing in the US should not obscure the current depressed levels relative to earlier periods.

Chart VA-15, US, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units, Jan 1959-Nov 2012 

Source: US Census Bureau

http://www.census.gov/construction/nrc/

A longer perspective on residential construction in the US is provided by Table VA-14 with annual data from 1960 to 2011. Housing starts fell 70.6 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.4 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 60.8 percent from 2000 to 2011 and 37.4 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-14, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2011	608.8	624.1
∆% 2011/2010	3.7	3.2
∆% 2011/2005	-70.6	-71.0
∆% 2011/2000	-61.2	-60.8
∆% 2011/1960	-51.4	-37.4
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,636.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.2	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

Source: US Census Bureau

http://www.census.gov/construction/nrc/

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/gor1210a.pdf). For fiscal 2013, the forecast is of growth of GDP between 1.3 and 1.8 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.1 to 0.7 percent and the all items CPI less fresh food of 0.2 to 0.6 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
Oct 2012	+1.4 to +1.6 [+1.5]	-1.2 to -0.9 [-1.1]	-0.1 to -0.1 [-0.1]
Jul 2012	+2.2 to +2.4 [+2.2]	-0.3 to 0.0 [-0.2]	+0.1 to +0.3 [+0.2]
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
Oct 2012	+1.3 to +1.8 [+1.6]	+0.1 to +0.7 [+0.5]	+0.2 to +0.6 [+0.4]
Jul 2012	+1.6 to +1.8 [+1.7]	+0.6 to +0.8 [+0.6]	+0.5 to +0.7 [+0.7]
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]
2014
Oct 2012	+0.2 to +0.7] [+0.6]	+3.7 to +4.4 [+4.2]	+2.4 to +3.0 [+2.8]

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/gor1210a.pdf

Private-sector activity in Japan contracted at a marginal rate with the Markit Composite Output PMI^™ Index increasing from 48.9 in Oct to 49.9 in Nov, which is nearly equal 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10394). Paul Smith, economist at Markit and author of the report, finds that growth in services could raise hopes for avoiding contraction in IVQ2012 but that activity in services originated mostly in clearing existing contracts, raising doubts on sustained recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10394). The Markit Business Activity Index of Services increased from 50.0 in Oct to 51.4 in Nov, the first increase in services activity in seven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10394). The Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, decreased from 46.9 in Oct to 46.5 in Nov for the lowest reading in 19 months and the six consecutive month of contraction below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10339). Foreign orders fell for the eighth consecutive month at a faster rate. Paul Smith, economist at Markit and author of the report, finds the data consistent with quarterly contraction of manufacturing output at a quarterly rate in excess of 3 percent in Nov that could affect GDP with weak internal and external demand, particularly in foreign markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10339 ).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	Nov ∆% 0.0 12 months ∆% minus 0.9 Blog 12/16/12
Consumer Price Index	Oct NSA ∆% 0.0; Oct 12 months NSA ∆% -0.4 Blog 12/2/12
Real GDP Growth	IIIQ2012 ∆%: minus 0.9 on IIQ2012;  IIIQ2012 SAAR minus 3.5; ∆% from quarter a year earlier: 0.5 % Blog 12/16/12
Employment Report	Oct Unemployed 2.71 million Change in unemployed since last year: minus 180 thousand Unemployment rate: 4.2% Blog 12/2/12
All Industry Indices	Oct month SA ∆% 0.2 12-month NSA ∆% 0.1 Blog 12/23-24/12
Industrial Production	Oct SA month ∆%: 1.8 12-month NSA ∆% -4.3 Blog 12/2/12
Machine Orders	Total Oct ∆% -1.6 Private ∆%: -10.7 Oct ∆% Excluding Volatile Orders 2.8 Blog 12/16/12
Tertiary Index	Oct month SA ∆% minus 0.1 Oct 12 months NSA ∆% 1.1 Blog 12/16/12
Wholesale and Retail Sales	Oct 12 months: Total ∆%: -1.7 Wholesale ∆%: -1.8 Retail ∆%: -1.2 Blog 12/2/12
Family Income and Expenditure Survey	Oct 12-month ∆% total nominal consumption -0.5, real -0.1 Blog 12/2/12
Trade Balance	Exports Nov 12 months ∆%: minus 4.1 Imports Nov 12 months ∆% 0.8 Blog 12/23-24/12

Links to blog comments in Table JPY:

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html

11/25/12 http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real.html

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

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP decreased 0.9 percent in IIIQ2012 (Table VB-1 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth_16.html), industry decreased 4.2 percent, the tertiary sector increased 0.1 percent, government increased 0.1 percent and construction increased 1.6 percent. The report shows that the all industry index decreased 0.5 percent in IIIQ2012. Industry deducted 0.75 percentage points from growth of the all industry index and the tertiary index contributed 0.07 percentage points. Japan had already experienced a very weak quarter in IVQ2010, with decline of the all industry index of 0.2 percent and decline of GDP of 0.4 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth_16.html), when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 1.9 percent (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth_16.html Table VB-1).

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2012
IIIQ	1.6	-4.2	0.1	0.1	-0.5	-0.9
Cont to IIIQ % Change	0.07	-0.75	0.07	0.01
IIQ	-1.5	-2.0	0.0	-0.1	-0.1	0.0
IQ	5.7	1.3	0.0	0.1	-0.1	1.4
2011
IVQ	-1.5	0.4	0.5	0.2	0.5	0.1
IIIQ	3.3	5.4	1.5	0.2	2.1	2.5
IIQ	-7.5	-4.2	-0.5	0.1	-0.9	-0.7

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

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

There are more details in Table VB-2. The all industry activity index increased 0.2 percent in Oct 2012 relative to Sep 2012 with decrease of 0.1 percent of the tertiary or services sector and increase of industry of 1.6 percent while construction decreased 2.3 percent and government increased 0.7 percent. Industry added 0.27 percentage points to growth in Oct while the tertiary sector deducted 0.07 percentage points, construction deducted 0.11 percentage points and government added 0.08 percentage points. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec 2011 that was interrupted in Jan-Mar 2012 with modest growth in Apr, new decline in May 2012, moderate increase in Jun 2012 and new decline of 0.5 percent in Jul 2012, nil growth in Aug 2012, decline of 0.4 percent in Sep 2012 and increase of 0.2 percent in Oct 2012. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Oct 2012	-2.3	1.6	-0.1	0.7	0.2
Cont to Oct % Change	-0.11	0.27	-0.07	0.08
Sep	2.6	-4.1	0.2	-0.8	-0.4
Aug	-0.3	-1.6	0.3	0.4	0.0
Jul	-2.7	-1.0	-0.6	0.0	-0.5
Jun	1.0	0.4	0.1	0.2	0.3
May	9.5	-3.4	0.9	-0.1	-0.2
Apr	-5.5	-0.2	-0.2	0.1	0.1
Mar	-5.4	1.3	-0.6	-0.1	-0.3
Feb	4.2	-1.6	0.0	-0.4	-0.1
Jan	5.6	0.9	-0.6	0.5	-0.7
Dec 2011	-1.4	2.3	1.6	-0.2	1.7
Nov	0.3	-1.7	-0.8	0.1	-0.9
Oct	-2.6	1.8	0.6	0.1	0.6
Sep	1.6	-1.9	-0.2	0.2	-0.1
Aug	1.1	0.9	0.1	-0.1	0.2
Jul	0.1	1.1	0.4	-0.2	0.5
Jun	-0.1	3.8	1.2	0.2	1.5
May	6.5	5.8	0.9	0.7	1.6
Apr	-5.1	2.4	2.1	-0.9	2.0
Mar	-10.6	-16.2	-5.4	0.7	-6.6
Feb	2.3	1.1	0.3	0.0	0.1
Jan	6.3	1.2	0.5	-0.5	0.6
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

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

Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier of the all industry activity indices are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The all industry activity index decreased 0.2 percent in IIIQ2012 and GDP increased 0.5 percent relative to a year earlier (Table VB-2 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth_16.html). Industry decreased 4.6 percent relative to a year earlier while the tertiary sector increased 0.5 percent, deducting combined 0.51 percentage points to growth of the all industry activity index of minus 0.2 percent while construction added 0.19 percentage points and government 0.06 percentage points. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.5 percent in 2011, almost equal to the revised decline of 0.6 percent in GDP. Industry fell 2.3 percent, deducting 0.42 percentage points, while the tertiary sector increased 0.1 percent, adding 0.07 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2011	-2.0	-2.3	0.1	-0.2	-0.5	-0.6
Cont to 2011 % Change	-0.09	-0.42	0.07	-0.02
2010	-7.0	16.4	1.3	-0.7	3.1	4.7
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2012
IIIQ	4.2	-4.6	0.5	0.5	-0.2	0.5
Cont to IIIQ % Change	0.19	-0.84	0.33	0.06
IIQ	5.8	5.3	2.2	0.4	2.6	3.9
IQ	-0.3	4.8	2.4	0.1	2.4	3.4
2011
IVQ	-2.8	-1.6	0.6	0.6	0.0	-0.2
IIIQ	-3.2	-0.9	0.3	-0.1	-0.1	-0.5
IIQ	-5.1	-5.8	-0.5	-0.4	-1.6	-1.8
IQ	2.3	-1.3	-0.3	-1.0	-0.5	0.0
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	3.2
III Q	-3.2	14.0	1.8	-0.6	3.2	5.6
IIQ	-11.3	21.3	1.4	-0.7	3.5	4.5
IQ	-12.4	28.0	0.8	-0.5	3.9	4.8

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

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

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index increased 0.1 percent in Oct 2012 relative to Oct 2011. Industry fell 4.5 percent in Oct 2012 relative to a year earlier, subtracting 0.83 percentage points to growth of the all industry activity index. The tertiary sector increased 1.1 percent, adding 0.73 percentage points. Construction added 0.25 percentage points to the index and government deducted 0.11 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Oct 2012	5.1	-4.5	1.1	-0.9	0.1
Cont to Oct % Change	0.25	-0.83	0.73	-0.11
Sep 2012	4.1	-8.1	0.1	1.0	-1.2
Aug	3.5	-4.6	0.6	0.8	-0.1
Jul	4.9	-0.8	0.9	-0.3	0.6
Jun	7.6	-1.5	0.8	0.8	0.6
May	6.4	6.0	3.2	-0.6	3.3
Apr	3.7	12.9	2.6	0.8	4.1
Mar	4.1	14.2	4.2	0.6	5.5
Feb	-1.6	1.5	2.4	-0.7	1.6
Jan	-3.4	-1.6	0.4	0.4	-0.1
Dec 2011	-3.0	-3.0	1.2	0.8	0.2
Nov	-1.2	-2.9	-0.3	0.8	-0.7
Oct	-4.0	0.9	0.9	0.2	0.5
Sep	-0.4	-2.4	0.1	0.1	-0.3
Aug	-4.3	1.6	0.8	-1.1	0.4
Jul	-4.8	-1.7	0.1	0.5	-0.4
Jun	-4.6	-0.6	1.0	0.3	0.4
May	-6.5	-4.6	-0.2	-0.8	-1.3
Apr	-4.1	-12.7	-2.3	-0.6	-4.0
Mar	-2.8	-12.4	-3.4	0.0	-4.6
Feb	4.4	4.5	2.0	-1.4	2.1
Jan	5.9	6.1	1.0	-1.4	1.8
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

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

The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 30.4 percent of Japan’s imports and decreased 2.4 percent in the 12 months ending in Nov 2012 because of unwinding carry trades into commodity futures in another round or risk aversion. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.1 percent of Japan’s exports with decrease of 2.4 percent in the 12 months ending in Nov 2012. Machinery contributes 19.2 percent of Japan’s exports with decrease of 10.3 percent in the 12 months ending in Nov. Electrical machinery contributes 18.4 percent of Japan’s exports with increase of 4/6 percent in the 12 months ending in Nov. Exports of transport equipment with share of 23.0 percent in total exports decreased 10.1 percent in the 12 months ending in Nov but had been increasing sharply largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows decrease of the major categories of motor vehicles of 5.2 percent: cars decreased 3.0 percent with decrease of 22.3 percent in the minor category of buses and trucks, decrease of 2.5 percent for parts of motor vehicles, decrease of 15.9 percent for motorcycles and decrease of 46.1 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversion of carry trades from zero interest rates to commodity prices.

Table VB-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Nov 2012	Value JPY Millions	% of Total	12 Months ∆%	Contribution Degree %
Exports	4,983,900	100.0	-4.1	-4.1
Foodstuffs	32,453	0.7	1.4	0.0
Raw Materials	86,891	1.7	10.3	0.2
Mineral Fuels	69,060	1.4	-9.6	-0.1
Chemicals	513,898	10.3	6.5	0.6
Manufactured Goods	652,419	13.1	-2.4	-0.3
Machinery	956,387	19.2	-10.3	2.1
Electrical Machinery	915,416	18.4	4.6	0.8
Transport Equipment	1,144,757	23.0	-10.1	-2.5
Motor Vehicles	731,592	14.7	-5.2	-0.8
Cars	617,525	12.4	-3.0	-0.4
Buses & Trucks	98,270	2.0	-22.3	-0.5
Parts of Motor Vehicles	250,131	5.0	-2.5	-0.1
Motorcycles	22,080	0.4	-15.9	-0.1
Ships	95,273	1.9	-46.1	-1.6
Other	612,889	12.3	-4.8	-0.6
Imports	5,937,332	100.0	0.8	0.8
Foodstuffs	507,037	8.5	-4.6	-0.4
Raw Materials	392,548	6.6	-4.9	-0.3
Mineral Fuels	1,804,976	30.4	-2.4	-0.8
Chemicals	530,534	8.9	-2.5	-0.2
Manufactured Goods	474,052	8.0	-6.5	-0.6
Machinery	417,444	7.0	0.6	0.0
Electrical Machinery	839,857	14.1	16.1	2.0
Transport Equipment	202,733	3.4	13.7	0.4
Other	768,152	12.9	5.8	0.7

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm

Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.4 percent while imports grew at 3.3 percent per year in the years from 1979 to 2011. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.

Table VB-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,546	68,111	-2,565

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm

The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table VB-7 for Nov 2012. The share of Asia in Japan’s trade is more than one half, 54.8 percent of exports and 45.9 percent of imports. Within Asia, exports to China are 17.2 percent of total exports and imports from China 23.7 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 18.7 percent of total exports and share of imports from the US of 8.1 percent in total imports. Western Europe has share of 10.3 percent in Japan’s exports and of 11.4 percent in imports. Rates of growth of exports of Japan in Nov are sharply negative for all countries and regions with the exception of 5.3 percent for exports to the US, 11.0 percent for Mexico and 19.2 percent for the Middle East. 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 4.1 percent in Nov 2012 while imports increased 0.8 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Nov are negative for some trading partners: minus 5.5 percent for the US, minus 4.5 percent for the Middle East and minus 14.2 percent for Australia. Imports from Asia increased 3.6 percent in the 12 months ending in Nov while imports from China increased 5.8 percent.

Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Nov 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	4,983,900	-4.1	5,937,332	0.8
Asia	2,729,189	-2.5	2,726,959	3.6
China	858,693	-14.5	1,406,156	5.8
USA	933,760	5.3	479,933	-5.5
Canada	59,616	-11.6	90,043	10.8
Brazil	33,595	-10.4	91,728	0.6
Mexico	74,434	11.0	31,446	20.9
Western Europe	513,037	-21.2	676,894	3.6
Germany	131,431	-14.1	190,133	7.7
France	37,419	-25.5	107,427	24.5
UK	89,427	-34.4	56,689	16.2
Middle East	183,230	19.2	1,034,102	-4.5
Australia	120,513	-1.5	338,643	-14.2

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm

The geographical distribution of Japan’s trade balance is provided in Table VB-8. The combined trade surpluses with the US, UK and Mexico of JPY 529,553 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,069,002 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 547,643 million in Nov 2012.

Table VB-8, Japan, Trade Balance, Millions of Yen

Nov 2012	Millions of Yen
Total	-953,432
Asia	2,230
China	-547,463
USA	453,827
Canada	-30,427
Brazil	-58,133
Mexico	42,988
Western Europe	-163,857
Germany	-58,702
France	-70,008
UK	32,738
Middle East	-850,872
Australia	-218,130

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm

© Carlos M. Pelaez, 2010, 2011, 2012